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Jan 19 / Stocks - JNJ
Question From A Reader On A "Squeaker" Option Trade On
JNJ
Strategy
Article
A
"Squeaker
trade" is one of those trades where you have
sold an option (or bought one) and the stock is
hovering right at the Option Strike Price by
expiry. So what's the best thing to do. Today I
received a question from a reader that I thought
was worth sharing as it shows why I believe a
plan is so important:
QUESTION: I
was wondering how you approach the upcoming
decision on handling Jan ’11 JNJ puts, expiring
this Fri. Like you, I have some Jan ‘11 62.50
puts and since the current JNJ price is moving
back and forth ITM/OTM around that strike price
over the last week or more, in a case like this
are you more likely to wait ‘til nearer to Fri
to decide whether to BTC and roll them forward
or try to allow them to expire worthless? Or do
you let the chart tell you what to do in this
case? From T.
My Answer: You question and my answer falls
right into the category of having a plan.
Yesterday on the forum, I posted a comment
regarding the importance of a plan: Here is a
short summary of that post:
"The importance of putting in
place a strategy and knowing why you are
applying that strategy is what makes for good
investing. I have said so many times the same
thing over and over, I guess I am sounding like
a broken record – “treat your investing like a
business”. When you run a business every
decision you make has consequences. A business
plan puts together outcomes and strategies for
handling consequences. In this manner the
consequences are dealt with long before they may
appear. Therefore you should already have the
answer before you even place a trade. Markets
and stocks can turn on a dime. I urge anyone who
invests to take the time to consider paper
trading to learn how to invest. You literally
can write down on a piece of paper your strategy
so you know what you are going to do, as you
have already worked it out. There is no emotion
involved, because you already have the answer to
any problem that could develop."
So how does
this relate to JNJ and the squeaker at $62.50?
If you read through my comments on the JNJ trade
by
going here and following
it along
from its beginning, you can see that I have a very long term
plan for JNJ. I want to someday own shares but
use the earnings I have made to pay for them. I
therefore am in for the long haul with JNJ,
perhaps 5 to 7 years. If you look at my comments
throughout the trade last year, I was selling
$65.00 naked puts which were in the money,
in order to follow the stock higher. Okay - so
we know the plan. Now the answer is simple - by
Friday if I am not assigned before close of
trade, all those naked puts that are in the
money will again be bought back and rolled out.
Those out of the money will expire. The stock is
hovering around the $62.50. Because of my plan,
I really don't care. Come Friday I will
buy the put and roll it out. If the stock is
trading at $62.66, I will still buy and close
the $62.50 puts and roll. If the stock is at
$63.00, then I would let it expire. If it spends
the day in and out of the $62.50 strike, I will
buy and close it because my plan is firm: keep
rolling for income - some day own shares, but
not today. So the decision is without emotion.
But that's my goal. It may not be yours. If you
don't mind owning the shares, then you could
wait and see if you get assigned. Then you could
either place them up for sale for perhaps .50
cents more and wait to see if you get taken out
within a few days and therefore have a capital
gain and then go back to selling naked puts, OR
you could consider covered calls. My plan
doesn't call for that. So unless I am
prematurely assigned, I will close and roll out
if Friday is a "squeaker". Having a plan makes
all the difference.