Trade The Journey

Trade The Journey

Ford Option Trade: Ford $11 Call option at $0.61 premium

This past week I placed a call option on Ford. I was looking for a trade to place and saw that Ford and fallen to the important level of $11.12.  This level has been valid since the beginning of last year and I was confident it would continue to hold. Most of the time, Ford would hit this level and stage a rally, so I was hoping this would occur again but the trade did not play out as I anticipated.

Charts of the Daily and the hourly: 

Daily Chart:

Hourly Chart:

The first problem with this trade was the amount of open interest on the put side for the same strike. The volume and open interest caught my eye but I chose to take the other side of the bears. Of course, participants could have been selling puts but I don’t think that was the case.

The second problem with this trade was the size of the position I placed and the capital needed to maintain the position. Usually, I try to limit my position size to at most two call options but this time, I placed numerous calls on Ford with an $11 strike price.

Being that the call was slightly in the money, I felt good about my probability of closing the position with a profit. The position came up a little and then dropped the next day breaking the $11.12 support level. What should I do?

Should I close the position adhering to the stop level I set?

or

Keep the position open as the level is a well-test reference level?

I chose to close the position with a small loss relative to the premium I paid. The next day Ford rallied through this reference level, recovering from its steep slide the day before. The following day Ford posted another gain.

There are two ways to view this trade. I could think about what I should have done, which was to keep the trade open for another day and see if Ford retested this reference level.

However, the market is still volatile and it’s next to impossible to predict with any certainty the price movement for the next day. Hindsight is always 20/20.

Closing your position once it hits your stop level or predefined loss level is hard to do. The old market adage says, “Cut your losses short and let your profits run”, but I’ve found it to be a bit more challenging than the quote leads on. With time and experience, you’ll learn that keeping your position open in hopes of your position reversing from a loss into a gain will drain your account over time.

Sure, you might come out on the right side of the trade a few times but the majority of the time you’ll be an unwilling participant in enriching the person on the other side of the trade.

I included some charts from the option price history data I created in Excel to assist in understanding how this position moved from profit to loss.

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Position Opened: 12/27/2022

Position Closed: 12/28/2022

Premium: $0.61

Premium gained/loss: $0.48

Expiration Date: 1/16/2023

The right side of the charts below are measuring the implied volatility.

The first chart matches the Price of the Option with Implied Volatility. Clearly, the option was in the money and implied volatility was higher earlier in the options life.

In this chart, which features the option price and options greeks, you can see that the theta and vega are almost nonexistent. As the option price falls, notice the gamma increase as the delta falls. In the beginning, the gamma was almost negligible because the option was in the money.

The third chart shows the option premium dip well below its earlier levels as the price of Ford fell as did the implied volatility.

Later in the options life as the price rebounds, so did the implied volatility and option premium.

The final chart showed the option premium dropping which we know from the charts above was due to the price and implied volatility. Towards the end of last week notice the open interest rising far faster than the volume.

On December 22, we can see a high amount of Volume on this contract with a corresponding drop in the options premium. This means that most were probably selling their call position.

Interestingly enough the open interest never really dropped but picked up last week. Between 12/22/2022 notice that the option premium dropped from $0.63 to $0.38, a loss of $0.25.

On 12/29, the volume picked up as did the option premium, increasing from $0.19 to $0.42.

Looking back at these charts, I overpaid for the option, most likely buying at the option price high. Perhaps, I should be creating these charts before I open an options position. The one part of the trade I am happy about it is that I closed the position a little before it broke through the reference level.

To me, learning when to close your position and move on is just as, if not more important than knowing when to take your profits and close to the position.

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