The Money Tree

Safely Generating Income in Retirement

February 2014 Results

Posted by mounddweller on March 2, 2014

Fellow Traders,

February is now behind us.  After the 6% correction in January the market came roaring back in February.  We’re back at all-time highs on all the major indexes with the exception of the DOW which while recovering is lagging.

Let’s first look at the trades I closed this month.  I closed three trades, CLX, CSCO, and ADM.  CLX was closed on 2/5 at a loss of ($105.80).

BLOG - CLX Feb14 Result

This trade was a loser because I lost sight of the big picture and let my emotions get the best of me.  In addition, I didn’t fully follow my trade plan.  My trade plan called for rolling down and out as necessary to stay OTM on my strike price and to roll for a net credit.  I did this in my roll down and out from FEB to MAR expiration but when the stock rapidly fell to the new strike I let my fear of a big loss get the better of me and decided to close out the trade with a small loss.  I could have used the remaining capital I’d originally allocated in my trade plan to buy back the MAR puts and roll them out to the APR at the $82.50 put.  The better approach though might have been to remain calm and just given the stock another day or two to see what the market was going to do.  As it turned out the day I closed the trade was the bottom for CLX.  It since has run back up, closing Friday at $87.28.  Bottom line, had I been more patient I would now be sitting pretty instead of sitting on a loss.

I closed two CSCO trades in February, one of which was a quick 1-day trade.  As you can see on 2/13 I sold MAR $21 NPs for $0.22 but was able to buy them back the very next day for only $0.07.   My second CSCO trade was in the FEB $21 puts which expired OTM.  All in all it was a good month for me with CSCO.

BLOG - CSCO FEB14 Result

My final closed trade was in ADM.  I opened the trade on 1/23 and immediately had to roll down and out on 1/24.  Not a great way to start a trade.  However, by remaining calm and patient (why wasn’t I able to do that with CLX?) I was able to close out ADM with a solid gain.

BLOG - ADM FEB Result

Now let’s take a look at the 4 new trades I opened in February.  As you can see below I opened new trades in BEN, KMI, KO, and WMT.  The trades in KMI, KO, and WMT are all part of my long-term portfolio.  It is likely that at some point I will accept assignment in these stocks if my puts finish ITM.  At this point only KMI is at risk of finishing ITM at expiration.  My plan is to accept assignment only on a portion of the shares and roll the remaining contracts out to APR.

BLOG - FEB14 New Open Trades

Of my 5 remaining open trades 3 were opened in 2014 and 2 are hold-overs from prior years.  My trades opened earlier in 2014 include PG, T, and TGT.  The hold-over trades are in EXC and GDX.  Long time readers know my history in these two stocks.  EXC is finally approaching a break-even status after many months of being in the red.  GDX still has a very long way to go but it too is showing signs of life and I am hopeful that by year-end I will be in a much more favorable position with it.

My trades in PG, T, and TGT are a mixed bag.  I made a miss-step in my TGT trade.  Like my trade in CLX, I let my fear of a big loss cloud my judgment in how best to manage the trade once it began to move against me.  However, I remain confident I will close it for a profit, just a smaller one than I could have made had I been smarter.  PG is also well on its way to being closed at a profit.  It is well OTM with 3 weeks to expiration.  My last trade in T is my largest position.  I got into this trade too early but believe it too can be managed to a successful and profitable conclusion.

Well, that’s it for this month.  Best of luck to my readers this month as they trade in what I anticipate will continue to be a volatile market.

Best Regards,

Troy

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2 Responses to “February 2014 Results”

  1. Martin said

    Hi Troy, I had a similar situation with CVX as you did have with CLX. My original trade was at 115 strike and the stock dropped down to 100. I was able to roll it to 95 strike and collect 2.25 premium.

    I wonder if there is any repair strategy for short puts besides rolling down and away in time to avoid potential assignment converting the trade into a different spread.

    • mounddweller said

      Martin,

      Sorry for the slow response. I’ve had a busy week and am just now catching up on email and such. With CLX the reason I decided to take the loss is because I didn’t want to risk anymore capital in the trade. Rolling down and out to the $82.50 and increasing the number of contracts from 2 to 3 would have put almost $25,000 at risk. That’s more than I wanted to risk in one stock that I don’t really care to own.

      Since then a friend and mentor has suggested to me an alternative way of managing the trade once its started to move against you. Instead of rolling down and out and increasing the number of contracts simply buy back one of the contracts and roll the other out but not down. Let’s look at how that might have played out with my trade in CLX. I don’t have historical price data for the options but we can see generally how it might have worked.

      On February 5 I was short 2 MAR $85 puts. With the stock at $85.06, I bought them back for $2.00. This caused me to lose $105.80 on the overall trade. Now, rather than accepting the loss what if I had then sold one APR $85 put? Likely, I could have sold it for around $1.75. Doing so would have put me back in the black with around $70 in profit AND would have reduced the amount of capital at risk from $17,000 to only $8,500. If, by APR expiration the stock still had not recovered I could then have repeated rolling out the one contract at the $85 strike or resumed my previous plan of rolling down and out and increasing the number of contracts. Either way, I’m still in a much stronger position than if I had initially rolled down and out in February and increased my capital at risk to almost $25,000.

      Hind sight being 20/20 we know CLX recovered and is currently above my $85 strike. Even if I closed the position early I most certainly would be able to do so at a small profit or at worst a smaller loss than I took by closing the entire position on February 5.

      Regards,
      Troy

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