hi everyone,
not sure if you all ever encounter this. you sold an otm call and find that the stock advances and the short call is about to be breached.
in this case, what would you do?

some suggestion is to roll up and out the call to further months, in which the new call sold will be able to cover the buying back of the now more expensive short call. however, this normally would mean you have to roll out into many months ahead. good choice?

some other people said rolling out into the next month. in this case at the same strike price, rolling out only into the next month would definitely ensure a net credit in the position.

so the question is, which is better or is there another even better way of repairing this?

hope to hear from you guys. thank you.

rgds
ky

Good question for brainstorming. Everyone is welcome to post your opinion. Start now!

Hi KY,

The solution assuming same risk profile, is to roll the short call up and into further months, to avoid loss. I doubt you can roll for a profit since the bid/ask spread for higher strikes and further months are wide and not traded much leading to a bad fills.

Unlike an index or futures, a stock can go up for a long time. For me, if the stock chart looks very strong I will take the loss move on and try to recover it from another stock.

Eugene Tan

If the stock keeps rising, the repair on short call will take a long time.

I know what Eugene meant. If I suffer a loss of $100 when the short call is near the money, I have to sell to back months, and look for at least $100 in premium to recover my loss. If the stock rises again, I have to buy back the short call (again, at a loss), and sell further into back months. I think the repair takes too long. It seems short guts has a better repair mechanism.

But, normally, the far OTM call or put will expire worthless, especially those are too high in IV, right before earnings announcement or after earnings announcement.

JK,

If KY sold a otm put as well, then it will help his position a lot. While rolling up the otm call incur loss, rolling up the otm put as well makes money.
The principles is similiar to short guts only that short guts construct (itm) options while this is (otm) options.

Eugene Tan

hi everyone,
thank you so much for your input. :)

yes you are right, if the stock keeps advancing, the repair will be difficult and will take a long time.

thank you Eugene for the suggestion of using a put in this case. this selling of the otm call and otm put in a way makes it quite similar to the IC, except the protection outer wings are gone in this case.

with a put at the bottom, and rolling up the put together with the call perhaps will make the damage impact not that great after all.

so comparing this strategy of selling otm call and otm put, would it makes it similar to our short guts then? and what protection strategy (no IC pls...:)) would you guys recommend for this otm selling strategy then?

hope to hear from you, thank you.

rgds
ky

KY,

Trading is an art not rocket science. Some ppl prefer otm calls/puts (called: short strangles) and some others prefer short guts. One caution note: I do either one NOT both though. I did get mixed-up otm with itm for the stock and visa versa ! Haha! So now I stick with either short strangles OR short guts. For me the choice to decide is which one strategy gives me MORE premiums. Premiums is after all wants all seller hunger for-lol

Eugene Tan