Profit Taking Tuesday

My new favorite type of order is a trailing stop.  I only used it on one of my orders that hit today, but maybe I should’ve used it on all four since prices improved somewhat after my trade.  A trailing stop works the same on option contracts as it does for a stock or ETF.  I use it to protect myself from losses getting too big or locking in profits.  In short, a trader can enter a trailing amount (as a percentage or in dollars and cents) above the last trade price.  As the option price declines, so does the stop order to exit as it “trails” the price slide.

The advantage of a trailing stop is that it might not be triggered and the option can continue to lose value until it becomes worthless, therefore giving the short option a bigger gain.  If the option price starts to rise, the order is triggered and you get to exit the position before losses get any bigger or you lose your profits.  The disadvantage is the same as closing any position early.  The order could be triggered at the option’s high of the day and waiting it out could’ve been more profitable.  This isn’t the best order to use on options that aren’t very liquid and have wide spreads.  I’ve never done it, but if a trader used a trailing stop, the order might not be triggered until it has a much bigger price change and could be triggered at a higher buy price than the trader wanted.  I’ll give my example below when I get to SPY.  This is the order my profit taking came through today.

I started with T.  I looked at this one the past two days and thought about it, but didn’t get to it until today.  I should’ve entered a trailing stop last week.  Instead, my profit was a little less, but still good.  While T was trading at $34.29, I bought to close four T January $34 puts for $0.28 each and sold to close four T January $32 puts for $0.04.  I paid $103.86, including commissions, for the $0.24 spread.  I took in $253.79 when I sold the spread almost two months ago.  So, that gave me a realized gain of $149.93.  Remember, I didn’t have cash backing this trade.  That kind of makes it just an extra $149.93 on top of my usual cash backed positions.  It’s hard to figure my return on this trade considering that I didn’t have a real input cost in reserves, but just based on what I could’ve lost ($546.21), I made a 27.45% gain.

While QCOM was trading at $63.79, I bought to close one QCOM January $62.50 put for $0.46 and paid $46.77 with commissions.  I still had more than a dollar to buffer me from an assignment on this put, but QCOM can lose much more than that in a day.  Since I’m already long 200 shares of QCOM, I figured I should take this profit while I could.  It’s trading near the upper end of its trading channel, which leads me to believe it will move south before pushing higher again.  I plan to add another naked put on it, but want to see it stabilize some first.  I’m not rushing into it, so this could be one of those trades where I enter a limit order and wait for it.  If I miss the trade, it’ll mean QCOM has stayed flat or risen.  Either way it helps my current two covered calls at the January $65 strike lose time value and/or helps my long shares grow.  After selling this $62.50 put at $279.23, I had a realized gain of $232.46.

I debated closing my VNQ put spread, but could see it dropping at least $0.75 to a dollar or more in the near-term.  Since it was cheap to exit, I decided to eliminate the downside risk.  While VNQ was trading at $66.80, I bought to close two VNQ $66 puts for $0.20 each and paid $39.94 after receiving $0.06 in reverse-commissions.  I didn’t close this one as a full spread order because the $64 strike contracts are basically worthless.  I left an order in place to sell the long put side for $0.05 each, but doubt I’ll make that $10.  I took in $246.95 when I sold the spread, which gave me a realized gain of $207.01 today.

Finally, I decided not to be as aggressive in exiting these positions and used a trailing stop with my SPY put.  While the bid/ask was at $2.21/2.23, I entered a trailing stop order to trigger if the last trade was $0.05 above its best trade after entering my order.  When I transmitted the order, it showed my worst exit price would be $2.26 (the price had already improved a penny by the time I place the order).  From there, I watched my contract trade as low as $2.04.  While SPY was trading at $145.31, I bought to close two SPY January $147 puts for $2.09 each and paid $419.54 with commissions.  By using the trailing stop, I made an extra $0.13 per contract, $26 total.  It’s not much, but if I do that again, I will have paid for a new bottle of single malt scotch.  These two puts were part of a put spread I sold four weeks ago.  I didn’t try to close them in one order since I was working the trailing stop and this way was quicker.  After I closed my short puts, I closed the long puts with a market order.  SPY was trading at $145.31 still and I sold to close two SPY $139 puts for $0.07 and received $13.46 after commissions.  The bid/ask was $0.07/0.08, so I didn’t bother trying to use a limit order to gain $2.  My profit was fine.  Since I sold the put spread for $748.97, I ended with a realized gain of $342.89.  I could’ve let the SPY long puts stay in place, but don’t see much of a chance that they’ll come back into play in less than two weeks.

After taking more than $930 in profits today, my account is still fully invested.  I was able to remove a lot of risk for a relatively small amount of money and feel much more comfortable with my set-up now.  I’m up slightly more than 3% for the year so far and want to be a little more conservative through the debt ceiling and sequestration talks over the next six to seven weeks.  As much as I want to add some more upside potential, I am going to try to be relatively cautious with my next few trades.