Learning from Mistakes
No matter what one is trying to accomplish, in the process of learning mistakes will be made. The key is trying to learn from them. Although fairly experienced with stocks, we are learning the ropes on options, and have noticed the same mistake several times. It is time to learn from it.
For example, in early May 2006 we bought put options against the Nasdaq (QQQQ) at a $42 strike price. When the Qs bottomed at $36 in July we considered selling (and placed a limit order.) We were too greedy and lost it all in the subsequent market rally.
Then, in December we bought put options on FedEx (FDX - Annual Report) with a $115 strike price. Until this morning, they were up more than 100% as the call was right on the money.
Ahead of the Bell: FedEx Gets Upgrade: Financial News – Yahoo! Finance
Shares of FedEx Corp. rose Tuesday in premarket trading, after a J.P. Morgan analyst raised his rating on the shipping and delivery service, citing a growing parcel market and lower fuel prices.
Since our options expire on Friday, chances are we missed the maximum-gain boat. We should have sold and rolled over any continued bearish feelings into a new option with a lower strike price and more distant expiration date.
We are ready to learn from the mistake, and are establishing an initial trading rule to sell when a long option position is up 100% net of trading costs. On that basis we are selling our Intuit (INTU) puts. While we may still refine the rule in the future, for now we have to stop being too greedy. It is too painful to keep getting calls so right and not make money.
Disclosure: At the time of publication the author is still (unfortunately) long FedEx (FDX - Annual Report) put options.
