I would like to update you on the option selling trade I presented this week on Monday, 18 September. There are good news. Selling put options on Equifax paid off. The sold option was bought back on Friday, 22 September, with a profit. Let’s check it out.
Brief recapitulation of the introduced market idea
- Selling put options with the strike price 70, expiration date on 20 October 2017 for the option premium of $120 per option. This option was valid 32 days at that time.
- Selling put options with the strike price 60, expiration date on 19 January 2018 for the option premium of $190 per option. This option was valid 123 days at date time.
I decided for the second possibility. By selling the January put option, I was betting that the price of Equifax will not go below $60 per share in the next 123 days. My aim was to buy back the stock option at 45% of its original value. This would mean earning 55% of the original sum, for which I sold the option.
After 5 days, I could buy back the option fulfilling my aim despite the fact that the option was still valid 118 more days before it expires. On Friday, I bought the option back for $88. $190 was the original premium – $88 = $102. Hence, this trade resulted in a gross profit of $102 per sold option.
The put options lost value very fast
After panic at Equifax brought the price of the shares from $140 almost to $90, people used the opportunity to enter the market. Consequently, Equifax stock knew only one way in the last days and that was up. This was one major factor why the sold option lost the value so fast. The second major factor was the decline of implied volatility as the panic steadily disappears.
The October put options also performed well
What would happen If I would have been selling put options expiring on 20 October 2017? Actually, that option could be bought back after two days, on Wednesday, 20 September. This when using the same rule, to buy the option for 45% of the original value. It would bring $65 gross profit per sold option.
This option lost its value even faster as the time decay had much stronger impact. The October option was valid just 30 days. That is quite short time in which the price of Equifax stock would have to fall below $70 for the option to be in-the-money.
You will be the judge of which choice would be better.
Conclusion: Selling put options brings many advantages
In the introduced example, there is a big difference between:
- Selling put options and;
- Buying the Equifax stock directly (or directly buying any other instrument reflecting Equifax price).
When selling the put options, I did not know that the price will go up so much. It was luck that I entered the trade when the price reached the bottom.
However, I knew very well that there is a high probability of profit. Firstly, I did not bet that the price will go up. I bet that the price of Equifax stock will not go below $60 in the next four months. In addition, I knew that the high implied volatility will be of a huge advantage for my option trade. Even if the price of Equifax had continued to slowly fell (not too abrupt) I might have still made a profit. The extremely high volatility made the options very expensive so that they could be sold very far away from the stock price. More info about this in the original market idea.
On the other hand, if one had bought the Equifax stock directly and the stock price fell further, he or she would be immediately in minus. It is extremely difficult to pick the bottom. In general, it is not a good idea to go against the trend. “Trend is your friend”.
Thanks to option selling, it was possible to profit from the Equifax sell-out with much better probabilities than with any other method. That is why I like option selling. I hope this triggered new ideas and maybe showed you the financial markets from a different angle.
Premium-Flow scores again.
If you like this market idea, write me in the comments below so that I know whether this concept is of your interest.