WalMart trade 5/26

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We continue to struggle in our efforts to make WMT profitable for the year. Today, the market is down about 1% and our WMT position is down $1 per share. WMT is in a long term bear market and has fallen from $91 to $75 since January.

We own 900 shares in the portfolio. As stockholders, we would be down over $14,000 on this position. As option traders, we are now down $3000. The option sales against the long stock position have brought in $11,000 this year, so with the 900 shares of WMT we are creating about $2000 a month of income. This does not diminish the fact that we have lost money on the position (since Jan 1) and that losing is not what we want to achieve. However, we also understand that it is impossible to predict the future movement of a stock. As option sellers, we can predict the daily time decay of an option with a fair degree of accuracy. We know that all options will lose 100% of their time decay value, we just don’t know the rate of this decline. That’s why we are option sellers to generate income.

Let’s look at the numbers. We own 900 shares of WalMart which is valued today at about $67,500. We have been using this position to generate over $2000 a month in time decay income by selling a mixture of puts and calls. This is about $25,000 a year or over 35% return on capital. If you look at “trading options around a core position” as a marathon – you begin to understand the concept. We are not looking for the next opportunity to take in a quick buck. We’re not that smart. We want to take in the “sure thing” – or, the time decay of short options.

What could go wrong? WalMart could go bankrupt and we would lose all of our money. Obviously, that is not going to happen but it’s a good illustration. Don’t try to use this system on a struggling company that is losing money and actually could go under. As long as we stick with companies that are blue chip institutions, we can make any position profitable by the application of patience and discipline over time. Note that most of our trading positions are DOW 30 stocks. This also gives us the opportunity to easily hedge the entire portfolio, should we desire to do that.

Would you invest $67,500 in order to earn 35% a year? I can’t imagine turning that opportunity down. That’s what we are doing with WMT right now, but it’s not a passive investment. We earn that money in a number of ways which include; risk of extended unprofitable periods, risk of decreased profit potential, risk of bad timing on position adjustments, risk of letting fear and/or greed overcome our patience. If you can filter out the daily noise and continue down your path, profits will follow.

Stay optioned, my friend!

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