Option Writers Newsletter, Wednesday, 08/15/2007 09:18:18 PM ET
OPTION WRITER : ALTERNATIVES TO DELAY LOSS
by Steve Gail
HAVING TROUBLE PRINTING?
Well it finally happen, outside of the $50 loss we took in January, this will be the first month this year and the first month since July of 2006 that the Option writer will have taken a real loss. Well we all knew it was due. Anyway let's look at some potential solutions for this month.
We may not be able to save it, but let's see some alternatives we have as options:
1. IIIN, ACGY, MU ALL more than likely will be put to us if we do not close out the positions come Friday before the close. ( Truism)
You have the following choices:
A. You can let the stocks be assigned to you ( if you have enough margin and
if you feel strong enough about the stocks to want to own any of them down at these
prices.) If you do, then you can do the following. You may have the stock or stocks put to you ( any or all ) and immediately turn around and go out 3-4 months and sell an AT-THE- MONEY call option( or slightly out of the money option ) at the original strike price we sold our August puts. This will give us some premium ( maybe now enough to offset out loss, but to at least bring in some cash to reduce that loss ) If all goes well and the stock advances to the old price or strike we sold the call option for the stock will be exercised and taken from us at that strike and we will receive the amount of the stock at that strike price and also keep the premium we recieved for the sale of the call option. This should either get you even or in some cases put a slightly ahead. However, you must have enough margin to do this.
( see example scenario #1 below )
The second alternative is as follows:
B. Go way out and sell an in the money option call option as deep as you can so that you can get some additional premium in the account to protect you in case the stock conintues to go down. The problem with this second scenario is that you might not get back even, but will only reduce your loss by at least by 75% ( if IIIN ends up over $15 by January,( remember its $18.30 today.)
In other words scenario #2 helps you reduce the loss and gives you 20% protection in the stock price, so even if IIIN goes to $15 they will take the stock at $15 and you keep the $4.50 X 1000 or $4,500 and you net out $19.50 or a $0.50 loss = 10 X $0.50 = $500 NET LOSS. instead of $1750 currenty in IIIN. All IIIN has to do is stay above $15 between now and January. If it does get called away ,we net out a $500 loss instead of the original $1750 by closing the August put out by buying it back before Friday.
The same conditions apply , you must have the necessary margin or cash to buy the stock and still have enough to continue to sell the continuing put recommendations.
( see example Scenario #2 below )
C. Roll out the position and sell another short put either at a lower price
and double the contracts ( so instead of 10 IIIN August 20 puts, you would sell 20
IIIN Januaryn15 or 17,5 puts
D. If you do not have enough margin: Close out the position and just take the loss and go on.
Since the option writer is a startegy attepting to generate cash flow , we usually close out all position and take the losses and go on and mark it off as a bad month and to the cost of doing business.
For specific examples see the IIIN example below