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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1203  
Subject: Re: options panic Date: 5/28/2013 9:20 PM
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TDJ1,

You wrote, I don't know the best place to seek help on this, so I'll try here. I previously subscribed to MF Options, but I had to stop because I had to reduce my investment capital to buy a house, and the newsletter was too pricey.

I still had a diagonal call with MMM. I was short Jul13 $95 calls and long Jan14 $65 calls.

Today I was informed that the short calls were assigned to me, and I'm short 200 shares of MMM, which is a $22k obligation.

How do I address this issue? What do I do with the long calls?

Please help-- I'm in a bit of a panic.


First, don't panic. Second, this is a beginner's board so this may not be the best place to ask.

I assume you had enough margin left on the account to cover the exercised call. Otherwise don't worry - your long call is protecting you from any serious loss.

I'm guessing that at this point you need to close out your positions.

At this point you should have 200 short shares of MMM and 2 (protective) Jan14 calls with a strike of $65. (Wow, that's pretty far into the money, isn't it? Not that I've really studied this strategy in depth before.) At this point your two positions are opposing each other exactly. If MMM goes up $1, your short position loses $200 and your long position gains $200 (less time-value). If MMM goes down $1, your short position will go up $200 and your call will go down $200.

Your only big risk here if MMM falls back below $65. However, you have nothing further to gain if MMM rises or falls otherwise. You do have something to lose:

1. You have some (small) remaining time-value left in the call. You can recover that now.
2. You will need to PAY out dividends now that you are short shares. (MMM has a 2.28% APY, which is hardly insignificant.)
3. Should something drastic happen, you might actually lose big if the stock fell thru $65 now that you are short the entire 200 shares.

So have you made money in this position? From what I read, diagonal spreads are intended to (primarily) make money off of the relative difference in time-value decay between long and short dated options. (From this description, I'm guessing MF was advising this as a potential option income strategy...) Did this work out for you? Did you make any serious money? What were your costs and what have your realized over what time-frame?

- Joel
Who's never gotten into complex option strategies...
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