Friday, May 18, 2012

$QLD Lesson in "exercism" #2 $NDX

If you follow me then you know that this is my second post on getting exercised against. Yes, it happened again... ofgharisto Greece.
Lesson in "exercism" (my own play on words for exorcism and exercise). When I sell put options I understand that I run the risk of being assigned a stock. Conversely, when I sell call options I run the risk of getting short. If you read 'intro to option books' they will often tell you that it almost never happens. Here it is... it does happen! twice in one month for me. Today I was assigned on a short put option in QLD.

SITUATIONI started my machines this am expecting a busy day with opex and few spreads ITM. But I didn't expect to see a popup message from Trade Monster telling me of a 187k margin call!  To make matters worse, this was in a relatively small account where I don't have as much margin room as I need to absorb this. I had been assigned 3500 QLD at 56. Holy cow stockman! that's a giant loss. Not completely. This brings me to:

LESSON #1: NEVER EVER SELL NAKED OPTIONS EVEN IF STRANGLED. Luckily, I practiced what I preached and had bought 3500 QLD at 54.5 limiting my max loss at $1.5. Why so many contracts you ask? My initial position was half that but QLD split while I held the position. This brings me to lesson #2:

LESSON #2: DO COMPLETE HOMEWORK. I should have known about the coming split. Indeed, QLD was a recent addition to my watch list and I should have taken more time doing more homework before opening the position. I don't like to hold spread during splits so had I known it was coming I would not have sold the spread. To fulfill the margin call I click on "exercise" to sell my 3500 newly acquired shares of QLD. The order gets rejected for lack of margin room. This brings me to:

LESSON #3: Don't wait to the last minute during option expiration week to close or reset credit spread positions. This one is probably the hardest rule to obey especially in a persistent market tumble like we've had last two weeks. Getting put the stock issued this huge margin call AND locked out the account for liquidation only trades. This means I am only allowed to close positions. So what? This forces me to close out trades when I could have punted or let expire worthless. FURTHERMORE: If I have a iron condor and I need to close a losing leg that's in the money, I am forced to close out the 100% sure winning other leg that is way out of the money too. ex: I hated closing 11x short may put credit spread EQIX 150/45 last minute for .22, BUT I HATED EVEN MORE needing to buy the 180strike call for $.10. like I said, I have to close both sides of the trade; they are a pair trade and the margin desk won't let you do only one side. This brings me to:

LESSON #4: In my experience, Trade monster is the best platform all around for trading option spreads! Not only do they have the easiest and most user-friendly platform but they also are decent on the phone too. When I call I get the same bunch of people who never fail to have an answer. Case in point: this morning I called and they manually pushed my exercise for the 3500 in about 2minutes flat. I use TM, option house, tdemeritrade (TOS, TA).

SUMMARY RECAP: 5/18/2012
* Don't ever sell naked puts.
* Do complete homework: stock history, events and its competitors' events too. remember how PCLN moved on EXPD results?
* Don't wait to the last minute during option expiration weeks. I try to close or reset longer most of my spreads.
* If you are looking for a platform, Trade monster has served me well.
If you found this helpful then you should ready my other situation from earlier this month. Here is the link:

I hope that this is helpful. I am self-taught and would have appreciated a write up like this years back when I was first exercised. I 

As with any trade there are risks but in this case the I am very comfortable with the dollars at risk. I always try to know and manage my risk; I ask 'what will I lose if the crap hit the fan in the worst possible way.' If I know the answer to this and am ok with it then I should be ok.


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