Using options in a bull market with core stock positions?

[scorpioncapital]

has anyone used options with a core position? for example, say you are unloading stock in slow motion as markets rise. Is it better to sell covered calls longest out or sell puts at say your cost basis price if the stock is far ahead at the moment?  The latter commits you to buy in the future, but at a price potentially no higher then your cost basis several years back. The former is a gamble on how high the bull can run and you may have to sell in 100 share lot something you wanted to sell in smaller pieces or not at all.

 

 

[SharperDingaan]

Its usually better to just just sell the stock vs an ATM covered call - simply because the sale actually took place. With a covered call there is a real risk that you will not get called; trapping you with a position that is falling in value - which you would otherwise have sold at the higher price. You got some premium, but it'll still hurt.

 

To buy in a position its better to sell ATM puts. If you're called, you buy the same quantity out of the market to lower your average cost; if you're not called the premium gave you some cushion against the now higher market price. 

 

SD

[Gregmal]

I prefer using ITM options. You can put on the same size positions for a fraction of the cost. For years I was rocking Citi $40 calls while selling $40 puts. Much cheaper than buying the same amount of the stock outright. You can also use a simpler version where you only buy the ITM call, which essentially provides you with a stop loss. But my thoughts were always that if my work was right there is no way in hell I'd want to get stopped out at those prices, if anything I'd add, thus the put selling as well.

[scorpioncapital]

Whats a good way to do the following ?

 

You have a core position you want to maintain at a certain level but it's a bit too high right now.

You want to sell below this level slowly but maintain any option to upside at the core level .

 

If you only have one instrument to work with do you buy a put with the core position or sell down the core while adding a call option along the way ?

 

 

[writser]

I'm looking for an option strategy to do the following: if my core position goes up, down or sideways I want to make lots of money. Any advice would be appreciated.

[SharperDingaan]

Whats a good way to do the following ?

 

You have a core position you want to maintain at a certain level but it's a bit too high right now.

You want to sell below this level slowly but maintain any option to upside at the core level .

 

If you only have one instrument to work with do you buy a put with the core position or sell down the core while adding a call option along the way ?

 

Net-net there's really no difference if using puts/calls. Our preference has always been to sell down the core, replace with calls, and treat the premium as an immediate total write-off. If the write-off doesn't change your strategy, it's probably the right thing to do.

 

However margin works a lot better; as the margin mimics a share sale that didn't take place - on which you're only paying interest. X months of margin interest = Y of call premium. (Think of a house worth 100K financed with a non-recourse mortgage of 90K; if the value of the house fell < 90K you would give the banker your keys. Why? - because that non-recourse 90K mortgage is acting as a put (ie: a synthetic sale))

 

SD   

 

 

[John Hjorth]

I'm looking for an option strategy to do the following: if my core position goes up, down or sideways I want to make lots of money. Any advice would be appreciated.

 

Hilarious, writser. You're almost killing me. I don't think that I have deserved that treatment, I always - at least try to - repsond politely to your post here on CoBF.

[LC]

I'm looking for an option strategy to do the following: if my core position goes up, down or sideways I want to make lots of money. Any advice would be appreciated.

 

Hilarious, writser. You're almost killing me. I don't think that I have deserved that treatment, I always - at least try to - repsond politely to your post here on CoBF.

 

It was kind of funny though :D I think it was meant in a light-hearted manner :P

 

If you only have one instrument to work with do you buy a put with the core position or sell down the core while adding a call option along the way ?

Your options are to sell the stock and buy a call; buy a put ; or sell the stock because you know it is overvalued.

 

Your knowledge is worth the cost of maintaining the hedge.

 

Myself, I always went with this final route.

[John Hjorth]

Good, and most of all, a qualified answers here from LC and others.

 

Apology to all for derailing a good question from scorpioncapital here. I got carried away by writser's humor.

[writser]

Glad you appreciate it. Just wondering: you own an overvalued stock in a bull market and you want to sell it slowly but keep the upside because it might go higher. I'd say the important question is not: how do I implement this strategy with derivatives but: is this a sensible strategy? What's wrong with simply selling?

[scorpioncapital]

I like the idea of writing off a call premium. It usually is far smaller then the gross value of the position you are liquidating .

[sarganaga]

Glad you appreciate it. Just wondering: you own an overvalued stock in a bull market and you want to sell it slowly but keep the upside because it might go higher. I'd say the important question is not: how do I implement this strategy with derivatives but: is this a sensible strategy? What's wrong with simply selling?

I strongly agree with the above. If you want to lighten a position, just do it. If you want to buy it back later on, do that.

 

Unless you have reason to believe you have some sort of edge in trading the options, selling really looks like the much better choice. In these days of low volatility and markets which slope gently upward, options trading has looked pretty benign from a risk standpoint. But, like G K Chesterton opined, the wildness lies in wait.

GE is a good recent example.

[scorpioncapital]

I just see options as a deal when you suspect something is overvalued but it could still double because

a) markets are crazy bullish or

b) you are , in fact wrong on the upside, in your valuation.

 

The loss is far less if you sell at this guesstimate of overvaluation and then lose 1/10th on an option position.