The 3Dimensional Trading Breakthrough

Brian Schad
option I bought to be “sold back” for a profit, or at least break-even. Same with
the short call I sold. If I can buy that back for a profit/break even too, then at least
I am compensating for the market pulling back against my futures contract.
There will be times when I have sold a call option (against my long futures position)
the market will very soon resume its intended direction. When I evaluate the price
of the short call to buy it back, it may be for a (slightly) higher premium than what
I sold it for – decision time.
Remember now, I can revert back to the “unlimited profit potential” if I feel the
market has higher to go (based on my personal technical analysis), or decide to sit
on the “hedged” position and await a full market cycle for further reevaluation. If
I choose to buy back the call option for a higher premium than what I sold it for,
then the futures contract will most likely be at a higher price (in my favor) than
where it was when I originally sold the call option short! I may be giving up some
profit, but the futures profit will most likely MORE THAN make up for what I am
losing in premium with buying back the short call.
For example: Long the underlying asset from 53.00 even. The market trades up to
54.25, allowing a profit, then shifts momentum, from up to down. I sell a “covered”
call when the futures are at 54.25 for a premium of 75 points. Within a day or two,
the futures resume their upward trend and the momentum shift occurs at a price
of 54.55. If I buy back the short call at this point in time, I will have to pay 85 points,
for an overall loss of 10 points on the call option “buy back.” However, the futures
have a 30 point profit, if I want to revert back to “unlimited profit potential,” I will
have to forfeit 10 points from the loss of option premium – decision time!
Reevaluating the Market for an Option “Buy Back”
What would happen if after the covered (short) options were initiated the market
continued in the intended direction (without offsetting the options)? This will
happen at times and sometimes unexpectedly with “limit moves.” I would simply
continue to profit up to, and touching, the strike price of the call option (minus the
net cost of the option “hedge”) and I would have to wait for another momentum
cycle change to be completed before deciding to offset the options, or initiate a
new (2 nd ) position altogether.
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