Price action and stocks vs options

[Haggerston]

Hi

I've a sizable postion in stocks along with Dec $19 and Jan $15 calls.

I'm considering  rolling Dec calls into Mar and beyond, any thoughts on the prices action and  if we see that  price in the 20s by year end?

Thanks

[admin]

With the funds that have actually done DD on the ground in China buying large positions after the MW report appeared, I think we have reasons to be rather optimistic. This both boost confidence and decreases the float.

[kevinh]

Why is your farther out calls closer to the money? It's a weird position to set up.

[Mountainbiker]

Timing might be a bit difficult. But for sure we will grind higher, making higher highs and higher lows. The sub $10 price is in the rear view mirror.

[theotherbarry]

Why is your farther out calls closer to the money? It's a weird position to set up.

Agreed, usually ATM closer than OTM.

I myself was debating switching my Jan 15 C to March 20 C, but I think I'll wait till I'm ITM with them.

[kevinh]

Vol is still in the 120s, which is high (although not as high as 250s two weeks ago), so my advice is to not be a net buyer of vol. If you want to go long, go long shares.

March 20 call is priced at 2.00/2.05, you break even when the stock hits $22, or ~57% higher from here. It doesn't make sense to me to take this kind of position.

[theotherbarry]

Vol is still in the 120s, which is high (although not as high as 250s two weeks ago), so my advice is to not be a net buyer of vol. If you want to go long, go long shares. March 20 call is priced at 2.00/2.05, you break even when the stock hits $22, or ~57% higher from here. It doesn't make sense to me to take this kind of position.

Mmhm, and what of selling on the IV alone? Waiting until the IV is lower (possibly Dec) and selling pre-earnings? Do you think it'd be worth it or?

[kevinh]

Up to you how you want to put up positions but my opinion is that long calls is a bad trade. If the stock goes straight up at .25-50 cents a day, it will crush implied volatility, so you will be losing money on both theta decay and a loss on the vol, a double whammy as your vega drops significantly.

My go to trade on this has been selling otm front month calls on price spikes, and then buying the calls back as the price slides back down. With a long stock short call position, I am 100% delta hedged and am shorting vol and collecting premium. But people on this board seems to hate this trade.

[admin]

Up to you how you want to put up positions but my opinion is that long calls is a bad trade. If the stock goes straight up at .25-50 cents a day, it will crush implied volatility, so you will be losing money on both theta decay and a loss on the vol, a double whammy as your vega drops significantly. My go to trade on this has been selling otm front month calls on price spikes, and then buying the calls back as the price slides back down. With a long stock short call position, I am 100% delta hedged and am shorting vol and collecting premium. But people on this board seems to hate this trade.

Certainly not me, Kevin, athough I think it is quite likely that NQ shares will have recovered most, if not all of its MW related losses by March, so this might be one of those cases where buying OTM calls actually pays off:

• Funds are buying, especially encouraging where they have done DD in China after the MW report
• In the five months since MW to March, the company isn't sitting still
• We'll have the independent audit coming out, most likely considerably before March, so NQ could have a clean bill of health that is difficult to negate, before March

[kevinh]

Up to you how you want to put up positions but my opinion is that long calls is a bad trade. If the stock goes straight up at .25-50 cents a day, it will crush implied volatility, so you will be losing money on both theta decay and a loss on the vol, a double whammy as your vega drops significantly. My go to trade on this has been selling otm front month calls on price spikes, and then buying the calls back as the price slides back down. With a long stock short call position, I am 100% delta hedged and am shorting vol and collecting premium. But people on this board seems to hate this trade.

Certainly not me, Kevin, athough I think it is quite likely that NQ shares will have recovered most, if not all of its MW related losses by March, so this might be one of those cases where buying OTM calls actually pays off:

• Funds are buying, especially encouraging where they have done DD in China after the MW report
• In the five months since MW to March, the company isn't sitting still
• We'll have the independent audit coming out, most likely considerably before March, so NQ could have a clean bill of health that is difficult to negate, before March

Here is the problem though. Suppose you have $10,000, you can either buy 715 shares of stock or 50 March 20 calls at $2 a piece. The 50 calls represent 5000 shares.

If the stock goes to $20 by March expiration, you are up $4300 on the stock, but down 10k (or 100% on the calls).

If the stock goes to $21 by March expiration (50% appreciation in 3 months), you are up ~5k on the stock, but you are down 5k on the calls.

If the stock goes to $22, you are up 5700 on the stock, but just broke even on the calls.

If the stock goes to $23, you are up ~$6400, while up $5k on the calls. The stock needs to go past $23.40 by march expiration in order for the long call to be a better play than just long stock. You can be optimistic on the stock but expecting 70% appreciation in 3 months and betting on it happening is not a great position.

And not that it means anything, but my friends at various prop trading firms (real prop trading firms trading the firms capital, not the hundreds of chop shops across nyc) are net sellers of options (short vol) on NQ over the past weeks before Nov expiration when imp vol was between 180-220.