Buying to Close Two Short Puts in the Virtual Put Writing Portfolio
By Dr. Paul Price of Market Shadows
Market Shadows bought back a short position to close our Cummins (CMI) January 2014 $110 put four months before its expiration date. The stock had risen to above $135 allowing us to capture 87% of the potential profit while eliminating 100% of the risk.
CMI was $113.45 when we first sold a put on the shares. This was a quick, profitable trade.
We sold the put on March 22, 2013 for $11.00 per share. We closed today for $1.40. Our $960 profit is now reflected in the closed-out section of the Virtual Put Selling Portfolio.
On March 25, 2013, we sold a January 2014 $87.50 strike price put on agricultural equipment company Deere (DE). DE was then trading at $87.28. Today, it was trading slightly lower at $85.14 a few minutes after midday.
I still think Deere will reach or exceed our target. We rolled out our put from this coming January to the same month and the identical $87.50 strike price, but with a Jan. 2015 expiration. That locked in a small gain on the old option while bringing in a larger premium on the 2015 series.
We paid $5.80 per share ($580 for the contract) to cancel out the exiting short position. We collected $11.75 per share ($1,175 for the contract) on the newly sold $87.50 put. The net credit was $595.
That leaves plenty of time for Deere to reach our target. We now have more to gain than we did on the originally sold put.
The stock is lower than it was on the date we started, yet we booked a $235 gain on the close-out anyway–that's due to the premium decreasing. Time is on the option seller's side.
The 2014 transaction will be recorded in the closed-out section of the Put Selling Virtual Portfolio, while the 2015 version will go on the list of open positions. Our break-even on the new put is $75.75 (the $87.50 strike price – the $11.75 premium received).
We have one put with expiration coming up tomorrow. The Holly Frontier (HFC) $39.50 is likely to expire worthless as the shares are well above that price with one day to go. That would be our best-case scenario as we will keep 100% of the premium received without having to buy back the option. We'll know for sure at 4 PM est on Friday.
