My three Diana Shipping Inc. (DSX) puts were assigned to me on Friday when they expired in the money and I was forced to buy 300 shares today. I spent some time trying to decide what options to sell to go along with these 300 shares. I knew I was going to sell covered calls. I just had to pick the strike and expiration. I also had to decide if I should sell new naked puts to reduce my cost per share and/or grow my position if assigned again. While weighing my choices I noticed the difference between the August and September $11 strike puts was only $0.10 although the spread on each was fairly wide. I figured I could work it for 10 cents if I didn’t try to make a trade as a single option spread (I didn’t think it would hit that way, it might have and could’ve been easier) and I might be able to get it for less if I priced my trades fairly aggressively. With only a difference of 10 cents for the calendar spread I started thinking that I could make a profit without risking much.
I started with two orders, one to buy 10 September puts for $0.75 (on the low side of the bid/ask) and one to sell 10 August puts for $0.70 (in the top half of the spread). After I got these orders in place I got my focus back to the covered calls. Since I was working this other angle with the calendar put spread I decided to table the idea of naked puts for now. I opted to go out to September with my calls to let them expire when my long puts did. I also got a few cents more per contract to help reduce my cost per share some more. While DSX was trading at $10.87 I sold three DSX September $11 covered calls for $0.60 each and received $177.83 after commissions. This brought me back down to a slight paper profit on my 300 DSX shares.
As I was entered my order for the covered calls the first leg of my calendar spread hit. While DSX was trading at $10.87 I bought 10 DSX September $11 puts for $0.75 and paid $757.22 with commissions. I thought I was going to get the August puts to sell first at $0.70, so this was good news for me. After about 20 seconds of being happy with my purchase I started wondering why my August puts hadn’t sold yet. I didn’t want to get stuck overnight with the long puts and no short puts, so I quickly dropped my limit order on my August puts to $0.65 to try to get the $0.10 spread I was originally targeting. Over the next 17 minutes the August puts sold in four different trades and I was happy to have reduced my limit order since the market proved it only barely had an appetite for $0.65 puts. DSX was essentially flat during the 17 minutes. While DSX was bouncing between $10.86 and $10.87 I sold 10 DSX August $11 puts at $0.65 and received $642.78 after commissions. This brought my net cost of the DSX August/September $11 put spread to $114.44.
If DSX stays close to its current price or even doesn’t move more than a dollar in either direction I should be able to sell this spread for a profit of more than $0.15 each before the August contracts expire. I don’t plan to take the assignment on the short puts in August. I’d prefer to buy them back before expiration. Ideally I’ll be able to buy them back for a profit. If this is the case my long puts should be at a point where they’ve held their value and I can sell them for a smaller loss than the profit I make on the short puts. Without painting every scenario, in August if DSX is trading where it is today then the September puts should be worth close to $0.45 and I’ll be able to close both for approximately $0.30 net. That’ll allow me to double what I paid. I’m still thinking about adding three more DSX naked puts on much more of a dip or any sign or real strength.
I’m not going to get rich off this trade, but I barely put any money into it. In some ways this is just a test trade for me to get used to this type of transaction a little more. I’m not much for paper trading, so risking $114.44 is more fun and realistic.
I thought about selling another UCO naked put today, but am going to wait a little longer. I don’t think oil will fall a whole lot farther and some out of the money puts could help my cost per share on my current holdings.
Yuck! UCO bites too hard. 10% drop overnight is too painful. Perhaps USO. Good luck, Alex.
No kidding. Getting spanked there, but I only have a partial position. I’m about to post that I just bought back my July $42 covered call. Probably shouldn’t have quite yet, but want room for upside gains.