A Pleasant Surprise.. and Another Lesson Learned

I just closed a bear put spread on Pulte Homes that I opened in Sept.  My thinking at the time was that the stock was in a freefall and the housing market was not going to make a spectacular comeback in a month.  So, I placed a bearish trade that would be profitable if PHM moved anywhere below 15 and reach it’s maximum profit at 12.  I was sure it would hit 12.  I was wrong.  But, it did go down and that’s all I needed.  For a while there I was sure this was a losing trade and a hard lesson learned.  It may not have gone to 12 but it went low enough and since I had held on until expiration day I had the time value to make up most of the profit.

9/10, Bought Bear Put Spread

BUY 4 PHM OCT 07 15P
SELL 4 PHM OCT 07 12.5P
Debit 0.80
Cost of trade:  $320

10/10, Sold Bear Put Spread

SELL 4 PHM OCT 07 15P
BUY 4 PHM OCT 07 12.5P
Credit 1.15

Credit to account:  $460
Profit:  $140, 43.75%

Wow!  Here’s a trade that I’ve been regretting for weeks now because I was sure I’d lose my whole investment — any my trading account isn’t that big!

Instead, I got 43.75% return.  That’s not bad.

So, what did I learn:

• I didn’t really understand the Bear Put Spread strategy.
• Never trade a strategy I don’t understand.
• Options are great, even a small movement can have a great ROI so better to not be gready holding out for the biggest profit possible.
• I’m not a bear but I still need to work on how to trade like one