Options Education: Ask Us Anything

by CC January 30, 2012 2:58 pm • Education

It’s a slow day so I thought I’d post some Q&A. I’ll leave the comments open on this post for any further questions that may have been bugging you. We’ll do our best to answer. Remember, we’re not investment advisors so our answers will tend towards the general strategy of trading. I’ll assemble all of these questions that have been a part of the running series under the new Educational section.


How did you determine that the implied move post earnings for GMCR is 14%? Did you do so by adding the price of the call and put FEB ATM 52.50 and got 7.55 which is 14.4% of the last trade price? -MA

That is correct, I used the feb 3rd weekly options, i took the price of the at the money straddle, the feb3rd 52.5 straddle was offered at $7.70 and then divided by the stock price of about 52.50 that gets u about 14.5%. That basically is a fairly simple way of doing it when weeklies are listed. I hope that helps. -Dan

I’m actually working to build a calculator for the site that will allow subscribers to quickly do this math in a more sophisticated way taking into account more inputs. -CC


Danny boy……I was already to sign up for your newsletter and then you recommened a short on NIKE at Christmas. Good luck in the New Year. -JS

NKE was not a great way to close out an otherwise solid year. Wasn’t my first bad trade and most certainly won’t be my last, but the beauty of the structure, I was not naked short the stock, I was long put premium and defined my risk.


I have a question on trade mechanics and management. I have a GOOG call spread ( that I held through earnings). It’s a 645/650 MARCH call spread, and it’s not a killer position so I am trying to use this as a learning experience for the future. My question is this: with GOOG missing earnings and the stock down big, is it a sound strategy to cover the 650 (buy it back) and hold the 645 call and trade around it over the next two months waiting for a bounce or comeback. I am not asking for specific advice, but rather what is the best strategy to implement when a trade goes south but you have a couple of months to play it. Any mechanical risk management would be appreciated in this type of trade. -TT

I think your thought process makes a lot of sense. Although because it was such a tight call spread you may not see a huge price differential between the 2 strikes. But I would say that if the 650 calls have less than a 10 delta it may make sense to cover them and and hold onto the 645s as a bit of a lotto ticket. -Dan


I have the FSLR march 37/30 put sprd which is working great now. Should i take the premium i paid when i can as you usually do and let the rest ride? -BG

I am always a fan of taking my cost off of the table when i can and leave the other half on , so i think u have the right inclination. -Dan


In addition to the call calendar you suggested, would it make any sense to buy a Mar/Feb03 GMCR 45 Put Calendar in case GMCR has a signifcant drop instead of pop? I didn’t know if this would improve the odds of making a profit to the extent that it would offset the big drop on whichever long option is on the wrong side. I realize you’re making a short-term directional trade and that the put calendar would make it fairly delta neutral. -MB

Your question is a great one, and truthfully that sort of strategy is not exactly what I do. Your suggestion is to essentially fade the implied move in the weeklies by selling the at the money straddle and then buy the atm straddle in march. In a sense it is a very similar trade that gives you more ways to make money, but also more ways to lose…..and you risk more premium. Not sure if that helps, but generally I start by picking a direction to make money. On a move that could occur either way is tough in a name like this where the options market does a fairly good job of pricing correctly. -CC


NFLX, I followed you out at 8.20. As a bit of a novice (getting smarter modeling you), I was contemplating alternatives, e.g., allowing the Jan 115 to expiry or cover the decayed option tomorrow, then letting the Mar 115 run, etc. I assume you think NFLX is basically a crap business model and that the run-up today may be temporary? -GY

This trade has a lot of moving parts. The biggest one, as always, is stock movement, however in this case the stock would have to reverse quite a bit for the profits of this trade to collapse. What is really affecting this trade at this level is the difference between the premium in each of the months. With the stock at this level, the easiest way to see what the premium is on each line is to look at the corresponding put. That premium you see in Jan is the risk assigned by the market that the stock reverses and finishes lower than the 115 strike before tomorrow’s close. All of that premium (the amount you see in the put) will be gone at the close tomorrow, and the only thing left will be the option’s intrinsic value, for that 115 call, if the stock finishes at 116, the intrinsic value will be 1, if it finishes at 114, it will be 0. The bigger risk and the reason we ultimately decided to close the trade is if that March volatility begins to get lowered. You can see all the premium at risk in those March options. The ATM straddle is over 20 dollars. This seems like the biggest risk to the trade. Vol coming in in that month could means dollars coming out of that straddle and not worth the risk of waiting for that 1.80 in premium in Jan to decay. -CC

I made really bad trade early last year when BAC was trading around $13 plus by buying Jan 2012 call $17 and selling $10 put with trade being wash with small credit like $80. I did not anticipate BAC to lose 60% and did not know how to limit my potential loss except closing the trade on the put. Now I got 1000 shares assigned to me at $10. What is my best course of action? -VK

One way to lower your cost basis would be to overwrite your long stock position on a monthly basis. the only problem with that is that because the stock is a single digit stock the upside calls don’t have a lot of premium on them. For instance, the Feb 8 Calls are a .10 bid. If you were to sell those and the stock was 8 or higher on Feb expiration then you would be committed to selling your stock at 8.00, plus receiving the .10 premium. This would obviously take you a long time too get back to 10.00 but it is one way you can add yield. You could also sell your stock and in an effort to reduce risk going forward buy an upside call thus just risking what you are willing to lose……The last and more obvious idea would be to take the loss and move on, and use the tax loss and apply it to some new more profitable ideas. Sometimes the best thing to do in a bad situation is cut your losses and move on. -Dan




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