How to hedge a call option

Analyst 1 in IB - Gen

I am down about 50% on a call option I purchased that expires in April. I don't see the underlying stock increasing to an exercise-able price. Is there any way to hedge this given the short amount of time left that will mitigate my loss? (Don't care about any sort of profit at this point).

Comments (43)

Jan 29, 2020

buy more of them. Stocks only go up.

Buying tesla weeklies is literally free money.

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Jan 29, 2020

    • 1
Jan 29, 2020

Sell it...unwind the position.

Jan 29, 2020

Either dump it or reverse it into a put. If a stock staying in a tight range then move on, don't fall in love with a position.

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  • Analyst 1 in IA
Jan 29, 2020

Sell a call option on the same security at the same premium you bought the call at to offset the loss. And hope the stock doesn't appreciate to the exercise price after you sell it.

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Jan 29, 2020

+SB for an elegant idea. Would you necessarily sell exactly as many calls as it took to get your original premium back? Or would this depend on how much conviction you have that the call options are, in fact, currently overvalued?

  • Analyst 1 in IB - Gen
Jan 29, 2020

So if I bought the Call at a $5.00 premium and its currently trading at a $1.00 premium with an expiration in April, you're saying sell an April call at a $5 premium? How would I get the same premium given it's currently trading at such a discount

Jan 29, 2020

You'll search for what you deem the most favorable combination of premium and strike price.

You could sell existing call at $1, and then sell another call at $4. Of course, to charge $4 for this call, your strike price is necessarily much lower than your original.

Or you could sell four calls @ $1 each, and keep your strike price the same. Or two calls @$2 each with a strike price in between... etc.

The question I ask above is: is there a rational reason for trying to link the sunk cost of your original premium to the amount you sell going forward?

Jan 29, 2020

I would be very surprised if the OP can sell naked calls in his account.

Feb 2, 2020

Well, he wouldn't be naked, he would have the long calls position, could make it a call spread depending on the rationale behind the losses

Jan 30, 2020

Do not do this.

If you have to ask how to hedge a position, you should not be selling insurance contracts.

Jan 29, 2020

Typically hedging is done before you lose half your money with the intention of, you know, not losing half your money.

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Jan 29, 2020

You can't take a loss if you don't sell!

Jan 29, 2020

Love the sentiment, but the expiration date on a call option begs to differ.

Jan 29, 2020

That's such a private equity thing to say. Just mark the assets at whatever you feel like. I'm jealous.

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Feb 12, 2020

Not true you gotta take L's and write down every now and then.... but yeah much more engineerable than this situation. +1 for making me laugh

Most Helpful
Jan 29, 2020

you have made a significant mistake asking how to "hedge" your long call.
The time to hedge was when you first bought the much higher prices.

At that time, the hedge would have been to BUY out of the money Puts..perhaps costing 20% of the price of the call. you giveup 20% of your potential profits, but this insurance policy would probably have saved ~ 60% of your loss at current prices. That would have been a decent hedge.

However, now that the underlying has already moved, there is nothing left to hedge. This is the price of education in trading. Sell the Call now and get flat...take the loss...and live to fight another day.

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Jan 29, 2020

+SB. This is how I would've liked to articulate my thinking above.

  • Analyst 3+ in HF - EquityHedge
Jan 29, 2020

this is the correct answer.

Feb 4, 2020

This doesn't hedge the risks. Doesn't it basically take a different risks? Now he's basically long vol though biased long. If the stock doesn't move he loses more money. Increasing his risks. If the stock goes down it of course shrinks the loss.

Jan 30, 2020

Is OP really asking how to recoup salvage value by "hedging"? SMH. No amount of finance knowledge will ever trump common sense.

Jan 30, 2020

As other pointed out - you don't hedge post event....................
You seem to not know what you are doing, having traded options and sold options for many years my advice is either:
Sell the call today and flat out your position.
If the call has lost most of its value just hold it to expiry and hope for the best.
Don't start selling calls or you'll lose your shirt.

People get excited with options and the potential win, what they forget is that your loss potential is 100% when you buy and infinity when you sell.
Stick to buying stocks (not shorting) while you are learning how to play the market.

    • 3
Jan 30, 2020

This is good advice.

If there is still some premium, which seems to be the case if this thing is April expiry, Sell it and get out. Take the loss as the cost of learning about options.

Did you buy this pre-earnings and then get hosed after?

Jan 30, 2020

From a theoretical standpoint, a few notes:

-The optimal way to hedge a position is typically not after the position has moved significantly against you. Any hedge has transaction costs and they increase proportionally to the risk that the other side of the trade is taking on.

-You could just sell your option. Your loss will be [Proceeds of Sale] - [Premium Paid at Entry]

-You could let your option run to expiry - max potential loss will be the premium paid at entry, potential upside if the position reverses in the next three months. You say there's no chance of that but honestly your financial acumen seems questionable at best so consider that you may just be overly pessimistic.

-On a purely theoretical note, you could also sell the same number of the same series of option contracts (i.e. same number of contracts, same strike price, same expiry), in which case your loss will be [Premium of call option sold]-[Premium of call option purchased]

Just a note on the above - because the information set that exists now is different than the one that existed when you purchased the call, and because time has passed, the premium will have changed as well (likely gone down if the underlying is in decline), and so this will be an imperfect hedge where your loss is the difference between the two premia.

Now, there's some dumbfucks in this thread suggesting that you should just solve this problem by selling extra call options to make the sale proceeds meet or exceed the premium you paid at entry - this is fucking stupid, as your loss potential for those extra contracts will be unlimited. As @George_Banker said, I doubt your broker will even let you write naked calls (unless you're with robin hood lmao, what a garbage platform, they probably have no controls in place for that).

Imho, and not to be gratuitously harsh, you do not have very good financial savvy if you got into an options trade without understanding how to close it or what a hedge is. I would recommend you exit this position promptly, in the least complex manner possible, and stay away from options going forwards.

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Jan 30, 2020

Should've bought $TSLA lmao

Jan 30, 2020

Or bought SPY.

Jan 30, 2020
Feb 15, 2020