By Paul Price of Market Shadows
More Proof of the Value of Selling Options
I continue to think IBM will be a big winner over time. It hasn’t, however, lived up to expectations since we sold a Jan. 2014, $190 put last April.
IBM was trading for $190.47 on April 19, 2013 when we sold that at-the-money, 9-month put for $13.80 per share. The shares were trading for just $177.67 in early afternoon today. With just five and a half weeks left until expiration we have rolled out our 2014 contract to the same strike a year later.
Realistic prices for the Buy to Close (BTC) and Sell to Open (STO) transactions were $13.10 and $23.45 respectively on this actively traded underlying security. We thus pocketed an additional $10.35 per share net for the two-sided roll out.
This illustrates once again the beauty of being option sellers. We were incorrect on the direction IBM took from the trade inception date through today. IBM declined by $12.80 per share over those eight months.
Even though we got the price movement wrong, time decay in the $13.80 premium we received up front allowed us to buy back the original put for a small profit ($70 per contract).
Not only did we capture a small gain, we’ve reduced our new ‘if put’ price to $166.55. That is figured by taking $190.00 (the strike price) – $23.45 (the Jan. 2015 put premium received) = $166.55 per share.
Nothing in life is guaranteed. However, IBM has not spent one day during the past two years in a position that would have hurt us at the new ‘if exercised’ level.
Think of the incredible frustration of the trader who bought the IBM 2014 put from us last April. They were right that IBM was headed lower yet they are still underwater on their trade after eight months.
Paying time premium makes option buying one of the hardest ways to make money in the market. You need to be correct on the direction and timing of a move in the underlying shares. Then you also need to overcome the ‘stagger’ of the premium paid, just to get even.
Why even try to fight odds like that?
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Virtual Put Writing Portfolio including all our closed-out and current positions.
