Monday, November 30, 2009

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

 

Jack,


You're not long stock. You bought back your shorts to lock in another quarter.

Mark

On Nov 30, 2009, at 6:01 AM, Jack 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?

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of mcatolico
Sent: Sunday, November 29, 2009 7:11 PM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

 

Comments below…

 

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Jack
Sent: Sunday, November 29, 2009 2:45 PM
To: OptionClub@yahoogroups.com
Subject: 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?

 

Mc -Because you get the same quarter lock PLUS 100 free puts by shorting the stock against the calls. (for those that can't see this , a long call plus short stock is synthetically a long put. In the example if the stock continued higher the long call would gain in value equal to the loss in value of the short stock and at expiration the exercise of the long calls would negate the short stock. Conversely that long call plus short stock means that below 80 the calls are worthless but the short stock gains value as the stock goes south. Thus, the synthetic equivalent of the long put.)

 

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 )

 

mc- you buy the stock back at 79.75 and lock in another quarter. If you don't buy it back for some reckless reason (why would you not buy back the short stock you sold for no risk at 80.25 with the stock now trading at 79.75?), you just exercise the long calls. There is absolutely no reason to be exposed to pin risk unless you are stubborn enough not to buy back shorts at expiration – or sell longs if you don't want to be exercised.

 

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,….

 

mc- you don't need protection since you've just closed all your risk: sold 10,000 at 80.25 and bought 10,000 at 79.75. (i.e. you've just locked in $5000).

 

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?

 

mc- this is  irrelevant. It's not the automatic exercise AFTER expiration that drives pin behavior. It's deltas PRIOR to expiration that professionals (and smart amateurs) are capitalizing on.

 

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.







__._,_.___
The goal of TheOptionClub is to provide a forum for members to work together for the purpose of furthering our individual understanding option trading.  All messages and postings, and any materials circulated are provided for discussion and educational purposes only.  No statement contained in any materials from TheOptionClub should be considered a recommendation to buy or sell a security or to provide investment, legal or tax advice.  All investors are encouraged to consult a qualified professional before trading in any security.  Stock and option trading involves risk and is not suitable for most people.  There is no guarantee that any information provided is accurate and, may in fact, be wrong.  It is understood that the participants in TheOptionClub have varying backgrounds and degrees of experience in option trading, and that regardless of experience each member is considered a student.  As such, any information distributed through TheOptionClub should be considered with a critical mind and not relied upon as an authoritative source.

To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com
.

__,_._,___
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)