Adjusted CSCO Mistake and Added KFT Naked Puts

A couple days ago I posted my trade details about selling CSCO naked puts at the money.  I was psyched when I saw CSCO beat earnings last night.  I checked this morning to see if I should consider closing my position for a quick profit or not, but noticed I was actually losing money on it.  It took me a second to realize my error.  Instead of selling puts, I sold calls.  I don’t know if I’ve ever made that mistake, but I have now and the timing wasn’t so great. 

My first thought was to just buy back the calls and take the loss.  Then I thought of turning the naked calls into covered calls by buying 300 shares of CSCO.  I’d still be able to turn a profit by doing this.  With the idea of leaving the short calls in place I decided I could sell in the money puts to accomplish basically a similar result.  By the time I figured out this was an option for me CSCO came off its highs of the morning.  I watched it drop for more than a few minutes while I still debated if I should take the loss or just add to the position.  I was thinking of selling March 24 naked puts, but then decided the March 25 puts gave me more upside protection.  While CSCO was trading at $23.42 I sold three CSCO March 25 puts at $1.82 and received $543.86 after commissions.

By creating a strangle on CSCO I extended the price range where I can end with a profit.  I’ve taken in $802.72 in premiums from these two legs of trades.  That gives me a range from $22.33 to $25.67 where I can make a profit.  Here’s the math, 1.81+.86 = 2.67 (rounding down), my call strike of 23 + 2.67 = 25.67 and my put strike of 25-2.67 = 22.33.  The most I can make is $201 and that’s if CSCO closes at March options expiry between $23.00 and $25.00.  If CSCO is in that range I’ll be forced to buy shares from my puts at $25 and at the same time be forced to sell 300 shares from my calls at $23.  I’ll take a $600 loss on the actual shares.  If CSCO falls below $23.00 at expiry, I’ll take the option assignment most likely.  I don’t mind owning these shares at a cost of $22.33.  If CSCO rallies above $25.00 by expiry I’ll have to assess the situation at the time and will either just take the loss if above $25.67 or sell a new leg of covered puts while short the shares.  I don’t want to go that route, but might.

I mentioned a couple of days ago that I had a limit order on Kraft (KFT) naked puts.  That limit order hit at the open today.  I should have raised my limit price when I saw the futures were down this morning, but I didn’t, so I had no trouble selling the naked puts.  While KFT was trading at $28.05 (on its way to lower lows for the morning) I sold three KFT March 28 naked puts at $0.80 each and received $237.86 after commissions.  These same options made it as high as $1.00 today, so I’m glad I didn’t chase the trade earlier in the week when the price was going the other way, but would be even happier if I had gotten in early enough to change my order.  Kraft has a dividend yield of more than 4% right now which makes it attractive as a longer term hold if assigned.  I think the downside risk is probably somewhere around $27.25 in the near term based on the trend line of higher lows that’s climbing higher still.  KFT is off of its recent intraday highs by about 6% as I write this, so some of the froth is already gone.  A dip down to my breakeven point would be a 12.5% fall from its recent highs.  That would enough of a correction to consider buying in there if I wasn’t going to be forced to do so anyway.