Realizing Profits on PUTS and Holding and Rebalancing Big Losses on CALLS — June 11 Trade Log
Today’s trading session was a tough pill to swallow, we only had a little bit of water to wash it down, although nominally it didn’t mean much, we put it to good use.
More than the FED’s call itself markets sold off on the scare of a new wave of coronavirus cases coming. The SPY began trading at $310, $9 dollars below yesterday’s close and it was all down from that point on.
After Wednesday’s end of the day selloff we expected the correction to reach levels of around $305, above the 200SMA and not yet rebounding but the market had other plans, the selloff was aggressive and closed up below the moving average support but still holding it.
On a panic move we were quick to sell most of the PUTS we were holding yesterday on the small correction and were mostly loaded on CALLS coming in to today’s session, luckily we still had some PUTS that were under the water yesterday and one which we decided to leave just in case. These contracts gave us some room to breathe, we were able to realize some profits.
In total, we realized $217 worth of profits from PUTs only, of course all our calls were really damaged; the short time to expiration and today’s dip made the prices plummet.
UNREALIZED P&L
Our list of Unrealized P&L today extended even further from the already long list we had yesterday.
The “Unrlz” (unrealized) losses recorded above was in the early part of the session, we hadn’t yet realized our profits on puts, after this, we saw those numbers reach highs of about -1.200K or more; if it wasn’t already implied, this was the tough pill to swallow.
REBALANCING AND COVERING
The market’s correction today was really violent and it may have scared many investors, at least for us, it really put us to a test but we did not back down.
The best case scenario we were planning for was this one and a sudden dip could not change that mindset for us. Since we bought the PUTS as covers we were expecting the market to make this movement so we could profit in both directions, we are just waiting for the bounce back, if it happens, so we can take profits from the CALLS.
Using the profits from yesterday’s and today’s sales we bought more contracts, some to bring down the average price of existing positions and the others to cover the long positions, for almost every underlying we owned at the time we brought down the cost basis, and covered the position with a PUT in case anything goes wrong and the stock keeps falling. We made sure to buy the PUTS with a shorter time to expiration, this allowed for cheaper premiums and more volatility which could favor us if anything went wrong. The CALLS we rebalanced were mostly 15 days ahead, since the covers were for next week it didn’t make sense to buy in the same expiration. It basically looked like this: PUTS — Jun 19 2020 | CALLS — Jun 26 2020 or further.
TOMORROW
Futures are once again positive and the VIX is dropping. It is nothing certain but it is as close to a crystal ball as investors get in the market and the outlook is really positive.
This dip could be in fact a great entrance point and we did not let it pass.
TAKEAWAYS:
- Options have an incredible advantage on covering long or short positions, for small amounts one can easily cover and reduce losses if the underlying does not follow the movement that you expected. In our case we are always buying PUTS to cover our bullish positions, we may lose and the contracts may expire to $0 but compared to the potential profits contracts can have the cost is minimal.
- Diversification is KEY and it gets even better when one can diversify on direction as well. If markets rise we win, if they don’t we also win.
- Managing risk is easy with options and there are many ways to do this, VIX CALLS, underlyings’ PUTS, ETF or indice PUTS and vice versa if the direction you are picking is bearish.
