Friday, May 11, 2012

$OEX lesson in 'exercism'

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! Today I was assigned on a short put option in OEX. (Side note: I learned to always assume the worst can happen. For ex: keep enough room for margin requirement changes or out of the blue assignments etc. I don't like to be forced into a trade just because of a change in the rules or unforeseen change cash levels like an assignment.)

IMPORTANT NOTE: OEX is american style and cash-settled. American style means that you can exercise your option any time you feel like it vs. euro style can only exercise your option on expiration day.
Cash-settled means that the debit is equal to the number of shares x the premium of the leg. I don't get assigned the stock. In this case, the debit in my account was 600 (6contracts x100) x stirke price premium at the time which was -16.95.

* I had an ITM May credit put spread in OEX 14x 635/630.
* Someone excersised their option so I was assigned 6x635 strike at $16.95. So I was debited $10177.65 (acct history showed -10170)
* So, in defense I sold 6x of my protection leg the 630 put strike that I was long. Sold it for $13.0
* So the net debit to my account became: 10177.65-7783.87=2393.78
* I also turned around and put the same trade back on for 6x635/630 for $4.15 credit & collected 2467.74
*** So net cash in my account from this OEX = +$73.96. the 4.15 was more than the net change of assignment and me selling (16.95-13.0=3.95)

THESISeconomists who are telling stories of impending doom may be factually correct about the trillions in peril. But that doesn't mean that all of it is going to happen. I am of the opinion that post the 08 financial implosion, the world has learned many lessons. I am also of the opinion that the world will forget these lessons and mess up again but not this soonSo, for the mid term I am optimistic that the worst case scenario of total doom being tooted will not happen. This has to be true otherwise we wouldn't call it investing; we would call it gambling a la Russian roulette!
My strategy for this specific trade is that next week we should see upside; hence, I should be able adjust/punt this position cheaper than being forced to do it today (5/11).

THE METHOD: Staying the course and waiting to reset next week. At which time I will post my exit strategy.

IDEAL OUTCOMEOEX moves up from here to above 635. I realize that this is a long shot BUT I also said in my thesis that I am optimistic from this level. So I anticipate that we improve next week. Today we rallied on super bad news (on a morning when cnbc was using words like panic, disaster, drag, loss of confidence etc.). If I am correct about next week, then I can punt or adjust this trade for cheaper than being forced to do it today.

WORST CASE SCENARIO: next week we back track and I lose the .85 (the difference between the 4.15 I collected today and the max $5 of the spread 635-630 = most I can lose from here).
From here, I am risking .85 (I put the trade on for 4.15 credit).

I hope that this is helpful. I am self-taught and would have appreciated a writeup like this years back when I was first exercised. I have to give kudos to trademonster as their help desk is always consistant.


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.


$AAPL $AMZN $bidu $SPX $NDX $RUT $C $GS $wynn $SPY $GOOG