On 8/19/2017, Ron sent me an email detailing a cash-secured put trade he initiated in a virtual account. I saved the email to use in an article because I felt it would be instructive on several fronts.

 

Ron’s trade with Abiomed, Inc. (NASDAQ: ABMD)

 

selling cash-secured puts

ABMD Price Chart for August 2017

  • 8/10/2017: Sell August 17 $155.00 put (sale price not disclosed in email but not relevant) highlighted by the red line
  • 8/10/2017: ABMD trading at $155.85 making the $155.00 put slightly out-of-the-money
  • 8/12/2017: Share price moved below the put strike
  • 8/15/2017: Share price moved up to the put strike price
  • 8/17/2017: Share price moved above the put strike which was once again out-of-the-money
  • 8/18/2017: Option exercised and shares put to Ron at the end of the trading day

 

Ron’s questions

  • Why didn’t the option holder exercise on 8/12 or 8/13?
  • Why didn’t the option expire or get exercised by the day’s end on 8/17?
  • Could I have bought back the put on 8/18 to prevent exercise?

 

Solving the mysteries of this put trade

Early exercise is rare

Even when a put strike moves in-the-money, exercise will only capture intrinsic value. The option holder would make more money selling the option by capturing both intrinsic value + time value.

Was it really an 8/17 expiration date?

No, it was 8/18. This is a common error made by retail investors and why Ron is so smart using virtual trading initially. The options chain showed 8/17 but the “17” represents the calendar year 2017. Expiration Friday in August 2017 was on the 18th. This is why the option did not expire or get exercised on the 17th.

Buying back options to prevent exercise

The general rule that applies just about all the time is that any option can be bought back prior to 4 PM ET on expiration Friday to avoid exercise. In this case, Ron had until 4 PM on the 18th but thought the option exit strategy opportunities ended a day earlier…lesson learned.

 

Discussion

This trade demonstrates the importance of paper-trading before risking even one penny of our hard-earned money. In this example, the moneyness of options, premium composition, expiration timing and exit strategies all factored into the success of the trade.

***Many thanks to Ron for sharing this trade with the BCI community

 

For more information on selling cash-secured puts:

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Market tone

This week’s economic news of importance:

  • Factory orders April -0.8% (-0.5% expected)
  • Markit services PMI May 56.8 (55.7 last)
  • ISM manufacturing index May 58.6% (58.0% expected)
  • Job openings April 6.7 million (6.6 million last)
  • Trade deficit April -46.2 billion (-48.8 billion expected)
  • Productivity Q1r 0.4% (0.6% expected)
  • Weekly jobless claims 6/2  222,000 (225,000 expected)

THE WEEK AHEAD

Mon June 11th

  • Survey of Consumer Expectations

Tue June 12th

  • Consumer price index May
  • Core CPI May
  • Federal budget May

Wed June 13th

  • Producer price index May
  • FOMC announcement

Thu June 14th

  • Weekly jobless claims through 6/9
  • Retail sales May
  • Business inventories April

Fri June 15th

  • Industrial production May
  • Consumer sentiment index June

For the week, the S&P 500 moved up by 1.62% for a year-to-date return of 3.94%

Summary

IBD: Confirmed uptrend

GMI: 6/6- Buy signal since market close of April 18, 2018

BCI: Favoring 3 out-of-the-money calls for every 2 in-the-money calls. Politics, as it relates to the global economy, is my main concern.

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral to slightly bullish tone. In the past six months, the S&P 500 was up 4% while the VIX (12.15) moved up by 25%.

Wishing you much success,

Alan and the BCI team





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