Last week I posted about a strangle I placed on JCPenny. This week it is time to add up the cost of my education.

My call option expired worthless.

I sold my put option for $33.

Altogether, my education cost me $51 ($33 – $84 = -$51). This is ignoring the trading costs associated with my strangle.

There was a moment when the strangle was profitable, but I neglected to pull the trigger. I had no compelling reason to believe JCPenny would go higher, so, I left the strangle in place. Efficient markets may be true in the long run, but I have a hard time convincing myself that markets are efficient in the short term. A stock like JCPenny should not swing wildly in a 5% range daily in an efficient market and yet it does.

Strangle Aftermath

The chart above from Yahoo! Finance, shows where I wish I would have sold (Hello emotional biases!) and where I actually sold.

I have a few lessons learned from my strangle education:

  1. When the underlying does decide to move strongly in one direction or the other, it would probably be a good idea to sell the losing position sooner rather than later. Once it was clear that JCPenny was going down rather than up, I could have sold my decaying call option and recovered some of the premium I paid. As stated above, my call options expired worthless.
  2. If the option market for the underlying is illiquid, and it appeared to me that JCPenny options were illiquid, it would be better to place option trades where you collect the premium up front. Bid-offer spreads and commissions do add up. I could have constructed the trade to avoid some of these costs.  Basically, you keep the premium and let the options expire worthless. The problem with the strangle, is that I had to sell the put prior to expiration which had real costs.
  3. Strangles require constant supervision. It is not a good idea to have a strangle in place while preparing for a major exam such as the CFA level 3 exam. It was exciting to watch, but there will still be strangles to experiment with after the exam.

Speaking of exams, I need to get back to work.

Back to the grind.