WalMart Time Decay is not enough now…

We’ve been talking about our WalMart trade and I’ve been explaining how we had created a very nice income position. Today, we are down about $1000 since inception of the trade string going back through 2014. Our market risk ( DIA Beta Weighted Delta) is about 180, and the position has no Theta.

Yes, that’s right, no Theta. We had sold calls against our long 900 shares, but with the drop in the price they were closed or expired on Friday. We will plan to sell new calls next week and bring in some money.

This is a beginner’s lesson in time decay generated by the selling of short options::

When we started trading WalMart in January 2014, it was around $78. This January, it went all the way up to about $90 and has now dropped to about $73. This is tough to trade and make any money, but we have been finding a way to work through this. Our total over the last 18 months is roughly break-even with dividends added in. Think about it this way – If we had bought 900 shares of WMT in January 2014 at $78 we would be down maybe $4000 or so. Instead, we are at break-even on the trade so the continued selling of options has earned enough money to keep us from having a loss. This is not a great result and not what we want to happen, but it is reality. Not every trade works and you absolutely must avoid losing money. As long as you can stay even over a period where things aren’t working as planned, then you are able to continue to work the position until it eventually goes profitable.  You never run out of ways to make money with a properly structured options portfolio.

We have a clear, almost automated, plan for this week. We are long 900 shares of WalMart and can sell calls against our position. One of our trading rules instructs us to wait until a day when WMT is trading up and sell calls on that day. This works well, but it is not the only strategy and not guaranteed to be the best choice. It’s just one well-reasoned choice and there are many others. This is always the case with options. You have many ways to tweak a position.

Any single option position can have 3 outcomes – it either makes money, loses money or breaks even. But, in the options market, there are many different expiration dates and many different strike prices. Option contracts can be combined in very simple or very complex structures to add or subtract any amount of risk at any time. We can also do something a stockholder can’t easily do : We can turn a losing position into a winning position with options – while lowering our risk! Our WalMart trade started out losing quite a bit of money. We were down $2500 after 5 weeks. We continued to manage the position, collecting time decay every day, until we had build a structure that was profitable. We will probably not make money every week forever, but most weeks should continue to be profitable. We have built a little business that sells insurance to WalMart stockholders.

Stay Optioned, My Friend!


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