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<DIV><FONT color=#000000 size=2>EXCELLENT POINT, Alex. I mentioned this in
a previous post, and it could probably stand being reinforced on every options
post! </FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2></FONT><FONT size=2>1) Most beginning
options traders don't even imagine the VERY real possibility of being exercised
early, and what that means to their account.</FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT size=2>2) If (more realistically, WHEN) this happens... if
there hasn't already been a conversation with the brokerage about this as a
possibility, the broker may liquidate whatever necessary to cover his ass (which
is, of course, understandable and necessary.) Often times there are better
solutions, including giving discretionary power to your broker to unwind the
position at his best-efforts. Since brokers only make money if you stay as
their clients and profit, they are most likely to do their best to guide your
position through intraday swings to the best possible outcome (I've had this
happen to me, at great surprise, and fortunately at a good outcome. THIS
is when you're REALLY grateful you use a full-service options broker, and not
the internet. </FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT size=2>3) it's equally important to note that you can be
exercised early EVEN IF YOU ARE LONG!!! All that is required is that you
are In-The-Money, At-The-Money, or even near At-The-Money. The deeper ITM
you are, the higher the probability of exercise EARLIER in expiration week (or
even, technically, earlier!) </FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT size=2>How do I know? It's happened to me! What this
means is that you can be secure and confident because you're not short anything,
and all your long positions are ITM, so you've got "locked in"
intrinsic value (I feel good again just thinking about it!) All of a
sudden, you get a call from your broker, with a somewhat urgent, panicky tone,
telling you that your options were exercised on you, your account just got hit
for a bazillion dollars, and you are involuntarily LONG "X" number of
share of stock!... Then he'll ask; "So, what do you want to do
now?"</FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT size=2>Of course, this specific situation is easily remedied by
liquidating the stock, hopefully on an intraday rally... and other than the
initial shock, it's not a big deal (other than possibly taking an extra round
trip of commissions.) </FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT size=2>The point here;</FONT></DIV>
<DIV><FONT size=2>Plan and prepare for even the most bizarre and expect the
unexpected!</FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<DIV><FONT color=#000000 size=2>Big Profits to you,</FONT></DIV>
<DIV><FONT color=#000000 size=2></FONT><FONT size=2>Dave Donhoff</FONT></DIV>
<DIV><FONT size=2></FONT> </DIV>
<BLOCKQUOTE
style="BORDER-LEFT: #000000 solid 2px; MARGIN-LEFT: 5px; PADDING-LEFT: 5px">
<DIV><FONT face=Arial size=2><B>-----Original Message-----</B><BR><B>From:
</B>THE DOCTOR <<A
href="mailto:droex@xxxxxxxxxxxx";>droex@xxxxxxxxxxxx</A>><BR><B>To: </B><A
href="mailto:deltaforce@xxxxxxxxxxxxx";>deltaforce@xxxxxxxxxxxxx</A> <<A
href="mailto:deltaforce@xxxxxxxxxxxxx";>deltaforce@xxxxxxxxxxxxx</A>><BR><B>Cc:
</B>RealTraders Discussion Group <<A
href="mailto:realtraders@xxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxx</A>><BR><B>Date:
</B>Thursday, August 27, 1998 7:41 PM<BR><B>Subject: </B>Re: LCOS Bull-Debit
Spread answers<BR><BR></DIV></FONT>One other IMPORTANT issue. Have a
plan for what you will do if the short call gets early exercised and there
is still time premium in the long option. If you exercise the long
option to deliver you throw premium away! You may not care but it
might help to know in advance your brokerage houses policy on what is called
"same day substitution".
<P>David Donhoff wrote:
<BLOCKQUOTE TYPE = CITE> <FONT color=#0000ff><FONT size=+0>OK,
William... I'm going to answer your questions embedded in the text
below. Hope you and everyone can read it OK.... I'm doing it in
blue to make it stand out from the existing text.;</FONT></FONT><FONT
size=+0>>Dave,</FONT> <BR><FONT size=+0>>Thank you for your expert
advice and willingness to help.<FONT color=#000000> </FONT>Here is
a trade I would like your opinion on. Two days ago, I have
just<FONT color=#000000> </FONT>started a debit bull calendar spread
(Did I name this spread right?) on LCOS.</FONT><FONT color=#0000ff><FONT
size=+0>Yes... technically you are correct in naming the position...
however what you are REALLY doing is better explained as a SYNTHETIC
COVERED CALL, or COVERED LEAP CALL. For many new options traders,
this will make it much easier to mentally grasp. You've created a
position with a fixed and limited upside (profit) and an unlimited
downside (risk/loss). Read on...</FONT></FONT> <FONT size=+0>I
have a bias as to its increasing in price in the near future due to
its<FONT color=#000000> </FONT>recent stock split announcement.
The stock was trading at around $60 before<FONT color=#000000>
</FONT>the announcement, and up to $100 intraday during the
announcement. It has<FONT color=#000000> </FONT>dropped down to
$65 last month. Today, LCOS closed at $77.625. The
split<FONT color=#000000> </FONT>will be reflected on 8/26.</FONT>
<P><FONT size=+0>My stragegy was to make use of time decay Theta.
The trade was as follows:</FONT> <BR><FONT size=+0>Long a Leap call
option Jan99 @ $50 strike price for $28.50 when the stock<FONT
color=#000000> </FONT>price was $72 two days ago. So the time
premium was $6.50 for 5 months.</FONT> <FONT color=#0000ff><FONT
size=+0>OK, so you went long a deep ITM strike option (50 strike when
LCOS was at 77-80), thereby having a very high Delta... probably well
over 95 (percent correlation to the underlying asset's price), and also
a very low Theta (rate of time decay). You've effectively bought a
proxy of the LCOS stock at a fraction of it's actual price. Good
job IF you want to be same as long the stock.</FONT></FONT>
<BR><FONT size=+0>At the same time, short a call option Sep98 @80 strike
price for $5.625. The<FONT color=#000000> </FONT>idea was to take
advantage of the high volatility and premium of the Sept @80<FONT
color=#000000> </FONT>call. So my net debit was $22.875 plus
commissions.</FONT> <FONT color=#0000ff><FONT size=+0>OK, so now you've
sold a call virtually At-The-Money, thereby having close to a 50 Delta
(a 1/2 correlation in price movement to the underlying asset... moves
half as fast up or down in price, compared to LCOS stock (and your
LEAP), at this stage), and just about the most significant rate of Theta
(time decay) you can get in this position. You've sold the option
with expiration in the closest available date, which is one of my
cardinal laws (broken only in very rare occasions.) If the stock
stays in a pretty close range, your short call will continue to have a
healthy daily rate of decay (Theta.) If LCOS climbs, your short
option will be going deeper ITM, and will begin to accumulate INTRINSIC
premium value (cash-exercisable value) which obviously won't decay
through time. The higher LCOS climbs, the less your covered-call
spread will be able to make, until it ultimately reaches the
predetermined maximum, as you've calculated below.</FONT></FONT>
<FONT size=+0>Possible outcome of the trade:</FONT> <BR><FONT
size=+0>>(a) If the stock goes above $80 before expiration and I get
called out, I will</FONT> <BR><FONT size=+0>>in effect get $80 - $50
for my $22.875 investment, = a return of 31% for one</FONT> <BR><FONT
size=+0>>month.</FONT> <BR><FONT size=+0>></FONT> <BR><FONT
size=+0>>(b) Or I may buy the Sep $80 call back one day before
expiration for the</FONT> <BR><FONT size=+0>>amount being
in-the-money, and write a new Oct slightly out of the money call</FONT>
<BR><FONT size=+0>>or slightly in-the-money call for an additional $2
to $4 time premium for the</FONT> <BR><FONT size=+0>>next
month.</FONT> <BR><FONT size=+0>></FONT> <BR><FONT size=+0>>(c) Or
if the chart shows the stock may be declining, I shall write an
in-the-</FONT> <BR><FONT size=+0>>money call.</FONT><FONT
color=#0000ff><FONT size=+0>Yes... this WOULD BE the "plan"...
however I urge extreme caution as you may have noticed the old saying
that "The markets warily climb the long wall-of-worry, and quickly
slide down the slippery-slope-of-hope."</FONT></FONT> <FONT
color=#0000ff><FONT size=+0>Most traders find it very difficult to keep
their flesh attached when the sharks start attacking the
bid-ask-spreads, and we want to make adjustments in the heat of a
decline. There are ways to place limit orders using
"contingent on" orders that will replace your fading short
call with a deeper ITM short call in the case of a collapse.... but
you'll still be subject to the mercy of the traders in the pits (who are
salivating as they read this!)</FONT></FONT> <BR><FONT
size=+0>></FONT> <BR><FONT size=+0>>(d) If the Sept $80 call
expires worthless by Sept 21, I can sell the Jan99</FONT> <BR><FONT
size=+0>>$50 call if there is good profit.</FONT><FONT
color=#0000ff><FONT size=+0>Since you established your spread (locked
your profit parameters) and went long the J99 50 Call LEAP when LCOS was
at 77... your short could only expire worthless with LCOS less than
80... and after minimal Theta decay on your LEAP, in order for it (the
LEAP) to be profitable, LCOS would almost certainly have to be above
78-79... a pretty small target to hit, wouldn't you say?</FONT></FONT>
<FONT color=#0000ff><FONT size=+0>If you're going to want to liquidate
your LEAP at a profit, you're probably going to need to have an upward
thrust above 80 to do so (because options that far forward, and that far
ITM are very sparsely traded... so the floor will tend to widen the
Bid-Ask spread, cutting sharply into your returns)... which puts you
back in the boat of just simply being long the stock (or it's proxy
equivalent) without any hedging. Not bad if you're confident in
LCOS... but hardly strategically covered.</FONT></FONT><FONT
size=+0>></FONT> <BR><FONT size=+0>>(e) Or I can write an Oct call
and collect the premium at about $2 to $4 per</FONT> <BR><FONT
size=+0>>month in time premium (hopefully, unless the stock price
drops significantly).</FONT> <BR><FONT size=+0>>I shall repeat the
process montly until Jan99. Then sell the Jan99 50 call</FONT>
<BR><FONT size=+0>>which should (I hope) still be deep in the money
at that time.</FONT><FONT color=#0000ff><FONT size=+0>Regardless of the
woes the Dow or the S&P may see in the next few weeks or months...
I'd have a hard time betting against the growth in the internet
sector... so in the long run, you're probably not in bad shape at all to
be long LCOS. One thing about holding long options though...
another of my "cardinal laws" is to sell or roll-forward (sell
and buy as a spread) any long positions 30-60 days before expiration, to
avoid an accelerating Theta (time decay.) In the case of LEAPS as
you are using them, I'd probably stretch that law to 3-4 months before
expiration.</FONT></FONT><FONT size=+0>></FONT> <BR><FONT
size=+0>>(f) I would lose money if by Jan99 the stock drops to below
$50 + my net debit</FONT> <BR><FONT size=+0>>less the monthly time
premium I collect every month, which loss is possible</FONT> <BR><FONT
size=+0>>due to the volatility of the internet market.
Right? But I don't know how to</FONT> <BR><FONT
size=+0>>evaluate that.</FONT><FONT color=#0000ff><FONT
size=+0>Forget the "by Jan99" business... in this trade,
whenever LCOS drops to have your spread re-sellable for less than you
paid for it, YOU ARE LOSING!!! Covered Calls are NOT for schizoid
markets!!! If this baby dumps and you're not prepared... your
trade goes right along with it.</FONT></FONT> <FONT color=#0000ff><FONT
size=+0>EOD closing print today on LCOS is 34 1/4, post-split.
That's 68 1/2 pre-split. I'm afraid to say it, but I'd predict
your spread is already in the red.</FONT></FONT> <FONT
color=#0000ff><FONT size=+0>Again, I don't think it's bad over the long
run... but you've got to take some quick defensive action!</FONT></FONT>
<FONT color=#0000ff><FONT size=+0>What you actually do is, of course,
going to be up to you... and you will be the one who profits, or suffers
the consequences... below are a few things to consider, but I
can't make any recommendations AT ALL because I'm at a bit of a loss to
the specifics of LCOS history, news, and temperament... and I'm not
sitting in YOUR gut/mind.</FONT></FONT> <FONT color=#0000ff><FONT
size=+0>Some of your options;</FONT></FONT><FONT color=#000000><FONT
size=+0>If you think LCOS may dive a little or a lot, but ultimately
come back up;</FONT></FONT><FONT color=#0000ff><FONT size=+0>Buy deep
ITM puts, 3-4 months forward. These will equilize some of your
Delta, and cover your risk in a short-term downslide. Use these as
covers on a "scalping" basis... i.e. keep them on only until
you see an "all clear" signal that the markets have clamed
down, and start marching up again.</FONT></FONT> <FONT
color=#000000><FONT size=+0>If you think LCOS is going to dump fairly
quickly in the short-term;</FONT></FONT><FONT color=#0000ff><FONT
size=+0>Buy back in your short 80's (now 40's) and sell ITM Sep calls
(maybe 35, and/or 32 1/2).</FONT></FONT> <FONT size=+0>If you think LCOS
is going to H&LL in a hand-basket... and THEN coming
back;</FONT><FONT color=#0000ff><FONT size=+0>Buy back in your short
80's (now 40's) and sell DEEP ITM Sep calls (maybe 30, and/or 25).
Stay ready to buy them back in when the dump stops... and you better be
quick about it! The "dead cat bounces" don't tend to
hang around for the sleepy!</FONT></FONT><FONT size=+0>></FONT>
<BR><FONT size=+0>>I don't know what other exit stragegies I should
look at.</FONT><FONT size=+0>>And if the stock does go above $80,
should I choose (a) or (b)?</FONT><FONT color=#0000ff><FONT
size=+0>That's another entire letter.... but for now, let's look at the
fact that you've established a basic spread with a maximized, limited
possible profit. You know how to place an order that reverses your
spread, and you know at what upside price LCOS offers you no more
profit... so place a contingent order to reverse the spread at market
when LCOS is at or above that price.</FONT></FONT> <FONT
color=#0000ff><FONT size=+0>You know that as LCOS dumps, so does your
kid's college funds... so look at your charts (stocks or astrology or
marine topography... whatever works for you), look even HARDER at how
strong your guts are for losses... and decide at what print downward
LCOS has just dug the grave too deep. Place another contingent
order to bail out at market (the wolves are howling) when LCOS is at or
below that price.</FONT></FONT> <FONT color=#0000ff><FONT size=+0>Make
the two orders OCO (one-cancels-the-other) so your broker doesn't have
to freak about accidentally getting filled both ways (don't worry, on
THIS trade it wouldn't happen... period!)</FONT></FONT> <FONT
size=+0>>Would this strategy work better on OEX, SPY (what
else)?</FONT> <BR><FONT color=#0000ff><FONT size=+0>Hooyyy.... that is a
BIG question. We'll save it for another time,
OK.</FONT></FONT><FONT size=+0>></FONT> <BR><FONT size=+0>>Would
this strategy work on a declining market? A tradig
range?</FONT><FONT color=#0000ff><FONT size=+0>This strategy will work
best in a steady, ranging market, OR a slowly climbing market. If
you're a market "timer" and you nail the beginning of a slowly
climbing bull JUST AFTER a sharp decline, you'll REALLY rack up the
profits.</FONT></FONT><FONT size=+0>></FONT> <BR><FONT
size=+0>>Thank you very much. Sincerely,</FONT> <BR><FONT
size=+0>>William W</FONT> <FONT color=#0000ff><FONT size=+0>My
pleasure... and I hope it helps.</FONT></FONT><FONT color=#0000ff><FONT
size=+0>Big Profits to you,</FONT></FONT><FONT color=#0000ff><FONT
size=+0>Dave
Donhoff</FONT></FONT> </P></BLOCKQUOTE></BLOCKQUOTE></BODY></HTML>
</x-html>From ???@??? Fri Aug 28 07:23:48 1998
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Date: Fri, 28 Aug 1998 09:59:55 +0100
Reply-To: richard.p.parsons@xxxxxxxxxx
Sender: owner-realtraders@xxxxxxxxxxxxxx
From: richard.p.parsons@xxxxxxxxxx (Richard Parsons)
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: Re: OEX P/C
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Who says the calls have been bought.....?? What if someone wrote a whole
bundle for the premium? Believing that they would be likely to keep the
premium..!<g>
-----Original Message-----
From: JW <abprosys@xxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: 28 August 1998 05:44
Subject: OEX P/C
>This looks interesting:
>
>S&P 100 Index-(OEX,OEW,OEY)
>OEX CALL VOLUME: 140725 OEX CALL OPEN INTEREST: 177233
>OEX PUT VOLUME: 92299 OEX PUT OPEN INTEREST: 224078
>OEX TOTAL VOLUME: 233024 OEX TOTAL OPEN INTEREST: 401311
>OEX LEVELS HIGH: 536.79 LOW: 512.74 CLOSE: 515.81 -20.98
>
>Why would so many more calls than puts be brought in a market like today's?
>Some believe we are bottoming?
>
>JW
>abprosys@xxxxxxx <mailto:abprosys@xxxxxxx>
>
>
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