Sold $17 Put Option on WTW
23rd January
Noticed a few entries of Weight Watchers (WTW) appear on the short put trade ideas post Friday's trading session.
The $17 March put option is bid at 1.25, which shows a return of 6.56% on the long stock capital if exercised. Expiry is March 20. I placed an order to sell the put for $1.30, which was filled.
Earnings for WTW, however, are out this Thursday and will be released after market close.
My probability tool estimates a 65% chance of the option expiring out of the money by March 20 given the 111% implied volatility of the $17 strike price.
I'm still thinking about placing a sell stop limit order at around $16 just in case. We'll see.
Market Close 24th Feb
Some volatile action today! Market down slightly, so my put option is up a little - about $20 unrealized loss so far. Getting nervous about this one...the strike isn't that far away from current close.
Update, Feb 27th - After Earnings Release
An extremely dissapointing result for Weight Watchers saw the stock dumped after its' release. The stock plunged 35% and my short put option is naked i.e. no downside protection so my losses are significant.
The position so far has an unrealized loss of -$440.70 and it could get worse. The delta of the position is now close to +1 so I will begin to lose money 1 for 1 if the stock continues to go lower.
It's an important lesson for me - even on a well know, low priced stock, not to just short a put without protection.
To rub a bit of salt into the wound, I had a look back over the volume and open interest of the strikes in the lead up to the announcement and see lots of activity traded on the $15 put. See the below images for each trading day leading up to the earnings annoucement - each thumbnail represents a day;
Seems clear there was a lot of money betting on a decline below $15!
Let's see how I get out of this one.
Update, March 2nd
Not being able to watch the stock continue to slide and wanting to just move on, I decided the best thing to do was cut my losses, as they say, and just exit the short put - so I bought it back 30 minutes before the close being filled at $6.90. Ouch!
Total loss on the trade was $560.
PeterMarch 4th, 2020 at 12:48am
Hi Cris,
Short option positions do indeed run the risk of being exercised, however, this is more of a risk with call options than put options. People usually prefer to exercise a call option early so they can qualify to receive a dividend (by taking delivery of the stock). But there isn't that advantage with a long put option, so early exercise assignments doesn't happen very often on short puts.
Cris De BiasiMarch 4th, 2020 at 12:37am
Hi
Great analysis, very in depth coverage of what may happen after a disappointing earnings announcements!
But when the short put went in the money, were you running the risk of been exercised? And why you have not been ecercised?
My best
Chris De Biasi - Italy
PeterSeptember 27th, 2015 at 7:03pm
Hi sm,
Mmm, interesting idea. I'll take a look at this construction with a real example and see how it looks!
smSeptember 23rd, 2015 at 9:51am
Hi Peter,
I am beginner in option trading and learnt a lot from your site.
It's impressive that you post in depth analysis of your trades including the loss making once which few people can dare to do. I think we learn more from loss making trades.
I recently read about Tony Saliba who is profiled in Market Wizards book. The way he makes this trade is butterfly spread in front month (long the wings) and long strangle in back month which he calls "explosion position".
If there is no surprise in earnings and price does not move much, then butterfly profits from collapse in implied volatility. On the other hand if there is a large move on either side then strangle profits.
I think this makes more sense than taking a direction call ?
Thanks,
SM
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