Option Trading Articles: Re: [ConservativeOptionStrategies] Re: Straddles

You exercise the long call you own with a strike of 59.

buy shares at 59, sell them at 63.

(I think these were the strikes Lou and I were using in our example)

You don' even have to have enough money in your acct. to buy the shares at 59.

Your broker buys them and sells them right away to give to the person

who exercised their 63 call against you.

On Jun 14, 2010, at 11:46 AM, the1educator wrote:

Doug - you sold calls 4 strikes apart. What happens when you get exercised, and have to buy the underlying? I see potential of large loss.
--- In ConservativeOptionStrategies@yahoogroups.com, rdmacarthur <rdmac@...> wrote:
>
> Lou, don't feel badly about being confused.....this is tough stuff to wrap your brain around.
> My focus lately has been to either reduce risk, and/or reduce cost basis.
> If I can do both at the same time I'm a happy guy.
>
> A strangle position works real well IF the stock moves either way, but in the mean time you
> are losing because of time value decay. Hence, seems to me it would be better to buy the position
> further out in time hoping for a move soon, and losing less to time value loss.
> Now, in the mean time, as the stock moves up and down over the next 3-5 weeks,
> is there something one could do to reduce cost and/or risk?
> My thought to investigate (but I've not done this with real money) is:
> After the stock moves say, up $3, then sell an atm or 1 strike itm call, and close out the put position
> while it still has some value.
> If, If, If you could get that call spread for cheap, then you would have a 3 strike or 4 strike call spread
> for little cost. Your max loss if the cost, and the max profit is the difference 'tween strikes minus cost.
> what if you ended up with a 5 contract call spread at 4 strikes apart, and your cost was 250?
> max loss is the 250, max profit is $400 (difference of strikes) X 5 contracts = 2000, minus the 250 cost
> is 1750. And this is on a cost basis of 250. If the stock turns south, your loss is the 250.
> If it stays or climbs, you have a pretty good profit, especially since you have a low cb.
> You don't care if the stock drops as long as your cb is low.
> You can be wrong many times, and be right once and still make a profit.
>
> I'm playing around with this on the free charting software from OIC.
> I also have a paper trading acct thru them, were I'm trying out other strategies.
>
> I'm not as far along as I'd like to be figuring out strategies, but I'd be interested
> in hearing your thoughts and sharing mine.
> Doug
>
> On Jun 13, 2010, at 10:20 PM, Louis wrote:
>
> > Doug,
> > Forgive me if I'm being a little thick, but my head is swimming with numbers and that can be rough on us English majors, but see if I have your suggestion correct:
> > Consider selling either a call or put further out AFTER the stock moves.
> > > I'll help reduce your cb. It reduces possible profit, but reduces cost and risk.
> > > When it moves up $3, call an atm call. Will give you a call spread, and a put.
> > > Mirror on the downside.>>
> > For the purposes of this example let's assume that if I'm assigned on the short call, I'll be using the differential between market and strike for this computation (since we obviously can't predict the option price).
> > I currently have a 37 call and a 34 put, both long. If the stock goes up to 40, I've made $300, less premiums paid. At that point you're saying I should sell a $40 call which will lower my costs. If the stock goes back down that works great. But if it keeps rising, for every point it increases, I lose $100, which will wipe out the premium immediately. But since I have the 37 long call, that will wash those losses,and I'll be left with the profit of $300 (40-37) on my original position. So I've lowered my cost some and capped my profit at $300.
> > An interesting idea as opposed to closing the entire position at a roughly 10% profit. And I can do the same thing on the put end if the stock should drop. You've given me some more numbers to play with.
> > But I've capped my profit at the $300 figure for a relatively small cost reduction, haven't I? As opposed to closing the position and opening a new one.
> > Lots to think about. Thanks.
> > Lou
> >
> > --- In ConservativeOptionStrategies@yahoogroups.com, "Louis" <loupi3@> wrote:
> > >
> > > I'm not sure I follow. My instinct is to take my profits, sell what's left of the OTM section and close the position once it's moved 10% or so and then move on. The market in general is so volatile that gains can disappear quickly.
> > > Lou
> > >
> > > --- In ConservativeOptionStrategies@yahoogroups.com, rdmacarthur <rdmac@> wrote:
> > > >
> > > > Your thinking is right.
> > > > Consider selling either a call or put further out AFTER the stock moves.
> > > > I'll help reduce your cb. It reduces possible profit, but reduces cost and risk.
> > > > When it moves up $3, call an atm call. Will give you a call spread, and a put.
> > > > Mirror on the downside.
> > > > Doug
> > > > rdmac@
> > > >
> > > >
> > > >
> > > >
> > > > On Jun 11, 2010, at 12:44 PM, Louis wrote:
> > > >
> > > > > Lately I've been experimenting with straddles (I hope I've got my terminology correct)where I buy a put and a call about one strike apart for the same month. As far as I can see, max loss is the cost of the two options and max gain is basically unlimited regardless of whether the stock goes up or goes down. I dipped my toe in a bit with BP and BAC, figuring their volatility would give me some practice in using this method. The past two days have been interesting watching them ride up and/or down on the u-shaped P&L graph.
> > > > > Any thoughts on this?
> > > > > Lou
> > > > >
> > > > >
> > > >
> > >
> >
> >
>