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Presentation Outline
Exit Strategies
long stock position long call or put position short call or put position short option pin risk
Concluding comments
Discipline
what loss would be tolerable? what profit would be sufficient? predetermining both will help your exit
Be creative & flexible many choices available Exit/repair method should fit the situation
no one method always the best
Or
lowers breakeven on upside little or no additional funds required downside risk remains same (original stock purchase) trade-off upside profit potential capped
What is it?
own 100 underlying shares overlay ratio call spread: buy call & sell 2 call spread little or no net cost (credit possible)
No uncovered calls
1 short call covered by 100 underlying shares 1 short call covered by long call
Investor wants
to recover original investment (at lower breakeven) no additional downside risk + no additional cash
Generally best after modest stock decline Choosing strikes rule of thumb
buy 1 at-the-money call sell 2 calls with higher strike strike increment = stock loss
Expiration month?
longer-term for no-cost spread more stock declined more time for possible rally
Investor wants 2 months for stock recovery Establish XYZ 60/65 call spread 1 by 2
buy 1 60-day XZY 60 call at $3.50 sell 2 60-day XYZ 65 calls at $1.75 $3.50 paid $3.50 (2 x $1.75) received = no cost
At Expiration
Long 100 XYZ @ $70
XYZ Profit (Loss) Stock
50 55 60 62 65 70 75 80
At Expiration
Original objectives met
downside loss limited to original stock purchase upside stock breakeven from $70 to $65 no additional funds required
At Expiration
Things to consider with stock repair strategy
strike prices cost for spread and new breakeven? expiration how much time for stock to recover? option prices do currently available make sense?
Exit Strategies
Profitable Long Stock Position & Covered Call
Collar
buy out-of-the-money protective put sell (covered) out-of-the-money call finances put small debit, zero cost or net credit
Downside
shares protected by put
Upside
short call caps gains possible early assignment
Limited Loss
Covered Call
Stock Price Increases
Above strike at or near expiration do nothing
accept assignment original goal met stock sale at call strike price realize maximum profit
Covered Call
Stock Price Increases
Above strike before expiration consider roll
retain stock still moderately bullish roll up: more upside potential roll out: more time value & time til expiration roll up & out: more upside & time
Covered Call
Stock Price Declines
Exit Strategies
Long Calls
Price Increases - Spread
Example
bought 1 XYZ 50 call @ $4.00 XYZ now at $60 XYZ 50 call now at $10.00 sell 1 XYZ 60 call @ $1.50 same expiration upside potential: (60 - 50) - ($4 - $1.50) = $6.50 downside risk reduced: $4 - $1.50 = $2.50
Before expiration close position accept outlook on underlying as incorrect sell position cut losses while options have value Before expiration consider rolling roll up/down, roll out or roll up/down and out Before expiration double up convinced outlook on underlying good until expiration willing to devote more cash be comfortable with (can afford) increased risk
Exit Strategies
Before expiration leg into bear call spread buy call (2nd leg) with higher strike now limited downside profit potential reduced original upside risk
Example sold 1 XYZ 50 call @ $3.00 XYZ now at $55 XYZ 50 call now $7.00 buy 1 XYZ 55 call @ $2.00 same expiration upside risk reduced: (55 - 50) - ($3 - $2) = $4.00 downside profit reduced: $3 - $2 = $1.00
In Conclusion
Concluding Comments
Before you jump into the market consider how you might get out Know in advance both your tolerance for risk and acceptable profit Dont be afraid to admit you are wrong and cut losses No one exit strategy is the best investigate and be open to many possibilities No buying power in your account can reduce flexibility on exit
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