The Money Tree

Safely Generating Income in Retirement

NP Trade – DLB

Posted by mounddweller on February 13, 2011

Fellow Traders,

Wanted to update you on a trade I made this past Monday (2/7/2011).  I had a busy week so wasn’t able to get it posted sooner.  Not to worry though, after reading this post you’ll be glad you missed it!

This trade is a perfect example of what happens when you abandon your rules and start flying by the seat of your pants.  This trade didn’t come from either my VISIONS trading strategy or my Deep OTM NP Strategy.  

DLB came to my attention as a selection in one of the several newsletters to which I subscribe.  The author of that newsletter thought they would come out with good earnings and resume their climb higher.  Shortly after the new year they had fallen from around $67 down to $60.  On this past Monday I noticed they were at $56.50, having fallen sharply after reporting earnings the previous Friday and the FEB $55 put was selling for $0.55.  At the time it looked to me that the stock had found a bottom and would not fall much further.  Looking at the chart below you can see this wasn’t the case.  The stock continued to fall all week long before finally catching a bid on Friday, closing up $0.06.

So  here’s where I stand on this trade.  I sold the FEB $55 put at $0.55.  Thus, my break-even price is $54.45.  Friday, the stock closed at $53.80.  It is currently sitting right at support levels it established back in late August.  I am going to watch the position closely this week.  If it fails to hold at this support level I am going to buy back the puts at a loss and chalk it up as a lesson learned.  If the stock remains flat or begins to recover slightly I will probably roll the FEB puts out to MAR.

Now, let’s get to the real purpose of why I posted this trade.  I wanted to share with you why I think this trade is not working out.

(1) First and foremost, I didn’t follow my trading strategy.  I did something on a whim.

(2) I didn’t look close enough at the support levels.  Had I did I would have seen the stock had the potential to fall below my chosen strike price.

(3) I didn’t look at what my options (no pun intended) would be if the trade moved against me.  DLB option strike prices are in $5 increments.  I don’t have a lot of flexibility going forward if I choose to stay in this trade.

(4) Last, but not least, I let my desire to achieve a certain level of monthly option premium income cloud my judgement.  This caused me to miss or ignore some of the things I referenced above.

I’ll let you know how it all turns out when I close out the trade.



4 Responses to “NP Trade – DLB”

  1. Rich said

    Getting off track on my game plan got me upside down on a position with DRYS. Was trying something new and then the stock dropped like a rock. I bought it close to 8. Its somewhere around 5 right now. been selling covered calls and naked puts ever since to get back to even. The premiums are real low. will take me a long time to get out without a loss.


  2. Dieter said

    Observing all the comments on Rich trade of DLB, I like to add some more look outs for traps on NP sales. I think the cardinal sin Rich made to sell the put around earnings. Thinking the stock has reached bottom is not the correct time to sell the put. In my experience in selling puts, I look at stocks which are well over their support level and breaking out over the 50 day line.
    I am looking for a delta of less than -.20. I noticed all the puts are sold in the following month, where you pay the max. on margin. I prefer to sell the put further out in time, where your premium is higher and you can better follow the ups and downs on the stock, giving a better time to adjust.
    Good trading

  3. […] NP Trade – DLB […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: