Sunday, November 29, 2009

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

 

OK, so you’re long 100 calls and the underlying trades up to 80.25.  Your calls will be worth .25+.  Why not sell the calls instead of selling the stock?

 

If the stock drops to 79.75 and your calls expire worthless, you are short 10,000 shares.  What if it gaps up Monday (pin risk – cost me $4,000 one expiration L )

 

OK, so it drops to 79.75 and you buy shares – where’s your protection?  What if it continues to drop, 79.50, 79.25,….

 

I can understand why stocks would close at the strike with the most options – when they had automatic exercise if .25 ITM.  What effect has the penny exercise rule had?

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of mcatolico
Sent: Saturday, November 28, 2009 9:09 PM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

For instance if I am long 100 80 strike calls on abcde stock and the underlying trades up to 80.25 with less than an hour or two to expiration, I will sell 10000 shares against those calls to lock in the quarter premium. I now synthetically own 100 long 80 puts. If my selling action (and if there are a lot of other open contracts at the 80 strike, the selling of many others) drives that stock back down to 79.75, guess what, I now buy 10000 shares to scalp another quarter out of the market. Lather, rinse repeat, as the pendulum wobbles back and forth and the scalps get tighter and tighter to the point where I’m scalping 10000 shares for a nickel or ultimately a penny.

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