"Remedy for Losing Call Options Position?"

Indeed, stocks rarely go up the very moment you expect it to and some volatility before your prediction plays out is a very common occurrence. However, what happens during such temporary volatility is your leveraged position, such as options and futures, gets taken out by your stop loss in what is commonly known as a "Whipsaw".

So, what can you do if you don't want to have a strict stop loss in place which could lead to a whipsaw, at the same time reduce temporary account loss while waiting for the stock to go back in the direction you expect it to? (Learn more about the Six Directional Outlooks In Options Trading)

There are two things you can do actually; Write Options and Delta Neutral Hedging.

If you bought sufficiently in the money (ITM) call options, you could write Near The Money (NTM) call options, either slightly out of the money or slightly in the money, with strike price higher than the one you bought, transforming the position from a long call into a Bull Call Spread. As the stock declines, the gains on the short call options will partially offset the losses on the long call options.

Using Bull Call Spread as Remedy for Losing Call Options Position Assuming you bought ten contracts of QQQ's Mar $60 Call options when QQQ was trading at $63 for $3.10. Assuming QQQ drops to $62 and its Mar $62 call options are trading at $0.80 and your Mar $60 Calls are trading at $2.20. To protect your call options by transforming the position to a Bull Call Spread, simply sell to open ten contracts of Mar $62 Call. STO 10 contracts of Mar $62 Call = $0.80 x 1000 = $900 credit Maximum loss should QQQ continue to drop = $3100 - $900 = $2200

If the underlying stock continue to drop, you could even roll the short leg down along with the stock in order to increase your protection.

Using Bull Call Spread as Remedy for Losing Call Options Position Assuming QQQ continues to drop to $61 and its Mar $61 call options are trading at $0.60, its Mar $62 Calls are trading at $0.20 and your Mar $60 Calls are trading at $1.20. To increase your protection, you could roll your short Mar $62 Call down to the Mar $61 Call. BTO 10 contracts of Mar $62 Call = $0.20 x 1000 = $200 debit STO 10 contracts of Mar $61 Call = $0.60 x 1000 = $600 credit Maximum loss should QQQ continue to drop = $3100 - ($900 - $200) - $600 = $1800

However, it is unlikely you can continue to write options with strike price lower than your long position without incurring margin should the underlying stock continues to go down.

The other, more complex, way of hedging against a losing call options position is by "Delta Neutral Hedging". This means using instruments that contain negative delta to reduce the delta of your call options to zero such that the price of the resultant position will no longer react to small changes in price of the underlying asset. Instruments that carries negative delta include shorting the underlying asset itself, buying put options or even shorting futures.

Using Delta Neutral Trading as Remedy for Losing Call Options Position Assuming you bought ten contracts of QQQ's Mar $60 Call options when QQQ was trading at $63 for $3.10. Assuming QQQ drops to $62 and your Mar $60 Calls are trading at $2.20 with a delta of 0.8. Assuming the Mar $62 Puts are trading at $1.10 with delta of - 0.5. Total delta value of call options = 0.8 x 1000 = 800 To delta neutral hedge this position, you could short 800 shares of QQQ or buy 16 contracts of Mar $62 Puts for a total of (-0.5 x 1600) -800 delta.

In the above delta neutral hedging, further losses in the call options would be offset by gains in the short shares or put options such that no further losses will result. An additional benefit of such a delta neutral hedging is that once the QQQ finds direction again, the position will automatically start to profit into that direction with any further adjustment! Learn more about Delta Neutral Trading.

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