By Paul Price of Market Shadows
Market Shadows has a number of put positions getting close to their expiration dates next month. We went ahead and tended to two of them this morning. Both underlying stocks, Caterpillar (CAT) and Agrium (AGU) have lagged the market and our own initial expectations.
CAT was trading for $91.45 back on our Feb. 22, 2013 trade inception date. It was $85.28 as of 11:10 AM today. We originally sold one Jan. 2014, $100 put for $14.60 per share. We bought to close (BTC) today @ $15.30.
That is the beauty of being option sellers.
CAT declined $6.17 from the day we started this trade. Our loss was limited to just 70-cents per share due to time decay. We still like the long-term prospects for CAT so we sold a new Jan. 2015, $100 strike price put at the $19.00 bid price.
We took in $370 more for the 2015 put than what we needed to lay out to close the 2014 contract. Our commitment remains the same- stand ready to buy 100 shares of CAT, if exercised later. The new break-even price is reduced to $100 (the strike price) minus $19.00 (the newly collected put premium) = $81.00 per share.
We have sequentially sold CAT $100 puts twice for a total of $3,360 ($1,460 + $1,900). We have bought back only once for $1,530. Our ‘if put’ price is now lower than it would have been the first time around.
Canadian fertilizer company Agrium (AGU) was $91.74 at trade inception on April 15, 2013. The stock was $90.83 a few minutes ago. With the shares above our $90 strike price this position could easily expire worthless on Jan. 18, 2014.
We closed early for $2.45 per share to eliminate the risk of a near-term pullback while locking in a decent gain on the original transaction. Since we still expect a higher price over time, we resold a $90 put out to Jan. 17, 2015 @ $10.45.
Agrium dropped by $0.91 per share from when we first sold the Jan. 2014 put. Despite that, we earned a profit of $5.35 per share or $535 for the contract due to time decay. Here’s the math on the entire AGU roll-out…
We sold Agrium puts twice, for $1,825 ($780 + $1,045). We paid $245 to buy back, once. Our new break-even, the ‘if put’ price, has been reset to a lower than original transaction committment. It is now just $79.55 per share.
Both the CAT and AGU 2014 expiration transactions are now reflected on our closed-out list. The new 2015 versions appear on our open positions list.
See full details of all Market Shadows’ option trades here .
