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If you are trading the indexes you can trade the spx options, which are
european style and have no early execise. Then you can sell deep in the
monies that are overvalued with no fear of early execise. I am not a devotee
of selling naked anything and never have been. I have seen to many people
go broke doing it. Ira
<P>David Donhoff wrote:
<BLOCKQUOTE TYPE=CITE> <FONT COLOR="#000000"><FONT SIZE=-1>EXCELLENT
POINT, Alex. I mentioned this in a previous post, and it could probably
stand being reinforced on every options post!</FONT></FONT> <FONT SIZE=-1>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> <FONT SIZE=-1>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> <FONT SIZE=-1>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> <FONT SIZE=-1>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> <FONT SIZE=-1>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> <FONT SIZE=-1>The
point here;</FONT><FONT SIZE=-1>Plan and prepare for even the most bizarre
and expect the unexpected!</FONT> <FONT COLOR="#000000"><FONT SIZE=-1>Big
Profits to you,</FONT></FONT><FONT SIZE=-1>Dave Donhoff</FONT>
<BLOCKQUOTE
style="BORDER-LEFT: #000000 solid 2px; MARGIN-LEFT: 5px; PADDING-LEFT: 5px"><B><FONT FACE="Arial"><FONT SIZE=-1>-----Original
Message-----</FONT></FONT></B>
<BR><FONT FACE="Arial"><FONT SIZE=-1><B>From: </B>THE DOCTOR <droex@xxxxxxxxxxxx></FONT></FONT>
<BR><FONT FACE="Arial"><FONT SIZE=-1><B>To: </B>deltaforce@xxxxxxxxxxxxx
<deltaforce@xxxxxxxxxxxxx></FONT></FONT>
<BR><FONT FACE="Arial"><FONT SIZE=-1><B>Cc: </B>RealTraders Discussion
Group <realtraders@xxxxxxxxxxxxxx></FONT></FONT>
<BR><FONT FACE="Arial"><FONT SIZE=-1><B>Date: </B>Thursday, August 27,
1998 7:41 PM</FONT></FONT>
<BR><FONT FACE="Arial"><FONT SIZE=-1><B>Subject: </B>Re: LCOS Bull-Debit
Spread answers</FONT></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 SIZE=+0><FONT COLOR="#0000FF">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>>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 COLOR="#0000FF">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 COLOR="#0000FF">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 COLOR="#0000FF">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 SIZE=+0><FONT COLOR="#0000FF">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>
<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 COLOR="#0000FF">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>
<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 COLOR="#0000FF">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 SIZE=+0><FONT COLOR="#0000FF">Some
of your options;</FONT><FONT COLOR="#000000">If you think LCOS may dive
a little or a lot, but ultimately come back up;</FONT><FONT COLOR="#0000FF">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 SIZE=+0><FONT COLOR="#000000">If you think
LCOS is going to dump fairly quickly in the short-term;</FONT><FONT COLOR="#0000FF">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 COLOR="#0000FF">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>
<BR><FONT SIZE=+0>>I don't know what other exit stragegies I should look
at.>And if the stock does go above $80, should I choose (a) or (b)?<FONT COLOR="#0000FF">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 SIZE=+0><FONT COLOR="#0000FF">Hooyyy.... that is a BIG question.
We'll save it for another time, OK.</FONT>></FONT>
<BR><FONT SIZE=+0>>Would this strategy work on a declining market?
A tradig range?<FONT COLOR="#0000FF">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>
<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.Big Profits to you,Dave Donhoff</FONT></FONT></BLOCKQUOTE>
</BLOCKQUOTE>
</BLOCKQUOTE>
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</x-html>From ???@??? Fri Aug 28 07:52:08 1998
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From: "khanitha" <charlie@xxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: 1st hour just finished...."price action"
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We are now just starting the 2nd hour, notice ndq near/at session LOWS.
Even if i was a screaming bull this morning, you can't agrue with price
action. CLEARLY to the downside today. Sorry bulls.
gary
hawaii
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