Hello Mark, Hello Jorge,
I've read your article: "Covered Call: What to do when stock falls rapidly" at
http://www.bivio.com/know_your_options/mail-msg?t=77575400003
I really like how you write Thanks I try to keep it simple, cover all the details and not be too long-winded. and maybe you can give me some advice:
I bought BAC shares last month (yes, I know! I am a moron No. You made a stock market wager and lost. (I don't mean 'are losing' - I mean 'lost.') at $13.20, about 10 days away from the January expiration. I sold the 12.5 call and my break even point was $ 12.2. I thought it was a safe trade! considering that earning were going to be reported after the expiration day. Of course I was wrong, in a couple of days the stock went down to 11.5 and I bought back the jan 12.5 call and sold the feb 11 call, sending my breakeven point to $ 10.36, almost the exact 52 week low for BAC at that time. After that, the stock took a huge dive and I did not react quickly enough to re-position myself. That's unfortunate, but you could not have saved too much with the quick fall and it's not easy to make trades that lock in a profit - even when necessary..
Today at the feb expiration, BAC is worth $ 3.8 far far away from my $ 10.36 breakeven point. Before I read any further (I write as I read, so truly don't know what comes next) I suggest you forget the break-even point. You own BAC today at its current price. How to deal with that investment is, or should be, your primary concern.
I don't have a problem holding BAC for a long time (I am not in margin), but I would like to raise some cash in the mean time. I am not predicting, but there is a chance the bank can be nationalized.
What would you do in my position? First, let me say that I know less about the future than you do. Second, I cannot give specific advice. But I'll discuss this from the way I think about these situations. That means what I'm telling you below suits MY PERSONAL comfort zone and it may not suit yours. OK? The ideas below are neither 'right' nor 'wrong.' Instead they represent just one possible way to handle this situation. If you are not comfortable, that's fine. Perhaps my thoughts will guide you. But, to tell the truth, it seems to me that you have considered all of the reasonable alternatives pretty well by yourself. The difficult part is pulling the trigger on a trade.
IV is high. For good reason. This puppy is volatile! Whichever option you sell, you'll get a good price. There's some comfort in that.
Would you wait for a pop No. That's not MY STYLE. It could be yours. I have no idea if the next price will be 2 to 12. none. to sell 10 or 11 calls,When my stock is under four, I don't think in terms of seeing the stock ever reach 10 again (ever means within a few years, not 30 years). Besides I want my money to be working. I want to make money going forward. I know this stock bounced to six just the other day, but it was also down to 3 earlier today. Next month? I have no idea.
would you go for the leaps jan 10 or jan 11 with the 10 or 11 strikes?, 2011 is just too far away. I prefer to sell options that decay faster than LEAPS, but the Jan 10s are only 11 months down the road. But the premium is small. And it decays very slowly. And you may change your mind about holding for the long term. {Here's my philosophy. It's logical,but many just cannot bring themselves to go along with it: "IT does not matter which stock gives you your profits. No stock 'owes' you a profit. If you find a better stock, or better situation than BAC, you should consider selling BAC and putting the money into the 'better' (as in more likely to profit) situation." The point is - if you like BAC try to make some money, don't think about getting even. It's possible, but unlikely.]
thinking that BAC probably will not recuperate its value in a long time, would you sell month 10-11 calls for pennies month by month?, would you take a more risky approach a sell the -lets say- 6 or 7 month by month? With the risk of loosing my shares at that price. Here's your problem as I see it. You consider selling your stock @ 6 to be a 'risk' you don't care to take. I see selling stock at 6 as a HUGE VICTORY. Up more than 50% in a few months. Question: Going forward, how do you really feel about selling stock at 6? I'd be happy to write the Mar 6 call, collecting about 11% of the stock's value - and hoping the stock roars straight to 20. That would be okay with me. I do not get emotionally married to my stocks. But - how would you feel? If the answer is 'distraught' or 'terrible,' then writing the 6s is not for you. Maybe a compromise; with the 7.5s. If you see it from my perspective and agree, then you are free to write ANY options that provides some downside protection and some upside profit potential (from where you are today).
Do you know any other strategies that can be implemented in this case? You can sell the shares, benefiting from a tax loss and go long the March 3 calls instead. Then write the Mar 6 (or other) call. This gives you less upside profit, but gives you a better downside. Those Mar 3 calls have some decent time premium (70 cents, OUCH), and I know you would hate to pay that. It's a simple question: Is the March 3 put worth about 70 cents to you? Probably not. I doubt you'll want to sell stock here.
Any advice would be greatly appreciated. Again: General thoughts, using BAC as a reference, not a specific recommendation. Not because I'm afraid to recommend - but because I know less about this stock than you do. I'm offering advice on how to think about solving your dilemma.
Thank you very much. My pleasure. Do you know I write a blog: http://blog.mdwoptions.com/options_for_rookies/
Pay a visit. No cost.
best regards,
Mark
Jorge Skala
--
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
website: http://www.mdwoptions.com
blog: http://blog.mdwoptions.com/options_for_rookies
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