Stocks & Commodities V. 30:4 (49): Explore Your Options by Tom Gentile

Stocks & Commodities V. 30:4 (49): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile

BUY MORE FOR LESS?

I recently bought calls that proceeded to go up in price despite implied volatility dropping fairly hard from the levels associated with my initial purchase. Not wanting to look a gift horse in the mouth, yet wanting to maintain some directional exposure but also unwilling to sell call premium that appeared too cheap to me, I sold two-thirds of my position and let the balance ride. Do you think this was the right adjustment to make?

Congrats on taking one course of action that, as the saying goes, allows you to have your cake and eat it too. As a rule, you canít fault your adjustment if, when executed, you took what you considered to be an acceptable portion of your profits and were confident with the size of the remaining position whose premium remains vulnerable to opportunity costs.

In what is typical of this type of scaling out of a position, many traders will look to adjust and sell half of the contracts once a profit of 50% to 100% is reached. For instance, if you purchase 10 calls for $1.00 and can sell five for $1.50, the balance of the five contracts still held have an effective price of $0.50, while selling five for a 100% gain or $2.00 would allow for a free call position on the remaining contracts. That said, it looks as if your actions were motivated by this popular adjustment route.




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