Exit strategy opportunities must be taken advantage of with our covered call writing and put-selling trades. When there is a significant overall market decline in the short-term, there will be losses. Our job, as option-sellers, is to mitigate those losses using our position management skill. On October 20, 2018, Alvin shared with me a series of trades he executed with World Wrestling Entertainment, Inc. (NYSE: WWE) for the October 2018 contracts. During that contract month (specifically from October 9th through the 19th), the S&P 500 declined well over 100 points. This article will analyze Alvin’s trades.
Alvin’s trades with WWE
- 9/28/2018: Buy WWE at $96.73
- 9/28/2018: Sell $100.00 call option for $1.74
- 10/4/2018: Buy-to-close the $100.00 call at $0.35 (20% guideline)
- 10/12/2018: Sell the $85.00 call at $2.50 (rolling down)
- 10/19/2018: Stock price closed at $82.03 and the $85.00 call option expires worthless
S&P 500 decline from 9/19/2018 – 9/19/2018
Analysis of actions taken
Viewing this chart from a generic perspective, an educated option-seller (specifically a covered call writer in this case) would immediately think of closing the short call and then analyzing for next-step action. On October 4th, prior to the extreme market decline, Alvin closed the short call using the 20% guideline…good job Alvin. October 4th fell during the 2nd week of a 4-week contract and no immediate action was taken creating an opportunity to “hit a double” by re-selling the same option should share price accelerate. This, too, represented a reasonable position management tactic.
The 3rd week of the October 2018 contracts occurred from October 8th through the 12th. At this point, time value erosion (Theta) was accelerating and opportunities to mitigate were declining. On October 9th, the market began plummeting at a greater rate due to geopolitical forces in a rising interest rate environment (trade war with China, issues with Saudi Arabia and interest rate hikes). Options were re-sold on October 12th, the end of the 3rd week of the contract. By rolling down from the $100.00 strike to the $85.00 strike, Alvin captured an additional $215.00 credit per contract ($250.00 – $35.00). This also “locked-in” a substantial loss on the share side but desperate times call for desperate measures.
Possible enhancements to trade management
October 8th -12th represented the 3rd week of a 4-week contract. The time value of our options were rapidly eroding due to Theta. It is possible we could have rolled down 2 times during that week as share price plummeted $9.00 per share. Selling the shares may have also been a consideration but overall market performance was most likely the main factor in the price decline rather than a specific corporate issue. Losing $1081 is certainly no reason to break out the champagne, but by selling and managing our option positions, the unrealized loss was mitigated by $389.00 by selling and managing options.
Graphic representation of Alvin’s trades and potential trade enhancements
Stock markets move up and down in the short-term. As educated option-sellers, we must position ourselves to maximize returns and mitigate losses. This will involve having structured rules and guidelines (like the 20%/10% guidelines), understanding option forces (like the impact of Theta) and acting in a timely manner. My analysis of these trades is that Alvin did an outstanding job of mitigating the short-term market decline impact on the share price decline and may have been able to enhance the results by rolling down earlier in the third week and perhaps creating the opportunity to roll down a second time during that 3rd week of the October contracts.
***My thanks to Alvin for sharing his trades with our BCI community and congratulations on a job well done.
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Alan will be hosting a free webinar for the Options Industry Council (OIC) on generating income from selling options. Click here to register for free.
All Stars of Options
Bally’s Hotel, Las Vegas
10 AM – 10:45 AM
How to Select the Best Options in Bull and Bear Markets
Las Vegas Money Show
Bally’s/ Paris Hotel
12:15 – 3:15
This is a paid event hosted by The Money Show
***Alan will also be doing book-signing event at The Las Vegas Money Show
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