My Options Failure

How an Apple put caused me to re-evaluate my options strategy

Last week I bought back an Apple AAPL 0.00%↑ put that I had sold, realizing my first loss in an options play.

Given that, I thought it would be interesting to look back at what happened, why i bought back the put, and what I’ll be changing going forward.

What happened?

On the 16th of August I sold a single Apple Put with a strike price of 150 and expiring on the 23rd of September. I made around $66 in premium from that sale.

Later, on the 17th of September I noticed that Apple was trading very close to the strike price, and had even gotten “In the Money” a few times during the week, and so I would likely be assigned the options upon expiration.

At that time I re-assessed what role those apple shares would have in my portfolio, the Apple valuation that I was using, and other factors that led me to open this position in the first place.

I thought it through over the weekend, and on the 19th I chose to close my position at $178, this resulted in a substantial loss of around $113.

The put eventually expired worthless on the 23rd, just 4 days after I had closed the position at a loss. Had I done nothing, I would have made a $66 gain.

What went wrong?

Ultimately there were a few causes to this loss:

• I did not appropriately check the valuation of the company prior to setting the strike price, resulting in an overly high strike price.

• I did not appropriately check how large the position would become in my portfolio once it got assigned.

• I got greedy. I saw the $66 premium and didn’t do my due diligence and follow the plan I had laid out prior.

You will note that neither of those involve getting scared that I was “in the red”.

To be quite frank, I’m not scared of stocks or options “going down”, it simply was not a factor.

And neither was the fact that I sold out at a loss, when I could have made a profit had I just not done anything.

Ultimately buying back the position was the right move, even if it lost me money, for the simple fact that opening the position was a mistake in the first place.

In particular the number one reason why opening the position was a mistake, had nothing to do with the price at all (though that too was problematic).

The number one reason I sold was simply because having 100 shares of Apple in my portfolio would make Apple an unconfortably large portion of my portfolio. That’s it.

15 thousand dollars might not seem like a lot to many investors, but it would make Apple my largest position, and that’s simply not something I am willing to do at these prices.

I’m certainly willing to open a small position, but no more than 10 or 20 shares at these prices.

What am I changing going forward?

My underlying strategy is sound, and I will keep at it, even with this failure the strategy has proven profitable and with comparatively low risk.

That said, I will be modifying it a little bit, and changing my focus, specifically I will do this:

• I will no longer sell puts in such a way that if they were assigned it would bring my position in the business to more than 10 thousand dollars

• I will require a higher margin of safety than the standard 30% for options plays (and for anything other than a small entry position)

Ultimately my goal here is to diversify my options plays, and reduce the amount of “capital at risk” to a level that I would feel confortable owning.

This does mean that some of my most profitable and common options plays, Microsoft, Aflac, Altria, Intel, 3M, will now become unavailable to me, since they would breach the new 10 thousand dollar threshold.

That’s fine, I will take advantage to open options positions in new companies at attractive prices.

Let me know if you have any advice for me in the comments below!