So I want advice from both of you on ideas of how to play the two positions I've got on. They are both very similar. In March I bought a long call spread on JPM and MET, and sold naked puts to help fund the trades. Both were put on for little out of pocket expense, with the bigger risk being having to buy later if the puts were exercised. Below are the prices I paid. Currently if I were to close out the positions at Friday's prices I can lock in between 55-59% of the total possible gains. I can argue on one hand that you take 55% now in 4 months on what was originally a 22 month play. I can also argue that at today's prices being above the naked call strikes, all I have to do is trade flat or even slightly down for the next 18 months and I can pick up that other 41-45% of possible max profit. And obviously you can do something in between leaving the plays on or total liquidation. Let me know if you have any ideas on how to hedge the gains in these positions as well.
JPM
Short $35 call +3.70
Long $22.50 call -7.65
Short $12.50 put +3.80
Out of pocket expense is -.15 per share. I did 20 contracts so $300 is invested. Max possible value here is (35-22.50) x 20 contracts = $25,000. The liquidation value is $14,380 or 57% of the max value.
MET
Short $30 call +2.85
Long $12.5 call -7.70
Short $7.5 put +3.20
Out of pocket expense is -1.65 x 20 contracts = $3300 invested. Max possible value is (30-12.5) x 20 contracts = $35,000. Liquidation value is $20,650 or 59% of the max value. Keep in mind the last trade is what's used for the current value, but the bid/ask spread is usually large for these since their expiration is still far out. So realistically the liquidation value is lower than listed above.
Hey Jason, man I wish I could provide you some invaluable insight but unfortunately I'm not the options expert and I have no better insight into the overall market and sectors than anyone else. All I can is that this is a hard transitional time in the market while we wait and see which direction we are headed... There are so many conflicting indicators and the fundamental picture looks really cloudy.
ReplyDeleteI looked at the charts for both your plays and here's what I see:
JPM: Getting really close to the top of $ 39 resistance and upper bollinger band but still remains in a volitilty squeeze. Could pop if you believe that money will flow back into financials. Not a lot of short interest either so it doesn't look like there's a possibility of a short squeeze to the stock. I guess the question is do you think financials have more room to run. WFC announces earnings on the 22nd before the market opens. Do you believe that whatever they announce will be a catalytic event to push JPM which trades right alongside GS through resistance?
MET: I can't really see anything definitive in the chart. The stock looks like its midway through it's sideways trend, volume is drying up, stochastics look overbought... Earnings are on the 31st... which is 2 weeks of waiting. Again no real read on this one.
Sorry couldn't be more helpful with your picks. Right now tech I'm focusing on what's working really well like tech.
Good luck.
Mark, you were supposed to tell me the closing prices in Jan 2011 so I can make a decision today. Thanks for nothing.
ReplyDeleteMy first bit of advice on how I would play this trade is to buy back the puts that you sold short. You originally sold the $12.50 put on JPM for $3.80, you can know buy it back for $0.60 or 86% of the premium, Chop #1. Then also buy back the Short $7.5 puts on MET for about $0.45 or 86% of the premium you collected, Chop #2. Sub total $11,900 booked.
ReplyDeleteYour original out of pocket was .15 on JPM and with my suggested adjustment #1 it is $0.75 or $1500. So then what I would do if I still felt confident about the position is take off half or lock in another $3800 in profits and this will bring your risk exposure to zero. With upside of another $12,500. But know your risk is zero and you locked in some profits. But if I was not sure or was not patient enough or would prefer not to sit through the ups and downs I would just book the entire position now.
Similarly I would do the same thing for MET.
Sorry if any of the math is wrong but I am in a hurry because I have to get to a wedding. But I think you get the gist of how I would play these two positions.
Yeah buying back the naked puts seems a no-brainer, I've just been indecisive on what I want to do so consequently so far I've done nothing. What do you think about selling the long calls now and gambling that I can buy back the naked calls later if we dip? I know it's a gamble but the only way it doesn't pay off is if the prices never go below today's prices for the next 18 months, seems unlikely.
ReplyDeleteRegardless of how unlikely it may seem. As we have all seen the market has no care what we think it should or should not do. To be honest i think there is a possibility that we do dip. With the current prices you are sitting in a really nice position of deciding how and when you should take profits. I really don't see any reason that you should increase your risk exposure on a already profitable trade. I suggest that you either book all the profits now or the the suggestion above.
ReplyDeleteYeah I think the decision here is whether or not to hold long-term (18 more months until expiration) and not worry about next week or next quarter. My original feeling when I put them on was that at those prices I felt like I wasn't going to lose. It may take me two years to finally move, but just didn't I would be exercised at those put levels.
ReplyDeleteThings happened much faster than I thought. I was prepared for it to be a long-term trade. I guess I didn't have an exit strategy in mind when I put them on. I just felt the risk was low so I went ahead and did it and figured I could figured the rest out later. Well now it's later and I still don't know.
I'm leaning towards taking 50% off now and possible all of it. I don't really want to be in something for another 18 months that I have no solid opinion on. I would much rather be in cash for now. I guess this is a lesson learned, don't put on long-term spreads unless you intend on being in for the long-term, or unless you're willing to give up some of the profits if you want to exit early. A little earlier today I was convinced I'm going to liquidate in the morning, now I need a few more hours to think about it.
So here is another way I looked at things. Leaving the spread on today is the exact same as putting it on today. You can argue that I'm playing with profits and I originally didn't put much out of pocket, but I argue that that's just playing mental accounting games. I have the option of selling tomorrow and if I don't that in effect is the same as buying at today's prices.
So the question is, would I be interested in buying deep in-the-money calls tomorrow and selling at-the-money calls and waiting 18 months for the time to go away? No, that doesn't sound good to me. This is when I started heavily leaning towards liquidation.
Also, take away the dollar amounts and look at it this way. Before any particular spread is put on, if I told you that you could take 55% of the total available profit in month 4 of a 22 month window, would you take it off? Probably, unless you felt bullish for the future. Since I have such uncertain feelings about the future, I think I've just talked myself in to closing them out. Thanks for being a sounding board. I think the gambler in me will sell 100% of the long calls and leave 25% of the short calls on the books and buy those back on a dip.
That sounds like a reasonable compromise.
ReplyDeleteSo let us know what you end up doing...
ReplyDeleteOnce I do something I'll let you know. I spent last night doing the same thing I've done for the last few months, thinking and then doing nothing. So I played with the numbers and if these stocks get to $10 above my naked calls on the spread I can book about 80% of the possible gains. Right now I'm at 55-60%. This is certainly possible in a quick period of time so for now I'm in a holding pattern I guess. I doubt seriously that I'll ever enter in to another long-term spread situation based on my experience so far. But then again ten years ago I never thought I would do anything other than sell covered calls.
ReplyDelete