A Pleasant Surprise.. and Another Lesson Learned
Posted by | Posted in Lessons Learned, Trades | Posted on 21-10-2007
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 1.15Credit 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