8

I bought a 12/06/19 $202.50 call option on Alibaba for $2.45. The call is currently trading for about 25 cents and I have lost almost all my money because BABA has dropped to about $194.

Is there a way to salvage this call money? Should I place a Sell Call order and if so, how much money could I save?

New contributor
Raj Chayz is a new contributor to this site. Take care in asking for clarification, commenting, and answering. Check out our Code of Conduct.
  • 18
    It’s common for options to expire worthless. Don’t gamble with money you can’t afford to lose. – Rocky Dec 3 at 16:52
  • 3
    Unfortunately the only way to "profit" from this - is the learning experience. It costs money to go to college, it costs money to learn to trade. – Fattie Dec 4 at 13:31
  • 1
    If there was a simple way to make your option worth, say, $1.00, then someone would have an incentive to buy your option for $0.25, use that simple way, and make $0.75 in profit. If this was common knowledge, many people would do so... bidding up the price to $1.00, where the profit opportunity vanishes. That this has not happened tells you there is no such easy way. – S. Kolassa - Reinstate Monica Dec 4 at 20:54
20

When you buy an option, the premium is a "sunk cost". There's no way to get that premium back. You have to hope that either the option appreciates in value so you can sell it, or that the profit at expiry is enough to cover the upfront cost.

If you now have an option that's basically worthless, you have two options: keep it and chalk it up to a lesson learned (or hope for a rally), or sell it at the current bid price. You could also put in a limit order higher than the current bid, but if the price of the option doesn't hit your limit order it won't sell.

Unless your underlying stock has a massive rally to get to 204.95 (the strike plus your premium), this will be a losing trade.

5

@D Stanley spelled out the possibilities for your trade. Unless lightning strikes, this position is a goner.

A useful adjustment to be aware of for a losing position is the Long Call Repair Strategy. In short, you convert the long call to a vertical, lowering the break even point. IMO, it should be done if you can do this for no additional cost.

The adjustment won't help you now and it wouldn't have helped you with this position even if you took it weeks ago when the options still had some time premium remaining, but it would have improved your chances of salvaging this position.

This type of Repair can be used for stocks that are underwater. In fact, it can also be for a new position to enhance return.

For example, if you:

  • Buy 100 shares of BABA today at $193.80
  • Buy one Jan 10th $192.50 call for $8.30
  • Sell two Jan 10th $200 calls for $4.55 each

You'd receive an option credit of 80 cents (lowering your cost basis slightly)

You would net $208.30 for a $14.50 gain (7.48%) as long as BABA was above $200.00 on 1/10.

That's a $14.50 gain if there's only a $6.20 gain in BABA.

Note that the repaired position is a combination of a covered call and a vertical spread. There are no naked positions involved.

  • I assume that if both of your short calls were exercised, your broker would automatically exercise your long call so you can deliver both lots, but I'm curious about how the timing of this would work - isn't there the possibility that you might be a day late delivering if for instance you get an exercise notice after the close and can't exercise your offsetting position until the next day? – Michael Dec 4 at 17:54
  • Short calls will not be exercised by owner until they are deep ITM with little time premium remaining. If assigned, you end up short 100 shares. Even if your account does not have sufficient SMA to support the short 100 shares, the sale of 100 shares via the covered call frees up cash that will provide the margin required for the 100 short shares overnight (the short shares are 100% covered by the long call at the lower strike). The next day, you exercise your long call to buy the shares and everything is gone and you have your maximum profit. – Bob Baerker Dec 4 at 18:21

Your Answer

Raj Chayz is a new contributor. Be nice, and check out our Code of Conduct.

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.