Friday I watched as puts I sold on CHK fell to 0.01 cent on the weekly 5.5 SP.
Lesson: If you are sitting on cash and selling volatility to collect premiums you must have a pre-defined mark for closing the position.
You are probably saying “duh”. You have a price target for your long and short positions when you do a write up. The PT gives you a basis for judging when to exit the position…whether its years or months.
That’s easy and basic stuff.
My trap: I didn’t want to close the position since it was going to expire at the end of the day anyway.
As a rule: Don’t grab for pennies in front of a steamroller. In this case…literally 1 dollar per contract.
I had a 2.4% gain for all my positions ready to lock in at Friday close.
Then volume spiked on the puts. Still trading at 1 cent. I put in an order to go from short the puts to long with the volume spike. (just close the position…JUST CLOSE THE POSITION)
I left my computer to do other things.
Less than an hour later the mark is at 0.15 cents. I closed the written puts position at a small loss. What happened? “At least I rolled to long” I thought. Wrong. The mark spiked almost immediately after I placed the order and walked away.
I don’t chase entries but momentum was clearly moving in a big way.
Placed an order at 0.16 and came back to it at over 35 cents but no fill on huge volume. The mark had moved too quickly. While thinking about this it moved to over 50 cents.
This happened again and eventually the puts ended at 0.92 cents at the close.
That’s spectacular ROI.
Barclays released an article stating CHK was worth $1. I am not long the stock so it doesn’t matter to me. I was trading volatility.
I say all of the above to highlight the lesson of pre-defined exits and to remind everyone just how much institutional players are playing on a different informational playing field than the retail side.
My puts were never filled.