Monday, November 30, 2009

Re: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

On Mon, 30 Nov 2009 06:01:05 -0600, "Jack" <jack@jackcpa.com> wrote:

>I understand it the underlying is up a quarter and you short it, you do not have any risk. If it goes up, you exercise, if it drops, you buy and close.
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>Now, if it is down a quarter (you still own 100 calls but have no position in the stock), if you buy the stock ($775,000) you have no protection. If it continues to drop, you are long stock and long calls. All this risk to make $2,500?

I hope both you and Michael will forgive me if I butt in here and try
to explicitly specify the algorithm in question.

1. If you have N long option contracts (underlying multiple = 100)
ITM by M, sell 100*N shares of the underlying if they are calls, buy
100*N shares if they are puts. You forego further gains if the
underlying gets further in the money but lock in a payoff of M per
share. If you own N straddles, you can do this if either side is ITM
by M. Goto 2.

2.a. If the options now are OTM and there is very little time before
expiration (probably broker and hardware dependent), remove the
position in the underlying. If you own N straddles, this step can be
ignored, assuming one side will be exercised.

2.b.. If there is sufficient time before expiration and the options
are OTM by M, remove the position in the underlying. You lock in a
payoff of 2*M. Then Goto 1. Of course you can choose different Ms
for steps 1 and 2.

I hope this doesn't lead to more confusion.

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