Finance for those who care more about living than making a living

Hobofinance header image 1

Coffee Futures Options Trade Entry 8: Digging out of the Hole

October 24th, 2008 · No Comments

This last week and a half has been brutal. There’s a very simple lesson to be learned…Things can always get worse. Protect yourself from that potentiality by hedging, diversifying, or not…ahem…going all in at once.I have about 7 grand of equity at present, 4 and a half of which is tied up in options. I liquidated 4 December 1.35 calls for a whopping 600 bucks, a realized loss of about 20 grand. And I’m down an unrealized loss of another 20 grand in the December 1.30 calls, which at present don’t seem to stand a chance in hell of appreciating. Mind you this money was not mine to begin with so I’ve been in better spirits. It’s nearly all she wrote for this speculative venture but we’re not through just yet. You see, despite the ubiquitous force of panic liquidation and enduring uncertainty, I am still optimistic, if not for myself, at least for coffee prices. So I have to give what little fight I have left in me to the coffee gods, who have sought to destroy me time and time again. It isn’t over yet.

But what can a hobo do with a mere 2.5 grand in cash, and another 4 in contracts nobody else currently wants because they’re so far out of the money? Well, a hobo does what a hobo do, he figures shit out. He buckles down and rummages through his hobo bag, looking for any and every devise conducive to survival. If his foe was a landlord he’d use the ol point and run, if a drunken Irishman he’d head butt and bite, if a garrulous nuisance of a hobo, alas, the knife. But when fighting the intangible one has to use more specious devices, those created by evil financiers to fleece the ignorant masses of their hard earned dollars. One has to use money knowledge. But again you ask, “What can a hobo do with a mere 2.5 grand in cash, another 4 in worthless out of the money options?” He lowers his head soberly. Nothing my friends. Nothing. I haven’t the tools with what I’ve got. Not enough to make back the 60 grand I’ve borrowed and lost, and not enough to make a little something extra to live on. But I do have the tools with what I don’t got!

Pop quiz. Where do options come from (points to nerd in front row)? We know I bought a bunch of em, but who is the smart ass on the other side of my trade? Doesn’t matter, he’ll get his in due time. What does matters is I too can be that smart ass. Just as one can buy an option, one can write, or sell an option. This is not a recommended approach toward trading because if buying an option awards you limited risk and unlimited earning potential then writing an option does the opposite, awarding you with unlimited risk and limited earning potential. Earning potential is limited to the cost of the option in fact, and on top of that one needs to keep a good deal of capital handy on margin to cover it. Ok, so it’s dangerous and risky, accepted. But will it allow us any maneuvering we couldn’t have otherwise. I think so.

You see my biggest problem right now is and has been time decay on my December contracts, and illiquidity on my May contracts. So if I wanted to increase my trading size at these attractive prices I’d need to sell, which I can’t, unless of course I sell what I don’t have. This, like I said, is normally very risky. But I can not only allay some of that risk, I can also increase my position by using the premium from contracts I sell to by a greater number of cheaper out-of-the-money options for the same price. This will have an offsetting break even effect for several months and cost me nothing. The risk of this I’ll go into later on the chance this fails and I have nothing else to do but explain my stupidity. But should this succeed I’ll have a temporary liability that is covered by two or more assets should prices rise sharply. Should prices continue to fall and remain down, I loose nothing, as the contract I wrote expires worthless, and the options I purchased were paid for by the premium received from said written one. If prices come to rest between my strike prices after 3 months or so I’ll be hurting something awful, liable then for the difference in value. The technical name for this maneuver is called a call ratio back spread. But we’ll just refer to it as the hail marry play.

A couple days ago I put on one spread, selling a May of 09 $1.20 call, and using that premium to buy two May 09 $1.40 calls for a dead even exchange costing me nothing…now. I intend to put on another as soon as the market allows. If the market falls ten cents, I’ll buy back one of the $1.20 calls I wrote at a cheaper price, improving my ratio to [short one $1.20 call and long four $1.40 calls]. Should the market rise a dime or so I’ll use the bounce to liquidate my December $1.30 calls and perhaps some May $1.70 calls on a scale up. And after, using that cash to buy back some of the puts I’ve written on the next pullback in prices. This strategy should allow me to re-establish a position with a lot more time, as well as allow me to take advantage of short term volatility and uncertainty. Hope is still alive, though flogged mercilessly.

Current Position:
Long: 4 Dec. $1.30 calls, 6 May $1.70 calls, 2 May $1.40 calls (just added via the spread)
Short: 1 May $1.20 call (just sold via the spread)

Tags: Commodities · Current Trades

0 responses so far ↓

  • There are no comments yet...Kick things off by filling out the form below.

You must log in to post a comment.