"Repairing Losing Long Call Options?"
"Can a losing long call options be repaired to minimize loss?"
- Asked By Kevin Ho on 21 July 2011
Answered by Mr. OppiE
Options are the most versatile trading instrument in the world today. It offers not only a myriad of ways to profit from a single or multiple outlook but is also versatile enough to be transformed to accomodate changing outlooks as the trade progresses in order to limit losses or even turn around a losing options trading position.
So yes, there are indeed many ways to repair a losing long call options position depending on what your new outlook on the position is. Lets take a look at two of these ways.
If you think the underlying stock is going to continue dropping significantly
You can transform the Long Call Position into a synthetic long put
, which is a bearish options strategy
, in order to turn the losing position into a winning position should the underlying stock continue dropping. This is done by simply shorting 100 shares of the underlying stock for every 1 contract of call options you are holding.
If you think the underlying stock is going to drop only moderately
Example of Transforming Long Call Into Synthetic Put
Assuming you bought 1 contract of QQQ's $42 strike price call options when QQQ was trading at $42 for $1.50. QQQ dropped to $40 and the $42 call options are now trading at $0.75. You wish to transform the position into a synthetic put as you are now of the opinion that the QQQ is going to drop significantly.
You short 100 shares of QQQ at $40.
Breakeven point of position = $40 - $1.50 = $38.50.
The position will start becoming profitable when QQQ drops below $38.50 while making sure that the position will lose no more than $2 + $1.50 = $3.50 no matter how high QQQ goes should your outlook be wrong.
You could transform the position into a Bear Call Spread
by writing At The Money
or Near The Money
Call options against the existing out of the money
long calls in order to reduce or eliminate the loss on your losing long call options.
Example of Transforming Long Call Into Bear Call Spread
Assuming you bought 1 contract of QQQ's $42 strike price call options when QQQ was trading at $42 for $1.50. QQQ dropped to $40 and the $42 call options are now trading at $0.75. You wish to transform the position into a Bear Call Spread as you are of the opinion that the QQQ will drop only moderately by expiration.
You write 1 contract of QQQ's $40 strike price call options for $1.30.
If QQQ close below $40 by expiration, your position would have lost only $1.50 - $1.30 = $0.20 instead of the full $1.50. If QQQ rises instead, the position will lose no more than $2.00 - $0.55 + $0.75 = $2.20.
Of course, you would have noticed that in both cases, should the underlying stock regain its bull trend after such an adjustment, you could stand to lose more than you would if you had let the call options expire worthless. As such, you need to be very confident that the underlying stock is past regaining its bullishness before making such adjustments.
there are many ways to repair losing positions in options trading but you will need to make sure your outlook on the new direction is correct and make sure you calculate the new resultant breakeven point and maximum loss in order to decide if such an adjustment is worth it.