Lessons in Locking In TLT and SLV Profits

  • SumoMe

In this article on 2/27, I wrote about a potential bear put spread in ticker TLT (Figure 1), betting on a decline in bonds prices.  Then in this article on 3/9, I wrote about adjusting the original position in order to lock in a profit.  It turned out to be fortuitous as the open profit – left unadjusted – would have eventually ended up as a loss (See Figure 3).  By making the adjustment displayed in Figure 4 the trade ended with a profit (Figure 5).

Figure 1 displays the risk curves for the initial position.1xFigure 1 – Risk curves for initial TLT bear put spread (Courtesy www.OptionsAnalysis.com)

TLT fell from $121.29 on 2/27 to $117.78 by 3/8.

Figure 2 displays the open profit for the original position as of 3/8.2Figure 2 – TLT position showing a profit of $742 as of 3/8 (Courtesy www.OptionsAnalysis.com)

By April option expiration on 4/21 TLT was back up to $123.54.

Figure 3 displays the end result if no adjustment had been made and the original position had been held until expiration.  The trade gave back the$742 profit and lost the entire $973 initial investment.3Figure 3 – Original TLT position if held until expiration (Courtesy www.OptionsAnalysis.com)

Now lets assume that on 3/8 we had adjusted by “rolling down” from a 7-lot of the Apr 120-115 bear put  spread into a 4-lot of the 117-112 bear put spread.

Figure 4 shows the adjusted position as of the date of the adjustment (3/8) and the locked in profit of $210.4Figure 4 – Risk curves for adjusted TLT position (Courtesy www.OptionsAnalysis.com)

Figure 5 displays the end result if the adjusted position was held until expiration on 4/21 (a profit of $210).5Figure 5 – End result of adjusted TLT trade (Courtesy www.OptionsAnalysis.com)

Silver (Ticker SLV)

In this article on 4/11, I wrote about a potential straddle position (Figure 6) in ticker SLV.  Then in this article on 5/3, I wrote about 3 different potential adjustments to the original position based on ones outlook for SLV going forward.  Turns about doing any one of the three would have been a good idea.

The original trade left unadjusted (Figure 8) would have so far given back all of the open profit and would now be sitting with a sizable loss.  By making the adjustment displayed in Figure 9 the trade would have added some profit from the recent bounce in SLV (Figure 10).

Figure 6 displays the risk curves for the initial position.1bFigure 6 – Risk curves for initial SLV straddle (Courtesy www.OptionsAnalysis.com)

Between 4/10 and 5/3, SLV fell from $17.00 to $15.59 and the straddle accrued an open profit of $700.

Figure 7 displays the open profit for the original position as of 5/3.2aFigure 7 – SLV position showing a profit of $700 as of 5/3 (Courtesy www.OptionsAnalysis.com)

Since 5/3, SLV has rallied back from $15.59 to $16.23.  

Figure 8 displays the result if no adjustment had been made and the original position had been held through 5/22. The original unadjusted position has given back the $700 open profit and is presently showing a loss of $-460. 3aFigure 8 – Original SLV position with no adjustment (Courtesy www.OptionsAnalysis.com)

Now let’s assume that on 5/3 we had adjusted the original position into a bullish position by closing the original straddle and buying 2 June 15 strike price calls.

Figure 9 shows the adjusted position as of the date of the adjustment (5/3) and the locked in profit of $530.4aFigure 9 – Risk curves for adjusted SLV position (Courtesy www.OptionsAnalysis.com)

Figure 10 displays the result if the adjusted position was held through the close on 5/22 (an open profit of $780).5aFigure 10 – 5/22 status of adjusted SLV position (Courtesy www.OptionsAnalysis.com)

Summary

One primary advantage of trading options is the potential to “lock in a profit” and “let a position ride” while “playing with the house money.”  Of course, if you’ve made it this far through this article then you already known that.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

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