I2,
Re: Re: "I like to sell 1/2 of my position, and use the $ to buy twice as much calls, therefore, establish myself for a Recovery Spread for the run-up."
What do you do when the price either continues to decline or remains stagnant past the expiration date?
Then I lost, but not as much as if I was still holding the stock.
Say, this is a real world example:
I own 800 of SMOD at $25. The stock drop to $20, so I sold 400 for $8000 and a $2000 loss. I'd buy 4 calls at $20 strike price out 3 months for $3 each (4x3x100=$1200), so I now have some cash in hand, without losing my potential gain if holding 800 shares.
The stock then dropped to 12.5 at expiration, I now lost an additional $1200, but I would be much better off than still holding
800 shares at $12.5 a piece. All of this, without losing the potential to gain, should the stock recover to $25.
Of course, I do this only if I believe in the stock, otherwise I would be better off with a stop loss order.... :-( |
