I’m not typically big into buying put options, but saw a potential good opportunity with Monsanto (MON) this morning. MON has had a really good run from its lows not so long ago and could keep running, but the last time it came up around the $85 range it lost steam and faltered. I’m still long 100 shares of MON and decided I should buy some insurance in the form of a put option. While MON was trading at $83.72, I bought one MON April 90 Put (MONPU) for $8.50 and paid $860.74 with commissions.
I started with a limit order to buy a MON April 85 put for $5.40 and then $5.50, but it didn’t hit and I realized that a better trade might be to raise the strike $5.00 and only increase my premium $3.00. That raised my downside protection by $2.00. I can’t imagine such a volatile stock such as MON staying flat for the next month before this put expires. I’ expecting it to either take another trip lower or take off above $90.00. I think the first part could happen before the second, so I have to hope/plan to take advantage of a dip below $81.40 to take a profit on this option while I let the stock have all the room it needs to rise.
I bought this put option with only $2.22 of time value in it. If MON starts heading lower the volatility should rise and will add to my profit. If MON rises I’ll pretty much lose dollar for dollar on top of the $2.22 I stand to lose if MON stays flat. Since I’m long 100 shares of MON I cut my downside risk greatly and put in a speed bump for my profit potential.
Too bad I didn’t take the option assignment on SSO, it’s up huge this morning which means I missed out on a good $1,200 of potential growth from the underlying ETF. That was the original plan, but I didn’t have the stomach for it. At least I still have JOYG, MON, NDAQ and TDW all in my portfolio without covered calls as they keep rising today. I’m actually sitting on a paper profit on my NDAQ shares right now, not counting the premiums I took in for the vertical credit put spread from this month. I have a limit to sell those shares a little higher still. I’m trying to squeeze a little more profit from it before I get out. I might be playing with fire though. I might buy protective puts on NDAQ like I did with MON.
I’m a fan of protective puts in theory. Just out of curiosity, why don’t you do it more often?
I should buy them of more, but until recently almost never hedged. That’s why I’ve had such great returns in good years and such a bad year in 2008. I’ve learned and continue to learn.
Trading vertical spreads is new to my trading model too. I’ve been more into just taking in premiums and not paying. It has cost me in the past, but I’m trying to be better now that I realize there’s more money to be had if I don’t lose big on any one position.
I would have sold the Apr-80 [Covered] Call instead of buying the Apr-90 Put because I hate paying for time value. But, your method does provide more downside and you seem to get along pretty well with MON. Just my 2 cents. Good luck!
Mule, it’s funny you commented today because I was considering closing my put and selling a covered call, but with only $1.85 of time value at the time I figured it was better to keep my hedge in place with my belief that some of the past week’s rally was due to end of the quarter clean up for mutual funds. The next few days will be more telling.