The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – MAR Results

Posted by mounddweller on March 18, 2011

Fellow Traders,

Well, another month of options have expired.  The month started with a whimper but went out with a bang.  Volatility is up and this is evident in our results.  Fourteen of the 56 (25%) selections meeting our criteria this month finished ITM.   Before we look more closely at the losers let’s look some more at the overall results.  To have traded all 56 of the selections would have required $398,350.00 in capital.  This would have produced premiums totalling $6,216.65 (net of commissions).  This results in a ROIC of 1.56%. 

However, this month our premiums would have been gobbled up by losses.  We had several positions that finished deep ITM.   Our biggest loser by far was Finisar (FNSR).  At the time it showed up on our screen, 3 weeks before expiration, it was trading at $41.10.   The $35 strike price on the put offered a seemingly ample 16.3% of DSP.  However, the bottom fell out on March 9th.  The stock closed at around $40 on the previous day but closed at $24.61 on the 9th.  There was no chance to avoid this loss. 

Coming in second on our list of the biggest losers was Delcath Systems (DCTH).  It showed up on our Week 4 list with a price of $11.30.  The $9 strike price on the put offered 22.83% of DSP.   The stock closed today at $7.03.   However, this loss was easily avoided because the stock dropped precipitously at the open on the Monday following our selection on the prior Friday. 

Our next big loser was Medifast (MED).  Like DCTH, MED showed up on our Week 4 list.  It was priced at $27.15.  The $22.50 strike on the put gave us 19.34% of DSP.   Today, the stock closed at $18.36.  With this trade we would have had sufficient time to bail out before having to take a large loss.  The stock moved down steadily for over two weeks before the bottom fell out a week ago. 

These results have led me to conclude that this strategy can not be followed blindly.  In an uptrending market it does very well with very few trades finishing ITM.  When volatility picks up it pays to be a little more selective.  I am going to continue to post every selection meeting our criteria but I would highly recommend you do significant DD on any selection you choose to trade.

I’ll be back later this weekend with the first round of picks for APR expiration.

Regards,

Troy

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