Tuesday, March 16, 2010

RE: [TheOptionClub.com] How Do I Get Out?

 

RFH:

 

One of the things you need to understand about calendars (actually almost any options position) is that the max loss typically applies only when held to expiration and doesn’t take into account things like bid-ask spreads and commissions (any kind of slippage). DITM options tend to have large bid/ask spreads as their deltas are nearing  1. Both of your calls are DITM right now, and it would seem like the only way to “get out” with only your .20c loss would be to go to expiration with it. The risk there is early exercise (and you are assigned)  on the Mar 56 call since I believe SPY will go ex-div this Friday. If it is not exercised early, then it will be exercised at expiration and you will probably have to tell your broker to exercise your long Apr 56 call as well to flatten out the position since most brokers will not auto exercise a call that still has a month until expiration. (If you are assigned on Thursday for the divvy, you would then exercise your long Apr call then).  This all assumes you have enough margin or cash to sustain an exercise and assignment. If not, you probably have no choice but to bite the bullet and eat the additional loss.

 

I am also just wondering why, along the way as IWM went further and further and further against you, you didn’t adjust the calendar or just get out of it?

 

Dan Sheridan has some great videos (most free I believe) on the CBOE website that explains calendars and how to adjust them, and if you look through this groups messages there may still be a video replay available of a seminar he did for us on calendars a few weeks ago (thanks again to Chris for making that happen).

 

Hope this helps.

 

Ken

 

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of RobertH
Sent: Tuesday, March 16, 2010 12:33 AM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] How Do I Get Out?

 

 

In late February, I bought a Mar/Apr IWM call calendar at the 56 strike for 0.20. I paid $200 for this directional bet with IWM around 62 at the time. Well, the market certainly didn't go down, so I want to exit this trade. I was under the impression that if you bought a calendar spread, the most you can lose is the amount you paid. But to unwind this trade, I have to buy back the March call at $11.61 and sell the April call at $11.45 for an additional loss of 0.16. How can I get out with only a $200 loss?

Thanks,
RFH

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