Bad Timing on Monsanto
After selling a naked put on Monsanto (NYSE: MON) yesterday they lowered earnings estimates for the year to the bottom of the previous estimate. If they can hit that number I still feel MON is a good stock to work, but it did take the wind out of their sail some. It dropped almost 6% from yesterday’s close, putting me at a paper loss and worried MON would fall further in the near term.
While trading at $80.96 I bought into vertical put spread for a debit in an effort to give me more cushion if MON keeps sliding over the next four weeks. I bought to open one MON June 80 put (MONRP) for $2.58 and paid $268.74 with commissions and at the same time I sold one MON 75 put (MONRO) for $0.98 and received $97.24 after commissions. I paid a net $171.50 for the order.
AND THEN – I forgot to cancel my previous limit order that I started my thought process with. I first considered selling a call to make a short option straddle at June 85 and reduce my cost basis that way, but then decided to move for more protection to the downside. Since I was too distracted (at home with a sick child today) I forgot to cancel my first thought and while trading at $81.20 I sold to open one June 85 naked call (MONFQ) for $1.45 and received $134.25 after commissions.
To profit from this series of option trades, MON needs to finish the contract period above $82.50 and below $87.50. As long as MON is above $75.00 I’ll probably take the option assignment from the June 85 naked put, buy MON at $85 and then sell the long June 80 put for a profit, reducing my cost further from the option assignment. If MON is above $87.50, I might take the short stock (if I can borrow the shares) and sell an in-the-money put. I’m a long way from that happening, but it could make sense if I don’t think MON will continue to rally.
Comment by Ronan Mc Grory
Sorry to hear about the bad timing of your trade. It happens to all of us but is more annoying when the timing is less than a day off. MON is taking a serious beating today (now at $79.86). However, it is a good company and should come back a little over the next three and a half weeks. It’s doubtful, but possible, that it’ll come back to the $85. Even if it doesn’t, you max loss to the downside appears to be $250 right down to a share price of $75. Also, if the share price stays in the $80 – $82.50 range, you should have no problem recouping your $250 with a Covered Call at the 85 strike.
I’ve considered selling options on this stock the past but, at a price of $85, the $8500 cost of 100 shares would make it too large a proportion of my portfolio. I’ve also considered buying a smaller number of MON shares direct. However, I like the flexibility offered when holding shares in batches of 100.
Comment by Alex Fotopoulos
Yep, we think alike. If it’s at 81-82, I’ll probably sell an 80 strike covered call to give me a better shot at a profit overall. I’d take a loss on the stock if called away, but would have a fat premium at 80 if it was ITM.