Take Your Profits...

After examining the position, we decided on the following Tuesday to place an order to sell USG to close the position entirely - limit $15.40. The sell order was filled at an average of just a hair over $15.40. USG was briefly as high as $15.65 earlier in the day but not for very long, so I missed the day's high. No matter; I have never actually suceeded in buying at the day's low or selling at the day's high. I'm always too early or late, and have never had a hole in one, either. USG is an anomalous stock in that many of its option series have comparatively high volume but the stock itself is not a high-volume stock normally. In trading it is rare to catch the actual highs or lows.

Here is how the trade worked out - a net return before trade costs of $1.29:

Bought USG	-$15.14
Wrote AUG 15 C	+$  1.03
Sold USG	+$15.40
Net profit	+$  1.29

That's an 8.52% return for a 21-day hold - without using margin - which works out to a 12.17% monthly return. Using full margin would have doubled that return. Traders don't always make the most money possible on a trade, and our goal is consistent monthly returns with no drawdowns, not making the maximum possible return on each trade.

You may wonder why we closed USG instead of writing a new call. Even when USG moved up that day, the bid on the SEP 15 Call really didn't increase; we never saw the bid on that call go over $1.10. We kept thinking that the September premium would increase as the stock moved up and we could pounce on it. But the market just isn't seeing USG as very volatile right now and isn't putting a big premium on the SEP 15 Call. Put differently, if the stock can move from $15.25 to $15.70 in a day and not put any additional premium in next month's call, a new USG write for September didn't make sense to me.

In my view, writing the SEP 15C as USG moved up would have been letting the market pick my pocket, compared to other trades available. The reason is that USG was up ($15.40) and I could sell the stock at that price. That is, instead of writing the SEP 15 Call for another $1.10 in premium (only 0.70 was time value, remember, because the call was ITM and I would have to sell at $15), I simply elected to take the profit off the table. The return offered was not nearly as sweet as the AUG write.

Another trader might have decided that one differently and happily written the SEP 15C. Neither he nor I would be "wrong" - it is a matter of how you want to trade. Other traders might prefer to write a good stock they still owned, and that would not be a wrong decision; it just wasn't mine.

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