Ken,
Thanks for the great explanation. It was all up there in my head but I was too lazy to work it out. You did make it very clear.
It does show that like any equity trade there's no predicting the future even with risk graphs. While things like time decay may follow relatively predictable patterns, volatility in any given situation will always be a wild card.
So the answer to my question is that there is no answer, which means in turn I think that setting profit goals are quite critical and that, all things being equal,when the goal is hit use the appropriate choice---sell the options; or buy the stock and then exercise the options if you're on the put side or excercise the option and sell the stock if you're on the call side. It's a bit more work, but justifiable if it makes a difference. Commissions, at least at Fidelity remain the same since they don't charge to exercise.
Lou
--- In ConservativeOptionStrategies@yahoogroups.com, "Kenneth Ginsberg" <ken_ginsberg@...> wrote:
>
> Louis:
>
>
>
> The option value at any point in time also has a lot to do with Vega
> (Volatility), so even if your stock moves in your direction, if Volatility
> gets crushed, you will lose a whole lot more than just the theta or not earn
> as much as the Delta would have indicated the day before. Long options
> positions (puts and calls) are Vega positive, meaning as Vega goes up you
> make money, but if Vega gets crushed it is the equivalent of multiple days
> of theta decay as the extrinsic value gets sucked out.
>
>
>
> When you do your risk/reward analysis you need to include a what if.. what
> if Volatility goes up or down? How will that affect your option values. Vol
> crush, especially on the put side in this kind of market can suck out a lot
> of what you thought would be profit as your expected delta doesn't
> materialize because of the Vol crush.
>
>
>
> Ken
>
>
>
>
>
> From: ConservativeOptionStrategies@yahoogroups.com
> [mailto:ConservativeOptionStrategies@yahoogroups.com] On Behalf Of Louis
> Sent: Monday, June 14, 2010 9:11 PM
> To: ConservativeOptionStrategies@yahoogroups.com
> Subject: [ConservativeOptionStrategies] When to exercise options vs
> buying/selling underlying
>
>
>
>
>
> My basic plan was to buy and sell options only. However, the Greeks have
> such a strong effect that it may be better to exercise a winning option and
> take profits that way.
> For instance, I have a strangle on BP (long call @37; long put @34)which I
> purchased on 6/9 for $2.18.
> The stock today fell to 30.67, so if I exercised the put and resold the
> stock I'd have a profit of $307 less 218, net of about $89. The 34 put on
> the other hand is being bid at 3.65 and the 37 call at.07 which would net
> $154, so that decision would appear to be pretty straightforward.
> But I haven't been watching the day to day changes in option values and
> something is not adding up for me.
> I bought the put @ 1.43 when BP was at $34+, so the stock has fallen about
> $4.00 while the put has increased only 2.22. I don't think the time decay
> and bid/ask spread would explain the difference. Putting together the fact
> that overall the option sale would be better at this moment, but
> nevertheless overall the put moved considerably less than the stock,
> something seems out of synch so that at some point between now and june 9th
> it may have been better to exercise the put.
> Either I am missing something very obvious or over analyzing, or there are
> points at which one method is better than the other.
> Any ideas?
> Lou
>
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