What a crazy Week! And a very good one! However, this week had one big blemish! I had a good week but it could have been a great week. I’ll talk about the week and all the trades in my weekly report but this post is to talk about the big blemish.
On Monday, June 19th I sold a Naked Call on Weight Watchers (WTW). With the stock at $29.45 I sold 20 Naked contracts of the WTW 6/23/17 $30 Calls for a premium of 60¢ for $1200. This trade will be a very important lesson, not only for Grasshoppers, but for everyone, including me! Please read my post I wrote when I made this trade by hitting the link, Sold 20 Weight Watchers Naked Calls.
The trade and my post were perfect! I gave the trade a Risk Factor 5 (high risk), and I explained that If I go away from my computer I’ll put a buy order to purchase the shares at $29.90. I also explained that if that happens this trade would go to a Risk Factor 1.
A reader, Tony, even sent me a comment asking me about my buy order. He said,”You mean a buy-stop order don’t you“? And he was 100% correct. As a little side lesson, you must know what a “buy-stop” order is because if the stock is at $29.45 and I put in a “buy” order I would be executed immediately. With a “buy-stop” order it will only get executed when the stock gets up to the price you want to buy at. If it doesn’t get up to that price you will not buy the shares, you would stay naked…… Back to my trade.
Remember the stock is at $29.45 and the Call was sold with the Strike Price of $30. I want to cover if the stock goes up to my Strike Price, the price I have to deliver the stock if In-the-Money at expiration. The problem is, and the huge mistake I made is, the stock went up while I’m sitting at my computer and I didn’t buy the stock to cover my Call. I’m thinking the stock will come back down. It never came down and went up for the rest of the week. I was hoping for the stock to come down for 4 days and it never did. I would have been better off if I had to leave my computer and I entered the “buy-stop” order. I would have been covered and I would have delivered the stock at $30.
The reason I didn’t buy the stock is, well obviously I thought the stock would come down but also I didn’t want to pay the margin interest because I owned a bunch more stock I was paying interest on. I was trying to control my expenses. The problem is I was saving pennies while I was losing dollars.
The Bottom Line: I sold the Call for 60¢ which on the 20 contracts is $1200. Today, Expiration Day, I bought back the Call to close the trade for $2.30, which on the 20 contracts is $4600. This trade and the big mistake of not covering my Call gave me a loss of $3400. I could have done a “Roll-Out” and carried the trade a few more weeks or more to try and prevent the loss, but I decided to take the loss, move on, and use this trade as a teaching tool so everyone can see how dangerous Naked Calls can be.
It was a big mistake and I paid dearly. The good thing is I still had a good week. Even with this big loss I was still up $2270 on the week. Here’s the trade orders from this trade gone bad.
Sell to Open 20 WTW 6/23/17 $30 C @ 60¢ (+$1200)
Buy to Close 20 WTW 6/23/17 $30 C @ $2.30 (-$4600)
Loss -$3400
Watch for my week ending report. Have a great weekend!
Steve
The Options Coach
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