A few months after my CVS vertical put spread position expired last summer CVS tanked on November 5th down to an intraday low of $27.38. It closed at $28.95 that afternoon and that started a rally that’s still going. That massive gap down drew my attention, but for some reason (call it caution or stupidity) I didn’t get back in until today. I’ve been watching it off and on for the past two months and took a close look yesterday afternoon, but decided to wait until this morning to make my trade. By the time this morning rolled around I was working on something else and didn’t give CVS another thought until after lunch. CVS was already up more than $0.70 for the day by then.
My planning from yesterday that started with considering naked puts on the 31 strike moved to the 32 strike by the end of the day and by 1:15 today I had to move up to the 33 strike to make the trade worthwhile. While CVS was trading at $33.37 I sold two CVS February 33 naked puts (CVSNL) for $1.10 each and received $218.60 after commissions.
This option traded as high as $1.30 this morning which irritates me for not placing my limit order last night, but I can’t do anything about it now and that’s the mindset I had when I placed my trade. I saw that CVS traded right through its trend line of higher highs and I expected it was going to keep rallying, at least for the day. I waited a few minutes longer than I should have to make the trade and finally placed my order at the bid price to insure I wouldn’t miss out on further gains. Typically I like to place my limit orders a little above the ask price, but CVS was moving too fast for that play today.
I went with the February expiration which is six weeks and a couple of days from today instead of trying to squeeze a two week trade in. That’s in following with what I said in my 2010 investing goals post yesterday. I also started with smaller than full position in case I’m wrong on the staying power of this CVS rally. I might add to this position on a dip though. Check out how CVS compares to its competitors according to Yahoo! Finance. CVS has a P/E ratio of 13.54 compared to its industry’s average P/E of 17.59. Its operating margins are better too. I expect CVS to get back to $35 fairly quickly, but don’t mind owning it if it drops below $33.00 by February options expiration.