We have been using a combination of puts, calls and stock ownership to trade around a position in GE. So far this year we are up $350 on our little position.
The current position is short 5 weekly 25.5 puts, expiring this Friday. Right now, GE is trading at $23.22. This is ITM (in the money) – so we would own 500 shares of GE at the close Friday if the stock price stays below $25.50. This would require $12,750 cash in an account without the use of margin. We have made about 2.7% on our money so far this year, or close to 1.5%/month.
The chart shows GE over the last month or so. You can clearly see the price jump after a good earnings report. I drew the white Regression Line covering the time period since earnings. The price seems to be solidly entrenched in a channel revolving around 23.25 or so. I see no sign of this changing. At DPO, we place a lot of value on one certain skill – and that is letting the charts tell us what to do without believing we can predict future movements.
We can do a few different things with our position. We can go ahead and own the 500 shares of stock. Or, we could buy back the short puts at a small profit. Or, we could roll them forward and let the position continue to make that 1.5%/mo.
We will roll the position by purchasing the current short contracts and selling the next week’s contracts. There is only one thing wrong with that idea today – the weekly options for next week are not available to trade until tomorrow. This is the normal schedule – Weekly options begin trading on Thursday, 8 days prior to their expiration.
Tomorrow we will look at our choices again. We are planning ahead and preparing to consider all possible outcomes for this trade.