Monsanto (MON) has dropped more than $30 in the past two months. I targeted $115 as a bottom and sold a naked put at the August 115 strike that expires today. MON fell as low as $103.50 a week ago and I held on thinking I could sell covered calls and still do fine with it if assigned. It edged up over 115 yesterday and I thought I might get out with a full profit. That hope was dashed this morning.
While MON was trading at $111.70 this morning I bought back my August 115 naked put (MFPTC) and paid $360.74 after commissions. I received $499.25 from the original 6/27/08 naked put sale. I took a profit of $138.51 and will most likely sell a new naked put at a lower strike when I see MON closer to the bottom of its trading channel. I still like the stock long term, but had no desire to own the shares right now since I could get out with a profit and I think it’ll dip lower and offer me a better entry point.
The rest of my options aren’t as close to being in the money. I’ll detail my final results when the day’s prices are final.
If something you are naked is at-the-money the day before expiration, roll it or close it.
You didn’t receive $360.74, you paid it. It wasn’t just a profit of $138.51, it was a loss of $220+. You could have closed it at the end of day yesterday for 1.40 for a profit of $350 (probably could have done it for lower with a GTC limit order the day before, say 1.10). Instead of doing that, you tried to earn the last 1.40 by gambling. And you lost $220.
Expiration Thursday, with max pain of 115, there was a pretty good chance that most of the price movement on Thursday was pinning the strike. You got lucky and were on the same side as the market makers. They got out Wednesday and Thursday. You should have too.
I know how easy it is to rationalize it; I’ve done the same thing.
(Thanks for catching my typo. I edited it to show paid, not received. Just a habit I guess. People reading this now won’t see what you are talking about.)
I don’t like to close options the day before expiration. My model is to let all expire or at least take it to the final day to give them a full chance. Under your view each trade is a gamble. My view is that I should let everything have its chance for full profit. Sometimes (like on MON) I should’ve gotten out earlier and sometimes I should let it run. I base my model on doing the same every time (if the chart agrees). Had I bought it back on Thursday and saved ~$200 I’d be sitting better now, but if MON had stayed up I’d regret the move of buying back early. By doing the same each time (using the last day, not second to last as my decision day) I can reduce the emotional attachment. Had I closed the position a week earlier I’d be down another $1k. The other route would be to take all assignments and see how Monday plays out. I used to do that and have moved it up a day when the chart supports the get out early move. If I start moving my buy backs early I could see me closing positions even earlier than Thursday and I don’t want to do that.
An example on the other side is CSCO. It closed at $24.91 Friday and made it up to 25.25 during the day. I own some in my IRA with Aug 25 covered calls. I let it ride until the end of the day and saved myself from buying it back. Now I can rewrite the calls without having to buy the shares again since I still own them.
I don’t consider this a loss of $220+, but a profit like I wrote. I can’t worry about paper losses/profits. I can only use realized gains and losses. Using unrealized gains/losses is rationalizing. My account moves $500-2,000+ per day. None of that is a loss or gain until I close the position. Whether I take a profit or loss is based only on where I sell and buy the position, not where it moved in between those trades. I’d spend all my days thinking “woulda, coulda, shoulda” if I did that. Remember, I’m not as much of a trader as you are.
@ OS – MON closed at $118.08 on Wednesday. With that in mind, using your logic, you’d say I lost money by selling at all. I’d have made more by letting it ride. Neither of us follow that model, but just pointing out that you can pick a point anywhere in the week/month and say you made or lost money. In the end the only thing that matters if if you sell higher than you buy.