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American Capital Agency Corp. Message Board

  • reits_r_us reits_r_us Mar 16, 2012 1:37 PM Flag

    How to exit when it hits the fan

    In Parts as Yahoo hates me...

    I am grateful for a few trades, this past week, that have gone against me....really....kind of...;-)

    Anyways, the reason....A learning experience on how to exit bad trades with grace..that is a nice way of saying, "Save as much capital as possible, without increasing risk".

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    • Hi Robert,

      >>Is this the same in essence >>


      Eg. My Short Mar30Puts, I originally received .32 for were .54 yesterday, so I was upside down on them. I placed combo order to " sell to open" Apr30Puts and "buy to close " Mar30Puts for .18. The order appeared with the designation " roll". I now have received .50 for a credit against Long Jun3uts @ 1.18 original purchase. The idea is to roll each month to get more credits than the Longs cost.

      We'll see....


    • Appreciate the advice Doc,
      Good points- again I have never experienced flash crash and just noodling with what appears to me as logic

      Question- I asked about rolling options before- I read the article and called my broker (Vanguard IRA). They said a "roll" is simply tying the selling of the old option and buying of the new in 1 transaction to reduce broker fees.

      The article lead me to believe you could actually "roll" for a fee. Is this the same in essence or am I missing something?

    • Here it is Robert,

      I will try to be clearer. I already explained the "stop loss" and it's inherent dangers. The "stop limit" has inherent flaws also because in a flash crash(Oct 4th, last), the PPS blasted through the stop limits and stop losses.

      The difference....the stop losses were closed when the PPS rested to get fills 22+, while the stop limits waited to hit the stop limits on the way back up. Suppose the PPS came to rest at 26 and your stop limit was 28. You'd still be out some money, waiting for a hopeful return to your stop limit, which might never happen.

      The Put has no such problem. It just has to be renewed or rolled at each contract's expiration. The CC helps pay for it In the collar. If you don't have to worry about taxes , just buy more shares when/ if they are "Called away".. It's not a bad thing to get your shares called, because that means you made money. So go out and buy more shares with a further out CC and Put, and go for the next move up.

      It's not for everyone, but it is just another tool in the arsenal

      The short collar is interesting as you carry short shares and short a Put and buy a Call for upside protection. This is obviously employed when you are Bearish and anticipate a decline in the PPS.. It works out really well, when the CP(covered Put) is enough OTM to let the shares run down in PPS, while having a close ATM Call paid for with the Put premium.

      Just another tool for some to employ when the premiums are favorable for a particular trade.

      Hope that helps,


    • Actually I have heard of flash crash but never experienced it yet. There is also a stop loss limit that prevent stock from being sold dirt cheap if there is a flash crash.

      So what I am gathering (please correct me Doc)
      1. Use PUT/Call/Stock to straddle the stock and limit any large upside
      2. Use Stock with Stop /Stop Limit to avoid drastic loss and leave upside unlimited

      I am trying to see if #1 is something I would consider. So far it's a no as I go back to my basis of buying the actual equity on fundamentals + market dynamics and diversifying

    • I never use stop loss orders - I do at times us protective puts.

    • Good stuff, Doc. Like swimming in shark-infested waters... exciting to read about, but I hope I never have to do it.

      Seriously, this is good to think through. I always like to know there is "another way" to get out of a sticky situation rather than just throw in the towel and take the loss (although that is sometimes unavoidable).

      One other aspect of your trade (not mentioned) would be the carrying cost of the short shares for the period you hold them, and the possibility that those borrowed shares get called back on short notice (my broker says 24 hours). I don't think that would prevent me doing as you suggest, but it is one more component of the strategy.

      Thanks as always,

    • Part2..

      Take, for example, this KMP trade that went immediately South upon entry, to the tune of now almost 6.00 against me.

      The position is Short Sept 87.50Puts, Long Apr82.50Calls, Long Apr82.5Puts, in a 1/1/1 ratio.

      The original credit, 2.18. So what happens @ April OPEX when the PPS is perhaps at 80 and your Apr82.50Puts are about to expire. The Sep87.50Puts are worth 10.00 then, your Apr82.50Puts are worth 2.50 and the Apr82.50Calls are dead. If you liquidate the trade you lose -10.00+2.50+2.18(credit) = -5.32.

      Not bad...better than -10.00.

      • 3 Replies to reits_r_us
      • This is on my to do list- how to place stop loss trades on options in my IRA and brokerage accounts. Like most- I have a "real" job and dabble in speculation when I can.
        Would love to place orders in with a 10-15% stop loss on any options. I may lose out by doing this but cutting losses like that would be good.

        I treat stocks different- I diversify and stay with companies I have done alot of homework on- if it goes down at end of week- I buy more if the theory-fundamentals still hold true. And have the yahoo alerts for price moves to cause me to take action.

        Wondering what others are doing

      • Part3...

        What, instead, if you exercised the 82.50Puts and were short at 82.50. The reason to consider this is that there is still 2.50 time value(Theta) left in the 87.5Puts.

        If the PPS goes down you can still lose no more than the difference between 87.50 and 82.50, or 5.00, because eventually(Sept OPEX), the 87.50Puts will come to you as Long shares if the PPS is at 60, for example, and you will still be short at 82.50 and you just lose the difference, or 5.00.

18.960.00(0.00%)Jul 29 4:00 PMEDT