Making “Adjustments Trades” is a very important part of trading options. I just made one with one of my Micron (MU) positions.
Not that this was a very important Adjustment Trade but you must learn to use them when trading to better positions. 2 Days ago I did a Buy-Write with Mu. I bought 1000 share at $47.15 and sold a 10 contract Call to expire tomorrow, Friday. I received a premium of 62¢ for $620.
Yesterday the stock went down with the rest of the market. Today it’s bouncing back and is up over $1. Because of the drop in the stock price and Time Decay working on overtime, my 62¢ premium is down to 5¢. I could have held out until tomorrow and let it expire but I decided to do a Buy to Close and close the position. This Buy to Close cost me 5¢ for a total $50. Remember, this is a Short Position, you want the premium to go down. Below are the trades, 1 getting into the position and the other getting out.
7/30/19 – Sell to Open 10 MU 8/2/19 $48.00 C @ 62¢ (+$620)
Buy to Close 10 MU 8/2/19 $48.00 C @ 5¢ (-$50)
Profit +$570
Why did I do this?
The reason is because Micron is moving back up, but I don’t think it will get up to the Strike Price. So I feel I would not have gotten assigned only shares. I think it will continue up but not to $48 by the close tomorrow. If I’m correct, and the stock does go up but not to the $48 Strike, later today or tomorrow I can sell another Call to expire next week. If the stock goes down from here and I don’t get another Call sold the only thing I lose is the $50 I spent to close the position. This “Adjustment Trade” give me the opportunity to get another Call sold and make more money. If I didn’t do the Adjustment Trade I would have to wait until Monday to sell another Call. If I get it sold today or tomorrow the premium will be higher because it has more Time Value.
Another reason I like to get out of positions is if the premium is 5¢ or under you can make the trade commission free. I guess the brokers do this to give you the opportunity to get into another trade.
If you have any questions send me an email.
Steve
The Options Coach
Yes but you have a paper loss of $3715. !!! What are you going to do if it continues to trade down?
The key words are “paper loss.” Anyone who buys stock better do their homework and like the stocks they pick. We all have a different risk tolerance. Anyone who cannot handle stock swings better get into a different game. I am not worried, at all, about Micron. If I have to hold for a little while, I hold! And look to sell Calls along the way. Every options trader gets into situations, and this isn’t an option, it’s a stock. I am not worried here at all. However, that’s the reason I like to get assigned!
Steve