I totally realize that’s a completely disingenuous post title, but it’s true as far as it goes, and it’s fun to write. makes up for the thrashing I took in the markets on Friday….a little.
You may recall I dipped my toe into the options water for the first time here, with what I thought was a brilliant earnings-surprise options put play. Turns out the surprise was on me, because the earnings report was poor and yet nothing much happened to the stock price. While I don’t live on Patience Street, I know how to find it on a map, so I held on figuring I had little to lose.
Sure enough, the price of the underlying stock crept downward slowly. However the options on Questar (STR) are so thinly traded that the bid/ask price (not to mention the last or closing price) didn’t change for most of the time I was in this trade! That’s a little disconcerting.
I decided I’d use a ‘soft’ trailing stop for this based on the underlying stock price, and sell if the stop got hit. After Friday’s big sell-off though, I figured I needed a win and ought to take some profit while I can.
This morning the spread was a $2.15/$2.45 bid/ask, although amusingly the “last” price was my purchase of $1.60. Had no one traded this option since I did? I put in a sell-limit order of $2.30 just for yucks, and it was hit within about an hour or so. That yielded a profit of 36.70% after commissions.
But with options, that’s not as exciting as it sounds. It’s just as easy to lose 100% as it is to gain 36%. Treat an option like you would treat your risk money, not your capital. If you were willing to invest $2000 in a stock and willing to risk $200 in that move, then don’t buy $2000 worth of options. Buy $200 worth of options! If you’re ‘long’ a stock and it moves the wrong way, you can sell and get some of your money back. But it’s easy for an option to move quickly to the point where you get NONE of your money back. My Comcast call option lost 11% in just a few days when it moved the wrong way, so I sold it.
Did I mention STR options are thinly traded? 🙂 It was funny to look at the bid/ask spread later on and to see the volume as “1”. Hey that’s my contract I sold!