I’ve been tempted to sell new calls today, but haven’t. My paper losses are certainly ugly today and luckily a lot of it is coming from a spike in the VIX. Obviously I’m down on my underlying stocks and my long stocks, but I’m not seeing much long term pain from today. I’m flipping back and forth from down $2300 to down $1500 to down $3300. I am down any way it turns, but I have a good stance going.
Some of my positions like CAT expire on Friday. I’m long 100 shares of CAT and have a covered call deep ITM and another naked put at the same strike. I’ll get to take both of those premiums to the bank after my shares are called away. That type is the obvious hand off between share value and option value, but then I have postions like with FNM where it’s down $1.50 and I’m short calls on it, but yet the calls have gone up in value by $0.20. That matters none to me since the price is going in the right direction and I should have the full premium to pocket in five more weeks. That was a great hedge.
Others like VIP are down more than $2, but I only have two puts and three naked calls. I’ll pocket all the premiums and right covered calls on my assigned shares for a loss on the shares themselves, but will be able to come out even or possibly slightly ahead when those are assigned. Hoping for an even outcome isn’t a great goal typically, but in this market it’s a dream that’s possible.
Another example is FWLT. It’s down $6.50 today, so far, taking it to $13 ITM. When assigned, I’ll write covered calls and will have the opportunity to cut my loss to $2 from all premiums added together and that’s assuming everything stays flat for another five weeks. I think we’ll come off this low sometime fairly soon and will have the chance to sell our ways back to even or better. If FWLT goes down a little more this week I’ll really have to think about more more naked put on it for May. That would lower my cost a good bit more and give me more cushion to write my new covered calls even cheaper.
Good luck to all getting through this latest mess!
Hang in their…………….your daily posts on your trades are very helpfull and educational. I have “Married Puts” on POT, MOS, CF, initiated on 2/14/08 with initial risk of around 9.5% (if exercised), two weeks ago I was able to adjust too reduce the risk to .7% (if exercised). Like you mentioned many times, the increase in volatility makes for more opportunities too adjust ones trade……keep your blog posts coming………..”stay hedged”….Warren
Nice adjustment on those.
Hmmm, IMHO, jury still out on those Fannie Mae naked calls. The trend’s your friend but it might not be a cake walk. Good luck.
So far you are right on FNM. I entered a limit to sell 2 naked puts OTM this morning and I should’ve sold at market prices since FNM is up $1 since then. I see a trend line it’s hitting at 25 AND the 20 day moving average. If it breaks this range I’ll have to counter my original move with new naked puts. I have a trade alert set to text my phone if it goes above 25.25. I’m also curious how it’ll react to the Fed cut.
I know we had a discussion about volatility and how it affects options positions a while back. I learned something (obvious) today. Spike in volatility eats away at your buying power so you need to make sure you reserve for that to avoid margin calls.
Exactly, I think that sounds like it’s been the cause of your margin calls as much, if not more than the drops in the underlying’s value. It all adds together to beat you hard if you are running close to margin limits. If you are not close to margin limits the spike in volatility is just there for paper loses or better opportunities to sell new options. I didn’t take advantage of it yesterday due to fear of what might happen today (3/18), but of course in hind site I should have. I was eyeing FWLT and VIP in particular. If this rally looks good by Wednesday aftn I might lower my limits to get in deeper on both of those.
re: FNM – I wrote a new post this afternoon that showed my rush to save myself on FNM after it broke through 25 and really took off. At least it finished $1 off its high of the day.
Regarding volatility – its important to for us to realize that volatility is not one way!! Its bi-directional. If we are on the right side of the move, great! If not and we are overextended, we might be subject to a margin call. What I am trying to learn is how to use volatility in my selection process. Two different stocks with same price, strike and expiration can have markedly different premiums due to the volatility factor. It might make a difference if one is a buyer or a seller!!
Generally, I try to sell volatility. So I usually only sell options that are on the high end of historical implied volatility (nothing to do with historical volatility). However, when you get a once in a decade credit crunch, it’s quite interesting. I learn something new everyday.
I never thought Wachovia would have 90%+ volatility. I know the dividend is at risk but the price action and the options price it as if the company is gonna get dragged under…
I used today to load up on hedges. Did it right before the fed meeting so I am little underwater on them but I’d rather miss upside than get margin called. I don’t want to get mauled like Bear.