Friday, September 7, 2012

Recent Transaction

Today I decided to go on and buy back my $7 Jan 18 2014 Put option on Bank of America.  I bought to close the option for $0.89 plus $7.98 in commission/fees.  It cost me a total of $96.98 to close out the position.  I originally sold the put back on February 2 for $1.73 and received a total of $164.32 in option premium.  If I let the put go to expiration and it expired then I would have a received a 23.47% total return which is annualized to 11.99%.  After closing out the put, I ended up with a total of $67.34 in option premium ($164.32 - $96.98) which is a 9.62% return ($67.34 / $700) over 218 days giving an annualized return of 16.12%



It was difficult deciding whether I should close out the option or not.  The main reasons that I decided to are as follows:

(1) I believe that we will see a correction soon and this frees up $700 to be put to use now.
(2) I captured 40.98% of the potential option premium in only 30.49% of the days.
(3) Jan 2014 is still a long ways away and therefore a long time to keep the $700 tied up.
(4) Most likely, I'll be losing the 200 shares that I used for the buy/write of BAC shares dropping my position size down.

I feel that overall I did quite well on this move and that this was the right move to make.  Obviously I could have netted a higher total premium if I let it ride and it expired worthless allowing me to keep the full premium, but I think freeing up the money now to put to work is going to work out better in the long run.  I don't think I'll be messing with such long-dated put options in the future unless I am sitting on a whole lot of cash that I just can't find places to put to work.

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