RIN option problem

[clancyfish]

Hi,

I bought a RIN call option 2 months ago to expire June 29 and it is not worth much now. RIN goes ex-dividend on 5th June - should i get out next Monday and salvage what I can or go a bit further into June risking that the share price goes down after ex-div making option even more worthless?

clancyfish

 

[Ageo]

i have no idea on Rinkers price etc.. so this isnt advice but if it were me and i paid for the call option already why not wait until at least the 4th of June? it might spike up before it goes ex-dividend (usually does to compensate for the loss, or even sometimes people buy to receive the dividends). If nothing has happened still then you can sell back your position.

 

[professor_frink]

clancyfish, when buying options you have gotta be absolutely brutal in cutting your losses. It's the only way to survive trading this way. Did you have a stop price on the underlying when you entered the trade? If yes, and it's been hit, you should have been gone already. Holding a losing bought option into the final month is asking for trouble.

 

[wayneL]

Hi,

I bought a RIN call option 2 months ago to expire June 29 and it is not worth much now. RIN goes ex-dividend on 5th June - should i get out next Monday and salvage what I can or go a bit further into June risking that the share price goes down after ex-div making option even more worthless?

clancyfish

Hi Clancy

If you don't mind me asking:

What strike price did you buy?

What was the price of the stock when you bought the option?

What was the IV of the option? ...or What was the cost of the option and purchase date?

What was your position delta when you initiated the trade? (unfair I know, but you should know this stuff)

What was your intention when you entered the trade... what were you trying to achieve?

what is your current view of the future of RIN?

Cheers

 

[clancyfish]

Hi WayneL (and thanks for everyone's input),

In response to your questions -
strike price was - $21
price of stock at time was $21.50
cost of option 2000 @ $1.12
delta? - good question, I'm still grappling with all of these and slowing educating myself, I've been trading in options for 12 mths now and this is my first loss
intention - to make a smallish profit as an investment newsletter that I receive mentioned it was promising
current view on RIN not good due to housing slump in U.S.
thanks
clancyfish

 

[wayneL]

I've been trading in options for 12 mths now and this is my first loss
clancyfish

Clancyfish! Please come and trade my account!!!! LOL.

OK serious mode:

You've done nothing wrong in the selection of strike price or expiry, your delta would have been around 60-65% at a guess, so your position delta would have been about 650 per contract. (eg 5 contracts = 3250 delta)

The reason I ask that question is because, if trading straight shares, would you be comfortable holding 3250 shares (as per our eg above) because thats what position delta is telling us is applicable at analysis date.

Now as to your intention. If you were always going to hold till expiry, then fine take your loss. Losses happen...a lot more often than once every 12 months normally.

Looking at the chart though, it looks as though you would have had quite a tidy open profit about a month ago, yes?

Tech Analysis Commandment #1 - Though shalt not allow a healthy profit turn into a loss!!!!!

By having some sort of trailing stop arrangement on the underlying, you would have sold that call while still in profit... or sold some higher strike calls over the in profit bought calls, or any one of several other methods of crystallizing a profit, using options.

Options are really worth making the commitment to learning properly, it is so much more than simple buying calls and puts.

As for what to do with your current situation? Well no-one should advise you unless "qualified" (uurggh) lest they leave themselves open to being sued or prosecuted by the toothless tiger known as ASIC (they only pick on easy targets)

But you can look at this trade as a trade initiated today. Forget about what happened up till now or what you paid.

Starting from now, what you have is a short dated, out of money call.

Whats your precise view of the stock now (even if it is precisely imprecise)

Would you initiate the trade you have today?

Would you initiate a spread strategy using that option?

Can you make a profit starting from todays value?

By consideration of the above factors, you will know what to do, whether to exit, hold, spread or whatever.

Good luck (and get used to the occasional loss, but remember don't let a useful profit turn into one)

 

[sails]

Hi,

I bought a RIN call option 2 months ago to expire June 29 and it is not worth much now. RIN goes ex-dividend on 5th June - should i get out next Monday and salvage what I can or go a bit further into June risking that the share price goes down after ex-div making option even more worthless?

clancyfish

Hi Clancyfish,

Just to address your concern re x-div on the 5th June - usually any anticipated fall in the share price is already factored into option pricing. IF the share price only drops by the dividend amount, then puts and OTM (out-of-the-money) calls usually do not alter much at all in price. It's only if other market forces drive it down further than the anticipated dividend amount that those options will move. ITM (in-the-money) calls I have found to move with the dividend drop - there are reasons for this but won't complicate this post as you don't have that issue at the moment!

Also, I notice that RIN is also adding a special dividend (in addition to their normal dividend) and this special dividend will affect your strike price. Here is a link to an options notice issued by the ASX: http://www.asx.com.au/investor/pdf/notices/2006/Clm08606.pdf which gives the formula for adjusting strike prices of options. To try and put this simply, the strike price of $21 is likely to become a strike price of around $20.60 and the number of shares per contract will increase so that the value of the option should be equivalent as if there were no special dividend.

Also, if you decide to trade RIN again in the near future, there is a capital return of 50c coming up and, once again, strike prices will be adjusted. http://www.asx.com.au/investor/pdf/notices/2006/Clm08806.pdf. Suggest you check with your advisory service to see what they recommend with these impending adjustments.

This is the link to the ASX notices page for 2006 if you need to check up on any other options notices or adjustments: http://www.asx.com.au/investor/options/notices/2006.htm

As the value of your calls is now so low, it might not be worth getting out as it's likely you may only get back the cost of broker fees. You could possibly look at rolling the position down into a bull call spread (buy 2 lower calls and sell 4 of the one you now own) and, depending on available prices and the strike you choose, this could possibly be done for very little extra cost or for even giving you a lower long strike should RIN move up between now and June expiry. Brokerage costs may make any adustments too expensive - just something to consider. If it keeps going down or if the new long strike is still too far OTM then, of course, the adjustment is wasted. Definately not advice - just my so you can look into it for yourself.

Good luck with the trade

Margaret.

 

[gsc]

Hi Wane

Been following your comments and info on trading on your site and this one for a while .....and found it very helpful ...so thanks and much appreciated

One question ..could you please explain the option metamorphosis chart you posted previously.... looks interesting and would like to make sense of it

thanks again

regards G

 

[wayneL]

Hi G,

The options metamorphosis chart is from Charles Cottles' book "Coulda Woulda Shoulda" and simply shows that you can metamorhisize, synthetically or otherwise, any strategy into a different strategy.

For instance, looking right at the middle of the chart you have the payoff diagram of a simple long stock position. Then looking to the left in the middle of quadrant IV, you have the payoff diagram of a long call. The long stock position can be morphed synthetically into a long call by buying an equal number of puts.

As our view changes, we can then morh this synthetic long call position into any of the surrounding payoff diagrams.

Looking directly up from the long call diagram (section 1), you have the payoff diagram of a ratio backspread. This can again be created synthetically from our synthetic long call position, by writing half the number of calls at a lower strike price.

An equal number of writen calls at a lower strike price creates a synthetic bear spread...

...and so on around the chart.

This is why I get a bit bemused by a few of the seminar clowns who promote one or two strategies exclusively. Options offer such flexibility as to be able to sructure a specific strategy for a specific view of market direction... even if that specific view is specifically non-specific, if that makes sense.

Cheers

 

[clancyfish]

thanks everyone, some of the advice I don't quite understand yet but never say die! I'll keep reading and learning and I think you guys are great to take the time to reply.

 

[gsc]

Hi Wane .

Sorry for the slow reply ....self employed work commitments !!!.........thanks for the explanation ....still a bit lost but working on it ...thanks

regards G

PS... if you put together a course I"ll buy it !!