# My first options trade, Doh!



## Hopeful (17 November 2006)

I liked the look of RMBS's chart on Wed 15th - it looked like it had made a strong line of support at 16 and looked like it was going up to 19.60-20. So, I bought some at 17.13 (almost the high of the day, doh!). Then on Thursday morning as it approached 20 and pulled back a bit I though that it may be making a short-term top as expected. Rather than jump ship like I normally would after getting a nice profit I instead sold a Jan 20 call for 1.75 then I was done for the day (night for me). The stock finished up 30% near 22 so now I have an obligation to deliver at 20 in Jan if I don't close out before then.

Bought stock at 17.13
Sold Jan 20 Call for 1.75
Last price for stock 21.72

If it finishes over 20 at exp I'll have a 2.87 profit on the stock and 1.75 for the sold call, that is a 4.62 profit.

I'm writing this to ask what you would have done differently and what you might consider doing with this trade now.

As my first options trade it feels a little bitter having sold a call that immediately went ITM by almost 2 points! But on the other hand I doubt I would have held on otherwise and I would be   anyway.

Any comments? What have I gotten myself into?


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## ducati916 (17 November 2006)

Hopeful said:
			
		

> I liked the look of RMBS's chart on Wed 15th - it looked like it had made a strong line of support at 16 and looked like it was going up to 19.60-20. So, I bought some at 17.13 (almost the high of the day, doh!). Then on Thursday morning as it approached 20 and pulled back a bit I though that it may be making a short-term top as expected. Rather than jump ship like I normally would after getting a nice profit I instead sold a Jan 20 call for 1.75 then I was done for the day (night for me). The stock finished up 30% near 22 so now I have an obligation to deliver at 20 in Jan if I don't close out before then.
> 
> Bought stock at 17.13
> Sold Jan 20 Call for 1.75
> ...




RMBS quote Real-time quotes 
After Hours: 22.41 +0.69 / +3.18% Vol. 526,684 
21.72  +5.07 +30.45% 
Volume 36.41 Mil RMBS Intraday Chart
NASDAQ Exchange



Data Source: CSI 11/17/06 12:10 AM ET


Avg Daily Volume 8.384 Mil 
Day's High 21.88 
Day's Low 18.10 
Open 18.40 
Previous Close 16.65 
Bid 0.01 
Bid Size 100 
Ask 2,000.00 
Ask Size 100 Current Div. Yield NA 
52 Week High 46.99 Market Cap. 2.232 Bil 
52 Week Low 10.25 Tot. Shares Out. 102.8 Mil 
fyi  Instit. Ownership 33.0% Forward P/E 108.60 
fyi  P/E 55.60 Sales 164.8 Mil 
Earnings/Share 0.30 Return on Equity 10.22 
Div/Share NA Beta 2.76 

.BNQAD quote   
4.30  +3.60 +514.29% 
Open 1.300 Open Interest 14,051 
Bid 4.200 Previous Close 0.700 
Bid Size 445 Volume 11,258 
Ask 4.400 Day's High 4.400 
Ask Size 493 Day's Low 1.150 
Strike Price 20.000 Days Until Expiration 65 
Expiration Date January 20, 2007 

First of all, this trade is far from over with a Jan expiry and 65 days left.
If you sold the stock after hours, covered the Option, circa the quoted price, then closing out both legs of the trade will net circa;

Common = +$5.25
Option = $4.40 - $1.75 = $2.65
Total Open Profit = +$2.60
Less Brokerage 

This is so, as you cannot deliver the common to close out your derivative position, as you do not own the derivative, thus the option to deliver is not your's to make.

Therefore you are stuck in a narrow range of $19 to $20 where your profit is maximal, should the common continue to rise, your open profit of $2.60 will continue to erode, and you will potentially show a loss on the position.

If the common falls below $15.38 you will also incur losses.
Your open profit erodes between $17.13 & $15.38

Things were fine until you sold the derivative position, and compromised the integrity of your position, now you have turned a winning trade into a trade management nightmare if you keep it open, or surrender 43% of your profit immediately.

jog on
d998


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## ducati916 (17 November 2006)

*RMBS* 

And here is the chart;


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## Hopeful (17 November 2006)

_Therefore you are stuck in a narrow range of $19 to $20 where your profit is maximal, should the common continue to rise, your open profit of $2.60 will continue to erode, and you will potentially show a loss on the position.
_

Max profit is achieved at exp if the stock is at 20 or above, right? You are talking about the open position. How can it potentially show a loss if the common keeps going up? That would only happen if the value of the call goes up above and beyond it's intrinsic value, and if I hold until exp it won't matter.

_Things were fine until you sold the derivative position, and compromised the integrity of your position, now you have turned a winning trade into a trade management nightmare if you keep it open, or surrender 43% of your profit immediately._

If I close it up now I'll have a 2.60 profit. That's nice for 3 days 'work' . But I sold the call to take in extra cash and cusion it should it fall. I'm thinking that I should hold it until exp. at which point I'll have the max profit if it's above 20 , as I said before (correct me if I'm wrong) that max will be 4.62 - that's pretty attractive to me - it's a 30% return (cash out 15.38 , profit 4.62, 4.62/15.38 = 30%) in 65 days or 168% annualised.

If it continues to rocket then I guess I could lock in a profit by buying a cheap Jan 20 put - then I can just put the trade to sleep until exp without any stress. Is that a reasonable option or what would you do? Cheers.


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## professor_frink (17 November 2006)

Hopeful said:
			
		

> _Therefore you are stuck in a narrow range of $19 to $20 where your profit is maximal, should the common continue to rise, your open profit of $2.60 will continue to erode, and you will potentially show a loss on the position.
> _
> 
> Max profit is achieved at exp if the stock is at 20 or above, right? You are talking about the open position. How can it potentially show a loss if the common keeps going up? That would only happen if the value of the call goes up above and beyond it's intrinsic value, and if I hold until exp it won't matter.
> ...



Hopeful, I think you'll find that your max profit will be if the underlying is at 20 or above when the option expires.
That will give you $2.87 on the underlying, and $1.75 for the option, making you 4.62.  Anything above 20 at expiry won't matter, as you'll have the stock called away at a price of 20, and you'll lose on the position if it closes below 15.38.


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## Hopeful (17 November 2006)

Thanks for confirming that, Professor. Hopefully it keeps going up so I can lock in a profit with a cheap 20 put and be done with it until expiry. It's not as if I need the capital to put somewhere else as I've got 20k just sitting there doing nothing anyway.


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## ducati916 (17 November 2006)

Hopeful said:
			
		

> _Therefore you are stuck in a narrow range of $19 to $20 where your profit is maximal, should the common continue to rise, your open profit of $2.60 will continue to erode, and you will potentially show a loss on the position.
> _
> 
> Max profit is achieved at exp if the stock is at 20 or above, right? You are talking about the open position. How can it potentially show a loss if the common keeps going up? That would only happen if the value of the call goes up above and beyond it's intrinsic value, and if I hold until exp it won't matter.
> ...





You will realize $4.62 if you wait to expiry in 65 days and the price remains above $20.00. The problem, is the 65 days. This is a volatile common with a beta of 2.76 odd. This volatility could see the price falling below $15, or retesting the bottom end of the chart.

Sure the annualised return of 168% looks impressive, which is why people annualise their returns, but, annualised or not, it is not a return until it is banked in cash........until that moment, it is an open trade, that is still exposed to beta & alpha risk.

With regards to buying a Put, yes you could, but it has two possible outcomes, it could as you assert, provide profit potential should the common fall from priceX back to $20.00, but it could also reduce your potential profit of $4.62 by the premium purchase price. As to it being cheap, that is incorrect, it is fairly valued, to very slightly overvalued [the spread].

What would I do?
Irrelevant, it is your trade, not mine.

jog on
d998


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## ducati916 (18 November 2006)

> SAN FRANCISCO (MarketWatch) -- Rambus Inc. shares soared 30% Thursday after several Wall Street analysts speculated that the maker of memory-chip technology will receive a favorable ruling in a patent dispute before the U.S. Federal Trade Commission.
> 
> Rambus (RMBS) , whose shares often see large one-day moves related to the company's many legal proceedings, rose $5.07 to $21.72. Trading volume was more than four times the stock's daily average.
> 
> Rambus has delayed filing full financial results for its latest reporting period amid a probe into past accounting for employee stock option grants. The probe prompted the company's former chief executive officer, Geoff Tate, to resign from the Rambus board.




Again, similar to enzo's medical company options trade [called in real time] we have a play based on *good news*. Obviously rather difficult to predict when good news may be released, and how, or which way the price may jump.

Just a relative valuation in reference to the 168% annualised return, to put the *time element * into perspective; the annualised return on the 3 day return = 562.1%, thus the time decay is quite significant in this case.

jog on
d998


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## ducati916 (18 November 2006)

An additional point [or risk factor] is the risk of being *exercised*
While this is generally regarded as a remote occurance, due to the ease of selling the Option, it is a real risk [currently] should it occur.

jog on
d998


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## Hopeful (18 November 2006)

ducati916 said:
			
		

> An additional point [or risk factor] is the risk of being *exercised*
> While this is generally regarded as a remote occurance, due to the ease of selling the Option, it is a real risk [currently] should it occur.
> 
> jog on
> d998




If I get exersized early I will realise the maximum profit potential and will be free from obligation. The call buyer will be giving up his/her theta to me. I'll hapilly oblige!


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## ducati916 (19 November 2006)

Hopeful said:
			
		

> If I get exersized early I will realise the maximum profit potential and will be free from obligation. The call buyer will be giving up his/her theta to me. I'll hapilly oblige!




Apologies, I should have been clearer;
As you hold the underlying, and are not naked, if the common is above $20, the exercise price, it is in your favour if the Option is exercised early.

However, it is not in your favour, should the price fall rapidly due to increased volatility in the underlying, although this may well impact the vega in a positive manner for the holder of the option due to the length of time to expiry. This could impact you the seller negatively, if you were required to cover your contracts.

*21.12  -0.60 -2.76% 
After Hours: 20.80 -0.32 / -1.52% Vol. 107,642 
Previous Close 21.72 Bid 0.01 
Open 22.60 Bid Size 100 
High 23.50 Ask 9,000.00 
Low 21.02 Ask Size 100 
Volume 24.59 Mil 52 Week Range 10.25-46.99 

.BNQAD quote   
3.90  -0.40 -9.30% 
Open 4.700 Open Interest 18,475 
Bid 3.500 Previous Close 4.300 
Bid Size 146 Volume 1,392 
Ask 3.700 Day's High 5.000 
Ask Size 198 Day's Low 3.500 
Strike Price 20.000 Days Until Expiration 63 
Expiration Date January 20, 2007 * 

You may subscribe to the theory of Gaps being closed, or you may not. However, that the move was based on a positive court decision, would not have been important to many latecomers, and possibly many holders prior to the external event. It now remains to be seen if the gap holds, or, price continues to rise from the current level.

Returning to the original point of *being exercised*
As you have sold the Call, and hold the underlying, you are quite correct that at current prices, if exercised early, you are in a good position and will maximise your profit.

If prices continue to fall, is where management becomes a more complex issue
It would be dangerous to sell the underlying common, and realize your profit, as you would then be naked, and subject to the risk of early exercise if price continues to rise. [without closing the derivative position]

If prices continue to fall, your profit starts to diminish.
 [-$1.95] + $3.76 = +$1.81 profit at current prices if you close the derivative exposure in addition to closing the common.
It is the *risk of being exercised* that limits to an extent your options with the current mix of securities the ability to manage the trade.

jog on
d998


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## Hopeful (15 December 2006)

I was able to buy back the call I sold at 1.75 for 1.60, and I exited the stock position as well at just under $20. I realised that without a protective put I was putting myself through a lot of unneccessary stress waiting for expiry to roll around whist watching the stock fluctuate wildly, so I just took my ~$300 net profit to the bank. Had RMBS kept moving up without threatening to drop below my sold strike price ($20) I would have just held the position until expiry to max out the profits. Had I not been away on holidays I prolly would have just bought back the call and HELD the stock as the chart pattern looked very positive.

Anyways, I learned a few things about this options business from my first options trade above, namely:

1) Buy (not SELL) options when V is relatively low (and not expected to go even lower)
2) Sell options when V is relatively high. Had you done so with RMBS options when they were going through the roof a few weeks ago you would have done well already - take a look at the chart RMBS $20 Jan Call
3) Don't do covered calls (or therefore naked puts) on high V stocks because you are putting on a very high risk trade for small bananas.
4) Instead do collars!

I've got another trade on now, it's a collar on MA and it is already looking good after a 5% drop the other day. I can buy back the sold call for a nice profit and write a new one closer to the money!


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