Emotion Free Investing – June 2008

I run the following drill one to three weeks before options expiration when I start to wonder if my holdings are still situated in a relatively safe place.  What I find almost every time is that I’m better off than I expected.  As much as I try to keep emotions out of my trading, it’s only natural to feel anxious when the markets move down with such dramatic moves as we’ve seen over the past four trading days - down nearly 400 points on Friday and more than 200 points down today.  Using a simple Excel spreadsheet strips emotion from the picture and leaves me with a purely analytical view of what I’m dealing with.

The only position I’m sitting on a paper loss in right now is KFT.  I checked the July 30 call premiums and they are very low due to low volatility and, I presume, low expectations for a snap back higher.  I have more than five weeks before it expires, so I’m not worried about it yet.  I highlighted my four call positions just to keep them from blending in with the puts.  DIS and VIP are both covered calls and are both above the strikes which is what I want.  AA and SFLY are both naked calls and are below the strikes, which is what I want.

My account balance is $95,557 as of market close June 11, 2008.  I have enough cash to support only 57% of my short positions if all are assigned, but yet I’m not worried because I strongly believe I’ll profit on most of these positions still.  Had I not taken the emotion out of the equation, I might have guessed I was already down on half of these while clearly I’m not.

The prices are as of the close on 6/11/08.  The formulas are very simple and used in column G and I.  In G, for the naked puts I used “=(F#-E#)+D#” and for the I used “=(E#-F#)+D#”, where “#” equals the row.  I don’t include commissions for simplicity for this quick analysis.  In I, for the current value of the options based solely on time value I used “=-C#*100*H#”.  Adding all this together in row 21 shows that if all of the underlying stocks do not fall much more until both June and July option expirations I’ll be up another $3,873.00 in just over five weeks.