Adjusted CVS Position

What a bizarre world we’re trading in these days.  The S&P 500 is down more than 1/2 a percent and I’m actually up for the day.  That comes from AAPL’s bounce to some extent, but TLT is also trading lower.  You don’t tend to see TLT losing ground on the same day as SPY, DIA, MDY and IWM usually.  That has to make traders wonder if this selloff has legs or if it’s almost over.  I’m not sure, but as I mentioned in my index chart yesterday, I don’t think there is going to be massive downside from here in general.

Two Fridays ago, news came out that CVS was being investigated for drug pricing /Medicare fraud.  They settled for $5 million within days.  I thought the quick settlement might slow the stocks descent that started before most of the public knew about the charges.  That hasn’t happened.  CVS has fallen from an intraday high of $49.23 to a low under $46.00 this morning.  That still leaves me with $2.00 before the short strike in my put spread comes into play, but it did make me sit up and pay attention.  If CVS falls much more I could end up with some losses that are avoidable right now.  Instead of taking a quick loss already, I decided to push it a little.

While CVS was trading at $46.15, I bought five CVS November $46 puts for $0.79 and sold five CVS November $45 puts for $0.45.  I paid $177.60 for the $0.34 put spread and changed my risk/reward breakdown some.  I’ll do best if CVS closes at $45 and I can make $322.40 (minus closing commissions) on top of my $209.62 for my short spread at $44/42.  If I don’t close either spread early and CVS tanks, my money at risk drops to $3,612.78.  If CVS stays above $46.00, my max gain falls all of the way down to $32.02.

Apparently, the market is going to continue to remind me of better ways to hedge earlier in a cycle.  I’m still looking for a new trade elsewhere, but want to see support hold around the current lows of today (so far).