I recently purchased $1200 worth of put options on the stock "RIOT." 21 contracts distributed amongst the 10,15, 20, & 25 dollar strike price for the January 19th expiration. I'm fairly confident this stock will lose value in the coming weeks but anything is possible with the current hyped up blockchain crypto mania. I was considering purchasing 6 call option contracts at the $30 strike to protect my investment. Wondering if anyone had any thoughts or words of wisdom? Thanks!
How important is that $1200? If you are considering a hedge, I would guess that you cannot afford to lose it all. Just know that purchasing yet more options means you could lose the $1200 plus whatever you end up paying for the calls. Purchasing the calls would be creating a position called a strangle, which is not necessarily a bad strategy in a market where you expect big moves. How much paper loss do you already have on the puts? Me, personally, if it was under two or three hundred, I'd close it all out and chalk it up to "experience." If you're really ambitious and experimental, you could close some of the way out-of-the-money put strike positions and try to set up some spreads with the 25s. For example, check your profit/loss calcs if you sold-to-close all the sub-25 strike puts, and then sold-to-open a number of 20 or 22 puts that equal the number of 25 puts you bought. And use some of those proceeds to buy some calls. In doing so, you might find you limit your loss if for some reason RIOT hews closely to the 25-30 range, but still leave open the possibility of making some coin on a wider swing in price. Ally Bank, of all places, has a pretty decent website for beginning options traders.
One other thing I should add. Setting up hedge/recovery strategies like I mentioned above was on the assumption that the RIOT options market is fairly liquid, with decent spreads and fairly easy-to-get fills on your orders. On a fast moving market, all three of these (liquidity, spreads, fills) can get tough. I've never traded RIOT options, so can't share any thoughts there. Eyeballing the bid/ask spreads and the open interest, I'd wager that recovery/hedging is a viable strategy at this point as long as RIOT doesn't go crazy Monday morning. If you didn't already know, a quick-n-dirty general rule of thumb for what the market anticipates in the price movement between now and expiration is to add the at-the-money call price and the at-the-money put price together. So on Friday's close, RIOT 24.5 calls were about 1.95 and 24.5 puts were about 3.25. Thus, 1.95 + 3.25 = 5.20 price swing anticipated between now and expiration. That's not to say that on January 19 RIOT will close 5.20 different from today, but rather the market thinks RIOT will swing 5.20 up or down sometime in the next 2 weeks. As an options trader, you need to monitor closely to catch that swing and revise your strategy/decision-making accordingly when/if it happens, bearing in mind all along that it may not happen at all! Exciting, yes?
Wow. Thank you! I appreciate all the great information. Lots to learn I'm still even on my puts at the moment. I'm thinking I'll sell to close the 10 and 15s and sit on the 20s and 25s another day or two. I might experiment with a strangle as well. Not quite brave enough to sell put options yet but I'll start reading about it. Thanks again !
