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  • sjs1234321 sjs1234321 Feb 2, 2005 7:58 PM Flag

    Sell my Feb calls? life savings. HELP!

    Hi dlb31,
    Thanks for your in depth reply.
    Heres some more details:

    My Brokerage Acct Current Status:
    - $19058 in cash
    - $18969 in securities
    - Equity With Loan (EWL) $37986
    - Maintenance Margin: $37867
    - I have unlimited trades left right now, however if I go below $25K Equity with Loan, they limit the # of trades.
    - $45K in another account totally


    Can I try to reiterate what I think you said for #3?

    Sell 2 of my 4 calls, the feb 210 and feb 220, to cash out on $32K. Here's where i am unfamiliar. I have never sold to open and do not understand it at all. You say to sell to open 2 new calls which i don't own? So they pay me $56K? Does this come out of my margin account, or are the 2 call positions that i would still own (200 feb05 230's and 200 feb05 240's) used as collatoral automatically? What exactly happens to the 200 feb05 230's and 200 feb05 240's that i currently own in that case? Do I give them up automatically the second I sell to open the other two calls? You did not mention them. At this point, am I still down $42K on the 230 and 240 calls I own?

    I am very fearful of getting put into some kind of margin call. could that happen here?

    >>if by Feb 18, the stock is below 220 you just keep your 15K.

    The lower the better? I am totally confused.
    In this case I am down $105,871-$15K = $90,871?

    >> The break even point, where you just lose you extra 15K, but keep the original capital, is ~220.75.

    >>After that, as the stock goes up, you start losing at the rate of ~ 20K per point maxing out at 240 with the loss of 400K.

    Why 240, and you are saying I could loose $400K? Man oh man....
    OK. The more I look at your post, the more I get confused. Sorry for rambling. Meanwhile, at least if I learn something new, that will be something.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • A little bit of theory:
      you can sell an option short(sell to open) just like short selling a stock. In such a case you have an option's premium deposited to your account, e.g. suppose that a stock ABC trades at $48 and a 50 call trades at $3. You can sell the 50 call short and your account will be deposited with $300 per contract. If at the expiration the stock is below 50 you just keep that $300. However, if the stock is above 50 you will have to buy your call back either directly or thru the exercise/assignment. So, if the stock is above 53, you will have to buy it back for more than $3 that you originally received and will incur a loss. The higher the stock the larger the loss.
      By itself call short-selling is a very risky, but it can be used in combination with other option positions to decrease your break-even, to mitigate risks, etc.
      Again, suppose the ABC trades at 48 and you bought 40 call at $10 betting that the stock goes up, but it actually goes down to, say, 46 and your call is now worth 7.5. In this case you can consider selling short 50 call, which could be worth, say, $3, thus decreasing your original cost basis to $7(10 - 3) and your break even point to 47; at the same time you limit your upside to 10 which is reached if/when the stock goes to 50+, so you kind of "fixed" your position although by limiting your upside.
      The scenario that I mentioned in my previous post is purely hypothetical, just to show a general direction in "fixing", at least partially, your situation.
      To come up with an exact strategy in terms of what options with what strikes to transact, you have to have a certain "belief" as to GOOG's future behavior (for the next 2.5 weeks), i.e., is it going up, down, or fluctuates in a ceratin range. THen you enter option transactions based on that "belief", and yet after that you define points where you adjust your position if your original belief does not materialize.

      Now, to answer your questions,
      1) when you sell you get the money; so you get 56K for short selling
      2) you keep you 230 and 240 calls; in fact long and short 230 will cancel each other, so like ktstocks says, this particular trade may not make sense and different strike price should be picked
      3)this scenario is based on the "belief" that GOOG will not be above 220 at expiration. So, you spent 105K and got back 78K, so if GOOG is indeed less than 220 you lose 105 - 78 = 28 and that is bad. But consider if you didn't do anything and GOOG <= 220, then you would lose at least 105 - (price of 210 calls) = ~74K, so you kind of "fixed" your position. Again you should choose carefully what options to use and you may even setup something where you actually get some profit.
      4)this particular combination becomes a disaster if GOOG is above 220 at expiration; because you're short 220 calls and still long 240 calls you can lose at most $20 per contract, which is huge in your case, but then again, you will not wait until the end, but adjust your position based on a new situtation.
      5) You will certainly need to meet your broker's margin requirements to maintain such a position. What exactly they are you need to ask them.

 
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