Monday, November 30, 2009

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

 

On Mon, 30 Nov 2009 11:00:26 -0500, I wrote:

>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.
>>
>>
>>
>>
>>
>>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.

The word "payoff" used above is misleading. What I meant was that by
using the scalping algorithm for one iteration, you will have a M or
2*M per share cash credit in your account at expiration. (Note than
when you have a straddle, you start a new iteration when you are in
step 2b of the prior iteration.) The payoff from the position will be
0. The overall profit depends on the prior history before you entered
the algorithm as well as transaction costs.

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