Do I need to hold my option until expiration when it turns profitable. If my
option has increased in value but, still has time value, lets say two or three
months, is it such a bad idea to close the position and collect a profit?
In general, whether or not to hold a profitable position would depend on your
outlook for the underlying stock and your risk/reward preference. If you think
that the stock has experienced most or all of its anticipated move, you might
want to close out your position and take the profit. If you think the
underlying stock has a lot further to go, for even more profit, you might want
to let your profits ride (and take the risk of a reversal in stock direction).
And if you think the stock has further to go but want to take some money off
the table, you might want to sell your options, or a portion of the position.
One might even consider then buying some with a more distant strike, thereby
earning a credit on the spread.
What are the advantages of "vertical spreads"? And, are there any
disadvantages?
One advantage is knowing what the risks and rewards are for that position. The
vertical spread consists of buying one option and selling another with a
different strike but both expiring in the same month. Another advantage of a
vertical spread versus a single option position is that it is possible to put
a cap on the amount of risk the option writer (seller) assumes, and decrease
the costs of the purchase if you are an option buyer.
Disadvantage(s): One obvious disadvantage is that while limiting risk,
the investor also sets a limit on their profit. So, the investor would put a
cap on profit potential. Also, the investor should be aware that commissions
and interest charges can effect the profitability of all spread strategies. It
is suggested that the investor consult a tax advisor concerning the tax
consequences of any spread strategy. Further, there are occasions where
certain types of corporate actions may impact the profit/loss profile of a
spread. Extraordinary dividends, tender offers and even mergers can alter the
dynamics of a spread.
If I buy an in the money LEAPS call and sell a shorter term call against it
which is just out of the money - what happens if I get called? How do I settle
the trade? Do I have to exercise the in the money LEAPS call to get the
stock and then deliver the stock to the party that exercised the option that I
sold? Or is there an alternate way to settle the trade?
One of the risks in entering into a calendar spread position is the early
assignment on the "short" leg of the spread. Therefore, you will need to
ensure that you are approved for uncovered options transactions by the ROP of
your brokerage firm. The near-term, at-the-money or just out-of-the-money
options with the higher premiums are tantalizing, but there is added risk too!
The contracts have a chance of finishing in the money. How will you meet your
obligation(s) to deliver the called stock? If it's your plan, if called, to
exercise your long LEAPS position, you should carefully review the strike
prices of the contracts in the spread to give yourself a chance that if
called, you still have a profit. Remember, when you exercise an option
contract you forgo any time value. You should understand in advance the rules
for handling option assignments using this type of strategy. In most cases, if
you are assigned on a short option position you must take some sort of action
(e.g. exercise your long call, buy stock in the open market) to meet your
stock delivery obligations.
In the event of assignment, if an investor chooses to exercise their LEAPS
call, because of the 1-day lag between exercise and assignment, using the
long-term call to close out the position would require being "short" the stock
for a day. You will certainly want to discuss this strategy with your
brokerage firm.
In addition, there may be a reason that the market is pricing the option more
inexpensively than in the past. If it is cheap today and cheaper tomorrow,
then what's going to happen the next day? Predictions are merely that -
speculation. They may Have a sound theory to them, but may not prove to come
true. There is a calculator on OIC's site at:
http://www.888options.com/desk/options_calc.jsp that you can use to
calculate implied volatility. There is also educational software package that
comes on a CD, which you can order:
http://www.888options.com/store/investigator_help_center.jsp.
This book describes just about every
fundamental strategy you could try with options. It covers the total return
concept of covered call writing, the pros and cons of option buying, examines
various types of spreads (vertical, calendar, and diagonal) and the various
delta (price) neutral strategies. If you have to have only one book on options,
this will be it.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
