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Options Strategies Discussion and Support Forum


Welcome to Etradehome Forum on Options Strategies. Feel free to post a message.
Any commentary or illustration generated in this forum is provided for educational purposes only. You must decide your own suitability to buy or sell options. This is neither a solicitation nor an offer to buy/sell stocks or options. Commission was not taken into calculation. Note: You have to know the risk of options writing before execution, especially naked call/put writing, bull/put spread, covered call writing, short straddle, short strangle, short guts, short/long iron butterfly, short/long wingspreads and short/long box.  Forum participants have to exercise responsibility and sincerity in message posting.

 

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Options Strategies Discussion and Support Forum
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Options writing, time value, intrinsic value and roll over

Hi Etradehome

I wold like to confirm with you on this:

1) when we construct a short guts on say QQQQ, say stock price now at $42, the two strikes are 44p and 40c. the spread between the two strike prices are safely covered by the intrinsic premiums of the 44p and 40c right? and the time premiums of the 44p and 40c will give us the potential profit if QQQQ falls inside this range by expiration, correct?

2) if some time before expiration, QQQQ goes down to $39 and we do our repair. the damage or loss as you mentioned during the course is actually $1 (from $40-$39), right? and this damage is actually due to the deltas significance of the 44p over the 40c options, correct? and to repair this loss of $1, we will roll down to say $37 in the next month. the key thing is that the time premium must be more than $1 to take care of the damage right? by having the time premium taking care of the loss of $1, even though the spread between the two strike price (44p and 37c) has now increased, when QQQQ eventually falls within this range on expiration, we would still be able to profit right?

hope u do understand what i am writing here. :) and pls help to correct any misunderstanding that i have over here. thank you.

rgds
ky

Re: Options writing, time value, intrinsic value and roll over

Excellent questions asked, KY!

$0.20 for these brilliantly written questions!

We open to the forum participants to provide their views/opinions/answers before we provide the reply. They might have many great ideas to add on to your understanding of options.

Thanks everyone!

Etradehome.com
Any commentary or illustration generated in this forum is provided for educational purposes only. You must decide your own suitability to buy or sell options. This is neither a solicitation nor an offer to buy/sell stocks or options. Commission was not taken into calculation. Note: You have to know the risk of options writing before execution, especially naked call/put writing, bull/put spread, covered call writing, short straddle, short strangle, short guts, short/long iron butterfly, short/long wingspreads and short/long box

Re: Options writing, time value, intrinsic value and roll over

Dear KY,

It seemed everyone was busy rolling down and forward and no time to provide opinions. Ha!

Here are the replies:

Q: let say we are in the middle of a short guts which has about 20 days to expiration and the stock moves up in price resulting in the call option being exercised. in this case, we will have to buy back 100 shares from the market the next day, at a price higher than the strike price that we were forced to sell the 100 shares away. there is a loss here right away.

Reply: Say you are selling 44 put (e.g. premium of $3) and 40 call (e.g. premium of $3 also) for QQQQ. QQQQ moves up to $44, and your short call is exercised. That means, you have shorted the underlying at $40 (assigned -100 shares). When you buy back the stock at $44, you will realise the loss of $400. Once they exercise you, you will collect the 40 call premium immediately, which is $3. 40 call exercised, you got shorted at $40, and when you bought back at $44, you realise a loss of $400. You collected
$300 from call selling. Then you are sitting on a loss of $100. Temporarily.

+++++

Q: how then should we go about from here? sell another call at a higher strike price such that the time premium will take care of this loss? or....?

Once you have bought back the call, you can sell to another month, either at 40 strike price, or higher, probably 42 strike price, if you always like to have a distant of $2 away. As you can see, there is no loss by buying back the stock, the premium sold earlier on above has taken care of the 'paper loss of $400'.

When the stock moves near $44, it is time to buy back the 44 put. The premium will probably drop to $150. You will realise/pocket a profit of $150. Remember the delta for short put is not high, probably
0.6 when it becomes ATM. Then you sell to next month, say 46 put. The premium is probably $310.

For the short call, you have to reconstruct back after
buying the assigned -100 shares. Say you sell into next month at 42 strike when the stock is at $44, say you will collect $310 also.

If the stock ends between $42 and $46 next month, then the profit is:
-$400 (from stock buy back above) + $300 (premium collected from 40 call assignment) + $150 (buy back 44 short put/roll over) + $310 +$310 (resell call and put into next month) - $400 (range of 42 to 46) =$270 (profit)

As you can see, if the stock ends in the range for this month, the profit is $200 max (time value). If it requires rollover, you get $270 in two months. It is lower than the profit of max profit targeted for one month (if both months do not require rollover). Anyway, it is still profitable.

Isn't it beautiful?

Etradehome.com
Any commentary or illustration generated in this forum is provided for educational purposes only. You must decide your own suitability to buy or sell options. This is neither a solicitation nor an offer to buy/sell stocks or options. Commission was not taken into calculation. Note: You have to know the risk of options writing before execution, especially naked call/put writing, bull/put spread, covered call writing, short straddle, short strangle, short guts, short/long iron butterfly, short/long wingspreads and short/long box.

Re: Options writing, time value, intrinsic value and roll over

"If the stock ends between $42 and $46 next month, then the profit is:
-$400 (from stock buy back above) + $300 (premium collected from 40 call assignment) + $150 (buy back 44 short put/roll over) + $310 +$310 (resell call and put into next month) - $400 (range of 42 to 46) =$270.”

hi Etradewhome, what if the stock for the 2nd (rollover) month does not expire within $42-46? thanks

Re: Options writing, time value, intrinsic value and roll over

Hi WinOption,

Thanks for posting, $0.10 as the reward!

If the underlying goes near $46 when you have the short guts constructed, you have to buy back the 46 put. Whenever you buy back the short put, you take a profit (because put is cheaper as the underlying moves up). Sometimes you will have a temporary loss due to delta increase from short call, but it will be offset by time value.

After buying back the short put, you have to sell to 47 or 48 put immediately, not the same month as the short 46 put, but 1-2 months forward. This is to collect more time value to offset any temporary loss due to delta. If it keeps rising, then buy back again the 47 or 48 put, then sell into 49 or 50 put, again further months than the original 47 or 48 put, for more time value.

One of the reasons why exchange traded funds is a better choice than single stocks because the market does not keep rising uninterrupted. It will stay flat, or retreat a bit, then probably climbs again. Everyday in this 'ting-tong position' will cause time decay in the sold options. Good for sellers.

If th stock drops near the short call price, do the same: roll down and roll forward.

Please write in this forum again if we do not answer your questions properly.

Have a nice week ahead.


----------------------------
Any commentary or illustration generated in this forum is provided for educational purposes only. You must decide your own suitability to buy or sell options. This is neither a solicitation nor an offer to buy/sell stocks or options. Commission was not taken into calculation. Note: You have to know the risk of options writing before execution, especially naked call/put writing, bull/put spread, covered call writing, short straddle, short strangle, short guts, short/long iron butterfly, short/long wingspreads and short/long box. Forum participants have to exercise responsibility and sincerity in message posting.