27 lines
1.7 KiB
Plaintext
27 lines
1.7 KiB
Plaintext
Would I Do It Now? Rule
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To follow this rule, ask yourself, “If I did not already have this position,
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would I do it now? Would I establish the position at the current market
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prices, given the current market scenario?” If the answer is no, then the
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solution is simple: Exit the trade.
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For example, if after one week material news is released and Johnson &
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Johnson is trading higher, at $64.50 per share, and the November 65 call is
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trading at 0.75, Brendan must ask himself, based on the price of the stock
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and all known information, “If I were not already short the calls, would I
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short them now at the current price of 0.75, with the stock trading at
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$64.50?”
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Brendan’s opinion of the stock is paramount in this decision. If, for
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example, based on the news that was announced he is now bullish, he
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would likely not want to sell the calls at 0.75—he only gets $0.09 more in
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option premium and the stock is 0.50 closer to the strike. If, however, he is
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not bullish, there is more to consider.
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Theta can be of great use in decision making in this situation. As the
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number of days until expiration decreases and the stock approaches $65
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(making the option more at-the-money), Brendan’s theta grows more
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positive. Exhibit 5.3 shows the theta of this trade as the underlying rises
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over time.
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EXHIBIT 5.3 Theta of Johnson & Johnson.
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When the position is first established, positive theta comforts Brendan by
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showing that with each passing day he gets a little closer to his goal—to
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have the 65 calls expire out-of-the-money (OTM) and reap a profit of the
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entire 66-cent premium. Theta becomes truly useful if the position begins to
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move against him. As Johnson & Johnson rises, the trade gets more |