Another rollercoaster day at the market today. On days like this, option traders have to be extremely cautious as large price movements can wipe out months or even years worth of profits.
#X ( US Steel) is a perfect example. Due to the war it's share price jumped over 41% in 8 calendar days. That's insane! On top of that, only a month prior to that the stock dropped over 31% in one week so if some one sold put options in mid Jan, then they had to desperately adjust their positions by rolling down the put and selling call to finance the roll. But within a week the stock bounced back heavily so very quickly the trader was could be caught on the call side.
When an option trader gets caught on the wrong side then the dilemma is always whether to adjust the position or to accept the losses. There is no magic formula to this as we can never tell which way the stock is going to move.
It did happen to me years ago that I sold TSLA call options as the company was on shaky grounds but then within a couple of weeks the price started to go up. Fortunately I exited my position (with heavy loss) as the price went up by probably 30x.
So going back to X, could we expect the price to come back down or will it continue going up?
Nobody knows. The only thing we can tell is that in the last 10 years it only went above the current price level 3 times. But if someone is stuck at around $30 and the price reaches the 10 year high of $47.64 then the trader must manage their position aggressively and carefully or have significant capital to survive such a large price movement.
So how do we defend our positions in these sorts of situations?
We must roll the call position to higher strike price and offset the loss by selling put option. When we already have a put option then we have to aggressively roll both the put as well as the call options higher.
In some instances unfortunately we have to 'invert' our strangle, which in our context mean that the put strike will be higher than the call strike. The obvious risk of that is that if the price comes down than we will get hurt on the put side, however if the position is managed properly then we can get out of trouble.
But enough of the theory for now and let's look at today's pick: #C ( #Citigroup ). The price came down a fair bit in the past couple of weeks and the very high level fundamentals look really solid. P/E is under 6, the tangible assets are at 0.67 and it pays over 3.4% dividends. What we also have to be mindful of is that the earnings is due just before the April expiry so hopefully we can close the position prior to earnings.
Trade Type: Short Put
Expiry: 14 Apr
IV Rank: 84.8
Cap Req: $504
Annualised Prof: 174%
Given the current market conditions I would not go for the next strike up, which is $52.5.