Put trades on WFM and COH

In early July I closed my LULU option for a nice profit. Rather than let the money sit idle, I decided to open some more put trades to generate income.

I chose two stocks with a high implied volatility (IV) to obtain higher premiums. Both stocks tend to have relatively high IV ranks compared to the general market anyway, but volatility is especially high for these companies now because they announce earnings at the end of July.

For both of these trades, I hope to see the stock rise higher, stay the same, or fall slightly following earnings. I also hope that volatility will drop after earnings, allowing me to buy back the option for at least a 50% winner. Should the trade turn against me, I may decide to roll the option, if I can do it for a credit, or close it for a loss.

You’ll see below that I am selling “naked” puts. I am able to do this now because I was recently approved for tier 3 advanced options trading. With my available cash I could technically sell 10 options contracts with the current margin requirement, the equivalent of 1000 shares of stock if assigned.

In fact, the margin requirement would only be just over $4000. However, there’s the possibility of being responsible for $32,000. Yes, I could sell other stocks to come up with this, but the harm would be huge. So, while technically I could sell that many contracts, I’m actually only selling two of them. This way my margin requirement is much lower, and I have all the cash available in the account, which I’m using to “cash-secure” it myself. Best of both worlds in this case.


WFM
Type: naked short put
Margin requirement (as of 7/8/2014): $503.00

07/03/14 STO 1 WFM Aug14 2014 35 Put @ 0.44
Comm = 1.54
Credit: $0.44

This trade could turn out a few ways:

Max Profit $44 – $1.54 = $42.46 Max profit occurs if WFM is greater than 35 on expiration day, which is August 14. Max Profit = Net Premium Received – Commissions Paid
Max Loss $3500 + $1.54 – $42.46 = $3459.08 Max loss occurs if WFM goes bankrupt before expiration day, which is August 14. Max loss = stock drops to $0
Breakeven Point $0 Breakeven point occurs at 34.56. Breakeven Point = Strike Price of Short Put – Net Premium Received
Possibly Assigned Shares varies At any point when the stock is trading for less than 35 I could be assigned 100 shares at $35/share.

Update (08/04/14): Earning came and went and the stock didn’t really move that. Volatility dropped from near 100 to 35. Subsequently, the put option I sold dropped in value to 0.12. Since my goal is to manage winners at a 50% (or greater) profit, I decided to buy back the option. Before commissions, my profit for this trade is $32.

08/04/14 BTC 1 WFM Aug14 2014 35.0 Put @ 0.12
Commission: 1.53

Profit/Loss: $28.93


COH
Type: naked short put
Margin requirement (as of 7/8/2014): $445.80

07/03/14 STO 1 COH Aug14 2014 32 Put @ 0.51
Comm = 1.54
Credit: $0.51

This trade could turn out a few ways:

Max Profit $51 – $1.54 = $49.46 Max profit occurs if WFM is greater than 32 on expiration day, which is August 14. Max Profit = Net Premium Received – Commissions Paid
Max Loss $3200 + $1.54 – $42.46 = $3159.08 Max loss occurs if WFM goes bankrupt before expiration day, which is August 14. Max loss = stock drops to $0
Breakeven Point $0 Breakeven point occurs at 31.49. Breakeven Point = Strike Price of Short Put – Net Premium Received
Possibly Assigned Shares varies At any point when the stock is trading for less than 32 I could be assigned 100 shares at $32/share.

Update (8/5/2014): Not much activity after earnings on this stock either. After work this morning I checked the stock price and saw that it was up a little over 1.50 this morning. The option, which I originally sold for 0.51, can now be bought back for 0.10. Rather than risk losing the profit for only an additional $10, I decided to buy-to-close today. Total profit for this trade after commissions is $37.93.

08/05/14 BTC 1 COH Aug14 2014 32.0 Put @ 0.10
Commission: $1.53
Profit/Loss: $37.93

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