I have four different options expiring today on three separate underlying positions for another profitable options expiration. The first two options were easy and will close out my exposure to both of the underlying stocks. I had one BA February $135 put expire worthless and one FB February $72.50 put expire worthless. BA traded over $158 today and FB broke above $80. These two option trades highlight a negative aspect to selling puts. I missed out on a ton of upside potential on both of these stocks by capping my upside, but I did come out of each trade with a full profit and didn’t have to close either naked put early since the chance of assignment was extremely low for a while.
My other two options were on TLT and the position is more complicated, but better (so far). I started with short spread on TLT using 10 February calls on both the $130 and $132 strikes. A few weeks ago, seven of my short $130 calls were assigned and I was assigned/sold 700 shares of TLT that I did not own. I still had my 10 long calls at the $132 strike as a hedge, so I didn’t have to react. I had the luxury of being patient and it paid off. TLT made it as low as $125.93 before bouncing a little. I still think it will fall again and will re-enter a limit order to buy back my short 700 shares of TLT closer to $125.00. My current limit order is only good through today and TLT is not tracking towards that mark as I write this.
The TLT position’s profit summary isn’t that complicated really. The seven options that were assigned are the same as the three that will expire worthless today. I didn’t buy them back, so I make a full profit on them and I take a full loss on the 10 $132 strike calls I was long as a hedge. This breakdown gives me a $464.18 profit on the options (i.e. my initial net premiums) and an undetermined profit or loss on the shares themselves. TLT is trading slightly below $127 as I write this, which means I have a paper profit of more than $2,100 on the shares in addition to the $468.18 profit on the options. If TLT falls back to $125 (I believe $123 is very possible near-term) and I close my position, I’ll net $3,500 on the shares. I haven’t decided what my new limit order will be. I might aim even lower or I could get out with a profit sooner and start the process over again with a new call spread at lower strikes.
If I exited TLT and BABA (which is down substantially this year) today, I’d have a small gain on the combined two trades and could essentially start over with a clean slate (and $3,650 I’ve gained on other positions this year). It’s a tempting idea, but I still believe TLT will fall further next week. BABA hasn’t moved more than a couple of dollars over the past two weeks, so I don’t think I’m risking a ton by delaying my decision on it. I’d like to get out of TLT this month to avoid paying the next dividend, but that won’t be my deciding factor since the shares can drop a lot more than the dividend payout in a single day. In fact, the price often drops on the ex-dividend date as the dividend’s payout is removed from the value and traders exit.
Since I started writing the previous two paragraphs, TLT has fallen more than $1.00 and I’m up another $700.00 (enough to buy the new lawnmower I need). You can see why it’s so tempting to stay short longer when the gains can grow so quickly. I recognize it can reverse in an instant and I can lose my paper gains quickly, but that’s part of trading vs investing – taking some risks to reach for alpha.
