Options expiration day is always a stressful day but today was amplified because we had Bank of America, Citi, and GE reporting earnings. All companies had their conference calls during morning market hours. The potential for fail was huge today. The potential for win, not so much. All it would take to tank markets today was one bad comment during either conference call.
Markets opened lower but spiked higher starting around 7AM PST. I had my own dilemma by that time, I was holding on to $390 (15% of the portfolio) worth of GOOG options that opened with a bid price of $5. Awesome, $390 turned in to $10 overnight.
This along with the value of my FAZ calls and IBN calls would have left my portfolio showing a loss - blah! I sold off the IBN as soon I could (took a $25 loss, which at the time didn’t seem bad at all), I didn’t need to worry about that, my main concern was the GOOG call and put I was holding on to. I quickly scanned my charts and looked up and down my watchlist to find stocks that had the potential of hitting a strike price quickly.
I took another look at FAZ. I knew I’d have an opportunity with the July, 43 calls. Taking a huge risk I bought 20 FAYGQ at $30 each, total cost of $600. Awesome, I had almost 50% of the portfolio invested, which if you remember, is more than I ever want to have invested at one time. This was a special circumstance however, I wasn’t going to have all my work this week destroyed by a bad call on GOOG.
I waited patiently and finally FAZ shot up, starting at about 7:30 PST. I watched it soar all the way up to 42.99 and blam, the stock hit solid resistance at 43, it just wouldn’t move past 43. At this point I knew this wouldn’t be a rockstar trade but rather one where I’d get to make up some of my loss on the GOOG trade and my portfolio would end positive for the week - that’s really all that mattered to me. I quickly shot out a limit order for $50. That didn’t hit after waiting about 30 minutes. It was clear at this point that FAZ would start sinking soon, the chart was looking really weak. I shot out a limit at $45, nothing. $40 and boom, they hit. Quick gain of $200 bucks and enough cushioning for me to cover the loss of the remaining FAS put I owned.
I sold the FAS put for $30 bucks, taking a loss of $315. Total loss for the day: $730. But thanks to my quick action and my awareness I was able to end the week in the positive.
Lessons I learned today:
1) Taking profits even if they deviate from the plan is OK
This is important. My GOOG play was profitable yesterday toward end of day. I should have taken the profits even though it differed from my plans - it was an earnings play. Which brings me to lesson two:
2) No more earnings plays, unless extreme volatility is assured
I could have taken that money spent on the GOOG strangle and played at a table in Vegas, it would have been the same thing. It was an unwarranted gamble that almost cost me my legitimate gains. This is going to end here and now.
3) Buying options close to the money, or in the money is preferred close to expiration
The closer we get to expiration the less I’ll be buying out the money options. The reason for this is simple: out the money options have only time value, the closer we get to options expiration they experience something called time decay - their value drops by the day. Options that are in the money are protected because they have less time value and actual intrinsic value. This is a way to protect against time decay. The in the money options still experience time decay, just not as much as the out the money options.
All in all though this has been a good week. This morning was stressful but I’m happy in the way I reacted and quickly made up, part of, the loss. My portfolio is up 11% after 5 days of full time trading, after a small withdrawal of $50. Not many people can say that for a week.
Hope you guys have a brilliant weekend! I need a beer 
Cheers,
Nik