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Lets break this thing into parts. A short position on an option means that you are selling an option contract. In simple words it means that you are giving the right to the buyer of the option contract to exercise the option on or before its expiry date at a predetermined strike price. Call here means that the buyer of the option has the right to buy the underlying security from you at a predetermined strike price. The option is exercised when its “In the money” i.e. when the market price of the stock is higher than the strike price.
In this article, I will be explaining how we can track and manage short calls using the marketXLS platform.
Tracking Call Options
Lets say you want optionchain data for Microsoft. We do this by referencing the value MSFT (its ticker value) and then in the cell below I type in the formula =qm_getoptionchainactive as shown in the pic above. This will show all the option contracts of Microsoft that are currently active in the market.
We then move on to select the whole area containing data and the use the filter function in excel so that we can further segregate data and get the option contracts that suffice our requirements. So lets say we want contracts that are short call, with expiry on 18 Dec, 2020.
I also want the contracts to be short calls so I will filter it accordingly.
With this you will be able to bring all your data that you need in excel.This is how you can track your short calls in Excel using MarketXLS.
Managing short call options
While managing short call options, you need to have knowledge about how to roll options and how best It can be used at your advantage. I will be covering this below.
What is rolling?
Rolling involves an adjustment in the strike price of an option position, an adjustment in expiry of the position, or both. A roll involves closing one position in favor of opening another, often a similar position.
For example, a covered call position could be “rolled” by buying in the short strike in the front month (to close) and then selling the same strike in another month (to open). Completing this process means that the covered call has been rolled forward in time.
Lets look at the reasons why anyone would roll options to manage their option positions.
- One could simply decide to roll because the time has come near of the existing position to expire (as stated in example above). This is done when the option is expiring out of the money, meaning a trader can re-deploy the position going forward by rolling (to another expiration month).
- The covered call is a solid example of a position that a trader might roll into another expiration month, the trader’s outlook and risk appetite remaining the same. As the front month contract loses value and produces profit for the trader, the risk-reward balance starts to shift toward closing the front month contract in favor of rolling up a new short position in another month.
- There might be instances where the market might challenge your stance on a position. Traders may then choose to roll those positions into different strikes or expiration months if their conviction and outlook on the trade remains the same. In this case, a trader is typically confident in their belief that the position will eventually move as per their expectations, provided more time.
For example, let’s consider a hypothetical trader that has short the $5 strike put in XYZ stock, which is trading at $12/share.
If XYZ experiences a downdraft and trades closer to $5.50, the short $5 strike put is now under pressure. In this situation, the trader has the option to “roll” his put into a different strike within the same expiration month or roll the short put to another expiration month.
This, without saying, comes with practice and experience. A trader, learns a lot from his past trades, and then develops an outlook which helps him sense where the markets will go in future and roll up or down a position accordingly.
You might now be wondering what exactly rolling up or rolling down is.
- An options roll up refers to closing an existing options position while opening a new position in the same option, but at a higher strike price. A roll up on a call option indicates a bullish stance on the option position.
- An options roll down, on the other hand, indicates to closing an existing options position while opening a new position in the same option, but at a lower strike price. A roll down on a put option indicates a bearish stance on the option position.
- Also, there is something else which neither involves roll up or roll down. Its simply called Roll forward, i..e you increase the time to expiry of the option but the strike price remains the same.
Now I suppose you have some basic knowledge about rolling options. Coming back to the subject matter of the article, now lets see how you can manage you short calls in excel using marketXLS.
Lets say, for any of the above mentioned reasons above you want to roll forward your short call position, for this you can use the steps mentioned below to achieve it.
Sell your existing position (i.e. go long on the position) or close your position when you are approaching the expiry on the option that you sold before
Look for another call contract that you want to go long for. As shown in the starting of article, you can roll over to any new call in January 2021 from the current short call expiring on 18 Dec,2020 or else even sometime after January, as you like, depending on which will help you better achieve your end goal.
With this I wrap up the article. Hope this article helped you to understand how to track and manage short calls using marketXLS.
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