Sold 14 FXI puts Jun 10 for an average of $3.25 each. Same situation as EWZ. Wanted to add some juice. This stock is exhibiting some life today and showed some reversal resiliency yesterday. Stochastics are showing extremely oversold conditions and have crossed over beginning to climb out. Money supply is showing a change in the upward direction.
Going to sell out of the positions as the stock climbs back up through the channel.
Looking at BBY too. May have found some support today.
What strike did you sell the FXI puts for? I do not see a June expiration for FXI.
ReplyDeleteOn your 6 puts that you sold on the EWZ. Why go so deep in the money? I understand that the premium are higher, but the further you go out of the money the lower the probability that the play will work out. Also make sure that you realize that you have a potential $40k commitment and you can be early exercised at any time before expiration. What is your back up plan. With all the news hitting the market saying that the Brazilian market is overvaulued and due for a pull back shouldn't you at least hedge your risk by buying an out of the money put (i.e. lower stike put to cap losses). If there was a significant pull back how much pain can you take before you call unlce?
I have to ask the same question on your FXI position. I am not sure what strike you sold but I would assume it would be around $40 which would put your potential capital commitement for this position at $53k.
Over all you have a potential committment of almost $100k. I know that you are new to options, I am not trying to be little you by any means. I just want to make sure you understand the risks that you are undertaking.
If you have any questions or want help developing a hedge just let u know and we would be more than happy to help.
Sorry the FXI was May 10 $41 strike.
ReplyDeleteI can be exercised any time before expiration? Why would I ever be exercised before expiration? Ummm... Good thing I have $130k.
Funny that IB doesn't warn or block you from this kind of risk.
It is actually in the disclosures when you first sign up for the ability to trade options. It warns you that american style options can be exercised at anytime. European options which are not very popular can not be exercised until expiration. But in the US equity market we trade american style options.
ReplyDeleteIt is rare to get early exercised, but it is a risk and does happen sometimes.
Sorry posted it in the wrong place.
Mark, here is a scenario where you might be exercised early. It never occurred to me either until I experienced this first hand recently. I own a long bull call spread on MET. I wanted to close it out but since it was over a year until expiration the BxA spread was about $1.50. The bid was under it's intrinsic value. Example: If I own the long call at a strike of $15 and the stock is at $40, that option has a minimum intrinsic value of $25, the bid was $24.80.
ReplyDeleteIf the bid from the market maker on the option is less than the intrinsic value, then if I really want out I should just exercise the long call option, take possession, then immediately turn around and sell it. The market maker does this on purpose as usually the cost of taking brief possession is prohibitive, or it's just a hassle. Most people would just give up the spread to the maker, I won't. However, if I did exercise, the person short that call is going to get exercised early and probably be very surprised with 12 months remaining until expiration. Depending on the broker of the person short the option, they may have enough margin to be in that position, but maybe don't have enough margin to actually perform on their side should they be exercised.
Your naked puts work the same way but in reverse. As long as they are in-the-money you can be exercised at any time. It is rare to get exercised early, but if you really have no interest in taking possession of the stock and it's meant to be a short-term trading play, then selling out-of-the money puts is a safer play. The real risk is by the time you find out you've been exercised, the stock has moved against you before you can get out and you have to incur a capital loss to close it out. With the out-of-the money option you always have time on your side if it initially moves against you.
Somewhere along the way you had to either sign an options disclosure or at a minimum click a box and disclose how many years experience you had in options. Once you do this the broker assumes (and has legal protection) you know the basic risks and characteristics of options. I would hate for you to learn something the hard way like I have so many times.
This is why smaller firms like Scottrade don't allow their clients to sell naked options, they used to allow it, but clients didn't understand the risks, lost money, then of course sued and lost.
ThanX Guys. So for selling naked puts I want to sell way in the money contracts correct?
ReplyDeleteThis comment has been removed by the author.
ReplyDeletesorry correction:
ReplyDeleteAfter I talked to Dom I lightened 3 of the EWZ puts for a quick $5 scalp each. Just bought back 1 put for $8.80 sold at $9.48 for about $70 profit. Thinking about buying back the remaining 2 when the stock reaches the $75-$76 level.
Still holding all 14 of my FXI puts at $3.25 average. Right now the current price is about $3.2. Will look to scale out around the $42 to $45 level.
Decided to just buy back the 2 EWZ puts at $8.80 for a $200 gain overall gain. looking for a lower strike price to re-enter right now.
ReplyDelete