Selling too soon !
We sold our XOM puts for a profit of around 196 % BUT we could have made over 800 % if we had waited just 2 more weeks. DAMN that hurts. This is the same mistake we made with AAPL and BYND some months ago. How to avoid this?
We said it before in our blog on January 22nd "nothing hurst more than selling a profitable trade too early. And this happend to us again. And my feeling is it will happen to us again and again."
Well I normlly wish that my predictions come true. But sometimes I would prefer to be 100% wrong. What I feared has come to true - unfortunately, once again. I identify a stock that could move, then I open a Strangle and oh wonder, the whole thing develops wonderfully. The stock goes up like a rocket or falls like a stone (what exactly is unimportant, because with a strangle it is only important that one side makes more profit than the other). I close one side of the strangle with a huge profit (maybe I even close the whole strangle) and enjoy a beer celebrating a huge win. And then ...
This is what happened
I had Exxon Mobile on my radar for a long time. The reason was that it moved relatively reliable within a huge channel where it made 10-15 $ moves on a regular asis. From mid 2016 until December last year it went up and down 9 times and I never was invested. So I finally said to myself "next time it touches the channel" I will go for it. And that's what I did.
On February 14th I opened a Strangle with expiration September 2020. XOM had fallen below the channel and was trading around 61 $. Energy stocks had been weak the whole past quarter and I thought the Coronavirus would hurt them further. So I bought Calls 70 $ and Puts 47,50 $. And then the floor fell through the stock market and within days XOM was down to 54 $. So on Februar 25th I sold the Puts with a profit of 169 % ! I kept the calls as I thought the market might recover which it did not and sold the calls last Friday for a loss of 57 %. Overall the XOM strangle made a profit of 69 % in less than a month.
And compared to people owning stocks I was not even sweating. I was sitting relaxed on the sidelines and hoped the market would fluctuate wild enough to bring my stragles into the profit zone. Times like now are the best for strangles. When the whole world is in panic we enjoy thevolatility and the big moves.
And then the market tanked further and XOM was hit even harder. Last Friday it closed down at around 48 $. I know I should not check options which I have sold (but I am just human and I was curious how the Put did). I bought the Puts for 64 Cents and sold'em for 1,90 $ and now they are trading for 6 $ ! ! ! !
Are we not greedy enough?
May be. On the other hand I also know the feeling of not selling with a profit and then watching the profits disapper. The feelinfg when you could have sold for 100% profit and the watch as the profit disapperas and sometime transforms into a loss is not a good one either.
So how can we lock in profits and still benefit from further rising prices? As far as I see there are 2 possible solutions.
A) Closing only 50% of the position: Let's say you hold 1.000 shares of a company and it climbs and you are 60 % in profit. I woudld not sell the whole position instead I would sell 250 shares and let the rest run with a mental "Sell Stop" and another mental "Take Profit". I should and will do the same with great runing options in the future. As we only hold a limited number of options I will sell half when I am in profit very quick and let the rest run.
B) Re-Open a similar position: If I believe the stock can recover from its huge move or fall further I will re-open a strangle on the same stock. Maybe as a leap as the recovery might take longer than the fall. This is what I did Friday. I opened a strangle on XOM expiring in January 2021.
Will this work out for me? Can I balance greed and fear? We will see.
In this sense - Strangle ahead!