My Trader's Journal

Closed QCOM and USO Calls for a Profit and Added to DIA Position

Posted on by Alex Fotopoulos

I literally waited until the last minute today to finish my trades for this options’ expiration.  My USO and QCOM call options were my only two that were near their options’ strike giving me a profit to work with.  I’m accepting all other option assignments as the come.  I blew off work for the final 30 minutes of trading today and watched these two and the respective options’ prices shift minute to minute with great fear and fun.  The difference I could make or lose was only a few dollars, so really it was more fun and interesting than anything else.

QCOM was above the 40 strike for a while today giving it the chance to finish in the money and assign my calls, forcing me to sell my 200 shares.  Near the end of the day it started to fall below $40.00 which would allow my options to expire worthless and then it would go back in the money.  That happened over and over, but the option price didn’t shift much.  I figured I’d wait until the very end to see if I could time it, but then USO started to drop and I was trying to “play” both, so I put an order in to buy my QCOM calls back at $0.05 and the USO calls at $0.20. Neither hit at first.  Waiting until the last five minutes ended up being a mistake since I didn’t have a chance to sell new calls yet. 

With just less than four minutes to go in the day I thought QCOM might finish a few cents in the money and decided USO would stay above my strike.  By the time I got back to QCOM my order hit while QCOM was trading at $39.88 at 3:57:06, I bought to close two QCOM October 40 calls (AAOJH) and for $0.05 and paid $21.49 with commissions.  That gave me a realized profit of $393.76.  I would like to have sold new covered calls on QCOM for November, but didn’t get my order in place in time.  I’ll be happy if QCOM opens Monday up or at least flat to let me get in near the same prices. QCOM closed at 39.75 meaning that I wasted $21.49 buying back my options that would have expired worthless.  I wouldn’t have spent the money to buy these back if it wasn’t so close and the markets so volatile.  I could easily have seen QCOM settle over $40.00 even if the 4:00 pm price was just under that.

I had to raise my USO limit order and while USO was trading at $59.18 at 3:59:22, I bought to close my one USO October 59 call for $0.30 and paid $40.74 with commissions.  That gave me a realized profit of $173.51.  USO closed at 59.15, making my trade OK, especially if USO goes up at all at the open on Monday which will allow me to pull in higher premiums.

As I mentioned with my concern of QCOM settling above the strike after market close, DIA had some settling after hours and my limit order I entered to sell new DIA puts hit at 4:07:09.  DIA closed at $87.69, so I guess that’s the best price to use for my records.  I sold to open two DIA November 83 puts (DAVWE) at $4.30 and received $848.50 after commissions.  These puts add to my DIA position of two December 84 puts I bought earlier, which makes these covered puts since I have downside protection.  My DIA October 75 puts expired worthless, cutting my cost of the position some.  Hopefully these new ones will expire worthless and then I’ll be able to sell a new leg against the puts I own and possibly end the whole series with a profit.  By selling this leg of series so close to the other strike I’ve basically eliminated my hedge, but I continue to think the downside of the market is limited compared to the upside potential.

10 thoughts on “Closed QCOM and USO Calls for a Profit and Added to DIA Position”

  2. I’m curious why you’re trading DIA and not DJX. I’ve come to realize that the stress I’ve been incurring regarding the possibility of getting assigned my open XLF and INTC options (stress due to my wife getting pissed, not about a margin call), could have been avoided by playing DJX instead. Since they’re European style, the possibility of pre-expiration assignment is eliminated. Thus, if you’re ITM near assignment, you can roll them over to the next month, collect some more premium and never have to worry about getting assigned. It seems as though you could do this forever until the market rebounded.

    And the premiums are almost as fat as the DIAs. Take the Nov 80 selling for about 3.50. That gives you 10% market downside before being ITM, and you’re collecting 4% on your margined capital. Of course, that 4% is a function of the insane variability at present, so that’s not something to expect long term.

    And worst case, if the Dow is at 7,000 in Nov, you roll it over to Dec., collect the premium again, and never fear getting assigned.

    I’m still wet behind the ears when it comes to options, so maybe I’m missing something here. If not, seems like a sure thing.

    Now if I can only gain my wife’s trust back…

  4. Mark, Check this post http://mytradersjournal.com/stock-options/2008/07/08/early-option-assignment-on-kft-and-sold-mhk-naked-calls/ for an example of a letter sent to me for an earlier option assignment. In short, if I sell a put at 50 and the stock drops below 50 the shares are “assigned” to me which means I have to buy them. If I sell a call at 50 and the shares trade above 50 I’m forced to sell them. In the example I provided in the link above I was forced to buy the shares before expiration which is the 3rd Friday of every month.

    Not Herbert, DJX doesn’t come up for me in TD Ameritrade. I see DJX-X.W in Yahoo!, but not with a ticker that works in AMTD. I don’t mind the potential of a pre-expiration assignment. That would just allow me to sell calls sooner, with less risk than I take when I sell calls on positions I assume will be assigned to me.

    Jack, Yes we are in unchartered waters now, but to me it makes it a better time to use options. Buying puts for downside protection or selling puts with high premiums can be safer than just buying a stock outright. The same goes for calls. Look what I just did with USO. I sold a call in the money instead of selling the stock and pulled in an extra $100 more than I would have if I had just sold the shares outright. Volatility is so high that it helps increase premium costs and lessens risk some for sellers. Selling more puts than you can afford to buy the underlying shares on is rarely smart.

  5. CBOE’s Index Options are cash settled European style options. You can learn more about them here:

    http://www.cboe.com/Products/Cash-SettledIndexOptions.aspx

    Because they are cash settled, there is no opportunity for call writing, since there is no underlying equity. Thus, if you don’t want to take a loss at assignment, your only choice is to roll-over the Option to the next month at assignment. By executing the rollover as a spread trade, you guarantee that you’ll execute both portions of the trade simultaneously, and thus you only have to concern yourself with the Net Credit you’ll receive by executing the spread.

    I use Fidelity, so I can’t speak to the symbology of TD Ameritrade. However, you did find the right symbol on Yahoo! Here’s the Yahoo! list of Nov. DJX Options:

    http://finance.yahoo.com/q/op?s=DJX-X.W

    The more I think about this, the more I like removing the risk of assignment. You know that nothing can happen until expiration, and you know you can roll your Option over (although maybe not at a favorable Net Credit) if you don’t want to take the hit at assignment. And because you’re dealing with Index Options, the chance of going to 0 (i.e. losing all of your committed capital) is practically 0. So it becomes a pure play on the market. Except, as a Put seller, your pure play includes the collection of time premium.

    And I don’t see anything that would stop you from rolling over your Option position infinitely. Of course, to save commissions, you’re better off letting winning Options expire and simply opening up a new position for the next month. But if your short Put is ITM, roll it over until the world ends and keep collecting that time premium.

    I must be missing something. Am I?

  6. Thanks Not Herbert. That explains a lot, but I would see the loss on rolling an option as a loss you could NOT write off for taxes due to the wash rule if you rolled it. The loss of the tax write off is enough for me not to roll my options when I have a loss.

    Here’s the link the the IRS.gov site that explains it along with a snippit of the text.
    http://www.irs.gov/publications/p550/ch04.html#d0e12561
    Wash Sales
    You cannot deduct losses from sales or trades of stock or securities in a wash sale.
    A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

    – Buy substantially identical stock or securities,

    – Acquire substantially identical stock or securities in a fully taxable trade, or

    – Acquire a contract or option to buy substantially identical stock or securities.

  7. Thanks Alex. I’m not at all well versed on the tax implications of Options. I see your point that a rolled option most likely qualify as a wash sale (although my two second Googling seems to indicate that this isn’t 100% certain). But I’m not sure how important this is. Even if it is a wash sale, it’s still only an unrealized paper loss until you close out the position entirely. You’re not out of pocket on the “loss” yet.

    I’ll have to think more about this and do some more research on the tax consequences. For one thing, if it is a wash sale, then that also must mean that you don’t have to book any of the income either for tax purposes until the position is closed out, apparently meaning that you collect premium tax free until you let the position expire. Which seems odd.

    I appreciate your feedback. Obviously I have more reading to do.

  8. If you didn’t have to take your profit/loss until close your position in full, you could carry it forever hypothetically and I don’t see the Gov’t allowing that. In a wash sale, you DO have to book income, you just can’t deduct the loss. Sometimes it’s worth it to not worry about the taxes if you can make up the difference in gains, but I rarely take that risk.
    I’d love to hear more from your research and comments from others too if anyone has some hard facts on it. Not being an accountant, I’m only translating at my simple level.
    I’ve read before about running your account as a business and using mark to market. I just read the same thing again on a Yahoo! message board, but don’t know any more about the restrictions with it. That might point you in a direction for further research.

  9. I found this article today:

    http://www.tradersaccounting.com/faq_answers.php?id=34

    Note the following:

    As to expiration dates, the wash sale rule should not apply to QQQ options which are identical in all respects other than time to maturity.

    Note that this is opinion, not IRS precedent. But it’s probably the rule I’m going to adopt until I find solid information the contrary.

  10. Thanks for the link. That’s the most informative I’ve seen so far probably. The take-away I get is that the law is hazy at best and thus makes a case tough for the IRS to make against someone rolling options when one leg was covered at a loss.
    I would think the underlying stock/ETF would be used as the identical item, but at the same time understand that different strike prices and dates could change that substantially. I think I’ll walk the line with trying different dates and prices to give me two differentiating factors if ever a case is brought.

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