No certainties in life…
I am sure that sometimes that you are so certain on something that you will bet your “xxxx” for it…
Many of times what was the outcome? Probably that you are so certain that whatever outcome that came was something totally unexpected…opposite of what you expected… we then call that the “unexpected” 😥
My friend there is only 1 thing in life that is certain…1 and not more, and that is death…we will all die one day in time. 😓
Anyway, we all have our days of having high certainty on things like, getting that job, getting a promotion, getting the girl of your dream or getting the deal done… and when the outcome does not come as expected, the question is how do we take it? Most people react to it because they were unprepared to accept a different outcome, and depending on what reaction you give, the consequences may be dire or damaging…
Actually I am in no different from you because human nature we tend to be biased in our thoughts and action that supports your expectations and outcomes that you would wish for… but if you take a step back and be a little proactive to also consider the other outcome and prepare for it, it would make huge difference when it comes to handling the different results.
I felt a little bad some days ago for some poor souls because they delivered an unexpected results to me and I bombarded them without even giving them a chance to speak or explain. Perhaps if I had listened to their thoughts, I would have understood better their reasoning and worked on a plan how to salvage the deal. Instead, I had to now make my own presumptions on the problems rather than helping them reason the difficulties on their part. Well, damage done and here suffer the consequences…
We can't see the forest for the trees…
Look at things objectively and stepping back in a situation and looking at things in a broader perspective may help you make a more informed decision. Remember, there are no certainties in life except “the one”, so be prepared and be proactive instead of reactive to situations…
SPX (4169)
SPX which had a pullback on the earlier part of the week had strong runup on Thursday and Friday after strong earnings by MSFT and GOOGL.
It is exactly sitting on the previous high of 4169and 4200 would still remain as the next key level to break. The next Fed Meeting for rate hike is expected on 3 May and likely for another 25 bps according to market consensus. However, the more important thing is actually what will be the next move by the Feds and their statements regarding their policy stance.
The trading range for the week is between 4100 and 4250.
NDX (13245)
NDX is up 245 points for the week after positive earnings results of MSFT, GOOGL and also Meta. It broke above the upper range of 13200 and closed at 13245. It remains to be seen if it can hold above this level and would likely see a retracement pre FOMC meeting on 3 May. The strong runup was purely after MSFT and GOOGL earnings runup on Wednesday and followed on by Meta’s post earnings runup on Thursday.
VIX continue to set new lows going further down by 6% for the week. It seems like market is filled with euphoria that things will be great in the next months as the big boys are giving out very positive signals going forward. Not forgetting that, there will be continued rate hike just in the coming days and banks that was previously saved is now asking for suitors to buy them out. Credit tightening and the high rate environment will make business more difficult in the coming months, at least for the small and medium businesses which forms a big part of the US economy. Whist the big names like the FAANGS have dry powder to sustain any slowdown, small and medium business will drop like flies when they are squeezed or credit runs dry.
Lets see if the earnings momentum continue or sizzle down for the week.
The trading range for the week is between 12900 and 13550.
HANG SENG INDEX (19894)
HSI broke below the trendline and retraced further down, closing the week around the same levels as previous week. As it will be the national holidays in China next week, expect the market to be slow and looking at 200 daily MA as the next support down.
OPTIONS TODAY - ASSIGNMENT
When you sell an option and the option ends up $0.01 In The Money (ITM) on expiry, you will be assigned the shares if you do not close the trade. If you are selling a Put, you will get assigned +100 shares and if you are selling a call you will get assigned -100 shares.
Sometimes, you will also get assigned before expiry if your option is deep ITM (delta more than 95) and the remaining extrinsic value left is very little, less than 0.05 probably.
Most people panic when they are assigned stock, mainly because they do not understand what is the implication and how they can manage the position. In the past, I would also panic if I see that my broker has issued a margin call notice when some of my naked puts are assigned.
Last Friday, I dozed off and the market closed before I rolled my ITM short call on XBI diagonal trade and the next day, I got assigned short 100 shares. Which means I sold 100 shares which I do not have! Is it a big deal? Depends….
As I have a separate ITM call position, there is nothing much I have to worry as the effects of price movement on XBI on the short shares and the long call would be opposing. Share price goes up, the 100 short stock will lose money but the long call will make money, offsetting each other. The net effects would depend on the level of movement in the long call. Example, my long call has a delta of 72, which means $1 increase in share price, the long call value will go up $0.72, while the short stock will go down in value of $1.00, the net would be negative $0.28 only.
Your situation would be different, if you do not have an opposing trade to balance out the short stock assigned. Which means, you would have probably sold a naked call in the first place, something which we do not advice to do as you expose yourself to unlimited risk. If the stock price shoots up the moon, you will be on the wrong side of the track and will incur a lot of losses to buyback the shares to close your position.
Trade Management
Say, in the same example on XBI above, what do we do when our short call on a Diagonal is assigned? Just close the share position by buying 100 shares at market price and sell another call at the same strike price as previous to open-up the diagonal trade again. You may also do at a different strike, but just ensure the credit received is more than the losses on the short stock less previous premiums earned.
Alternatively, you can also just close the short stock position and just leave open the long call. You will realise the losses on the short stock and keep the premium received earlier.
Nothing too complicated, so no need to panic when getting assigned.
The same, if we are in a short put position and if we are assigned, we can just close the long stock and sell another naked put to reestablish the position and earn more premium. The strike price can be maintained the same, even if it is ITM it is ok to do so as long as there is premium to be received. The unrealised losses would be rolled within the new trade and you can practically do this as long as you want, until your trade comes back out OTM.
So the next time you get assigned, don’t panic and just close the stock position and reestablish the option trade and you are as good as if you were not assigned.
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.