Mar

10

 I am sorely tempted, having bought a far out of the money position expiring in October, to offset the cost by selling nearer term options in the coming months. Were it a blitz chess game I would play this move immediately. But as I am resolved to stay within a rigorous preset plan, I am sitting on my hands.

Phil McDonnell adds:

One strategy you could think about is calendar rolls. Sell the March, let it expire, then the Apr and so on. If the underlying reaches the strike price, dump it all. That will be your peak profit.

Laurence Glazier responds:

After thinking more I've realized it is probably best not to sell nearer term calls against the one I hold. A good job I sat on my hands.

My positions are carefully selected to have a chance of doubling in value, and if this happens I close them.

I imagine that converting to a calendar spread would not be compatible (the short call would weigh against the profits). But selling a call expiring at the same date but more out of the money would, I suspect, make doubling more likely and might increase my choice of candidate positions - though there would be more commission charges.

Of 10 positions I have thus far closed since starting this strategy in November, 5 doubled– so I think it worth keeping the plan going. 


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2 Comments so far

  1. Patrick on March 6, 2011 12:35 pm

    I second that. You can roll tactically whenever the underlying makes a healthy move in your favor and you want to hedge the profits. Depending on the instrument, you can even do this every week, making it more likely that you’ll pay for your position, as long as the underlying is making some progress toward the strike.

  2. Sam on March 7, 2011 11:18 am

    “That will be your peak profit.”

    What Dr McDonnell means, no doubt, is that the position is at its peak profit *at a given moment in time* when underlying == strike. Of course, the profit of the position might increase the next day. This might go without saying, but it can’t hurt to be extra clear.

    “If the underlying reaches the strike price, dump it all.”

    This might be an empirical finding of his, though he doesn’t put the numbers on the table. It certainly isn’t an a-priori property of options, as per above.

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