Trading Basics: Adjustment on FB Long Calls
April 17, 2015
I’m updating my Facebook status to bear call spread; a simple adjustment to turn my long calls into a bearish trade that will still make money when it drops.
Original long call position
Adjusted trade
New profit zone
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Are you selling calls on FB and on which strike price? I have 5 contracts Long Call and didn’t quite understand how to adjust these?
Can you do a video?
Sandeep, the risk graphs are telling us that he originally bought the OTM May 87.50 call, and then adjusted by selling the May 85 call. The final position is a bear call credit spread. Even though the stock is at a potential support zone (including the 50MA) and the stock might bounce back, Noah has a winning position if the stock remains below $85, that’s more than 2 ATRs protection to the upside!
I think this is another advantage of initially buying OTM calls! If the position needs to be adjusted to a bear call spread, the adjusted position is really good!… if he had bought ATM calls this adjustment would have much higher risk!…. indeed financial Fung Fu! …. love it!
Gino I have 5 FB Long Call contracts, Sept 80. What strike price do I need to buy. I haven’t done spreads before but this trade needs help.
Thanks, Brad Smith
I don’t think a bear call spread is a good fix in your case because your long option is ATM and you would have to sell ITM options, increasing your risk of assignment if the stock bounces off the 50MA. To make matters more delicate, earnings is next week…. I’m looking forward to learning what adjustment Noah suggests. Your position is more challenging. Hope everything turns out all right for you.
Noah, after your adjustment are you planning to hold your position through earnings on 4/22? or will you exit right before earnings whether your position recovers or not? I like your adjustment very much, but earnings seems like a major problem… how will you deal with it?
@tofast1 if you wanna do what noah’s doing, you can sell probably around 2x the number of calls at the 85 strike price…so 10 in your case (i’m just guessing, i haven’t applied the risk graph to your trade). the risk becomes larger in your case, so test it out with the risk graph
personally, i would close out my trade entirely, or at least close out part of it. with earnings coming up, the risk becomes greater. take your money out and place it on other trades – there are lots of opportunities out there
I’ll close before earnings… Holding through the weekend gives a little theta, I anticipate a little downward drift early next week, I’ll most likely close out Monday or Tuesday or reduce the position at a minimum. already reduced the drawdown about 1/3
Selling ITM options really isn’t that big of a deal if you think about it.
1. statistically speaking odds of being called out prior to expiration are still relatively low.
2. if you do get called out early, then good, awesome, thank you drive through… the point of selling the ITM call to get the premium… it provides a delta hedge and theta positive, but at the end of the day those cap out at the maximum gain of the premium sold… so if they exercise then mission accomplished.
Yes, thanks Noah for the clarification. Apologies if I confused you Brad!!