Help with Option Strategy

[gradyvt 10]

Hello,

 

I currently have a short position on a stock RIMM.

sold short at 14.50 now 12.75.

I would like to keep the position but protect it somehow using options.

I think it will go lower but there is always a chance of a buyout.

I have made a few options trades but am certainly new to them.

Any thoughts on the best protection so I am not always checking the ticker to make sure someone did not purchase it for $20 and I am broke. LOL

original thought was to just buy a Dec $13 call. If stock stalled or went down to my exit point I could sell this option to recover some of the premium.

 

Thanks for any input

 

BT

[SIUYA 11]

a lot will depend on the costs of the options.

If you are just wanting to protect a catastrophic loss then the further out of the money maybe the better.

If you have a profit target on your short then maybe you could consider a zero cost collar.(or other named variation)

short a put say $10, long the $13 call - again all dependent on individual prices of course.

so that the options dont really cost you. - at expiry you will decide what to do. or get taken out of one or the other leg.

Alternatively you could buy an otm call option spread, slightly lower cost - maybe

Why no just buy a deep ITM put with not much premium on it eg; $16 put....take the short off and at least you know your downside in a take over is limited.

 

It will all boil down to doing some scenario analysis with regards prices and "thinking" about what might occur in various scenarios.

In the event of a takeover, option premium gets crushed as the stocks normally go into tight trading ranges, whereas takeover rumours see volatility for the just out of the money calls spike.....tough call.

[gradyvt 10]

Thank You very much for reply.

I will look at the different ideas you mentioned and check pricing.

 

I really need to learn more about options, sounds like a great game with many different ways to make (or lose) money.

 

Any other thoughts would be appreciated.

 

maybe I should just take a profit and close out before long weekend.

 

Thanks

BT