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I'm probably guilty of over trading this position (MO)

Last Friday 2/25 I put on a designed low risk income trade and didn't bother to post about it. But now I want to share my experience since then and how I'm probably guilty of over-trading this position. So for the sake of context, I'll explain the original trade idea first and then show you what's happened since then. The idea was to take advantage of a relative high IV in (MO) combined with a bullish chart to sell some OTM puts for a March expiration income play. So here is what I was seeing:

  • Bullish trending channel
  • Past support at $24
  • High IV (high for MO, not high in general)


So I sold (30) MAR 24 puts for .17 on 2/25, intending to hold until expiration and pick up $487 after commissions. But at the end of trading on Monday 2/28 I could buy those puts back for .08. Normally I would strongly consider taking this play off simply based on the percentages. Any time you can lock in 50% of the maximum possible gain in one trading day, I do it. Why take another three weeks of risk to possibly pick up another 50%. Very simply, the risk/reward for me favored exiting the trade. And my real thought process was to not only lock in those gains, but I have three weeks left for another entry point on the same trade if we do get a pull back. Now let me show you what I was seeing on the chart that led me to exit the trade:

  • Closing at possible resistance
  • RSI of 85, probably overbought on the short-term (last time we hit that level MO sold off pretty good)
  • Broke out of its bullish channel, probably confirming overbought short-term.
  • And here is a non-quantitative measure for you. This is one of those days where if I was long, I would love to unload here because my gut just tells me there will be a better entry, maybe even tomorrow.



So when I'm seeing the above indicators and I'm already inclined to take the 50% in one trading day, I just did it and didn't think any further. Now here is where I get in to trouble. First of all I was more than willing to own at $24. This wasn't a gamble on my part hoping that I don't have to take possession. It was meant to be an income trade and if I got in at that price I'm happy to own and write covered calls on it. So I've already taken down a trade for one reason that really isn't correlated to the initial trade idea. Here is my second offense, I didn't even model out the trade and estimate what price I needed (MO) to pull back to in order to find that next entry point were selling puts would be attractive to me. Case in point, see the screen shot below. The stock does pull back today by 1%, even closes on the lows, and the bid/ask is .11 by .13. Even if I successfully split the middle and get .12, big deal. I pay .75 cent per contract so I need .015 cents net just to break even. Does selling in to this pullback and getting .12 when I got out at .08 make it worth while? hardly. Wow, strong move, you just netted $25 genius. It's wasn't worth the time, effort, or commissions. Now while I may get a chance to sell these again this week at a more attractive price that does justify the trade, or use this capital for another trade, the point is I was reacting without thinking all the way through and that's just bad trade management in my opinion. I feel a little silly and calling myself out on it publicly will hopefully be a reminder to me next time I face a similar situation.



The Bloggers of In The Money Trades always welcome and encourage blog participation, suggestions, or constructive criticism. Please feel free to comment on this post below or contact me privately. Let's all help each other keep our trades "In The Money"

E-mail: JasonAndrewHaas@aol.com    

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