On July 3th the markets were closing at 1:00 p.m. with July 4th also being a holiday. Many traders were disconnected from the markets. It is holiday time. Let's look at these two different option series.
1) Boeing. It jumped up in price over $4.00 in early market trading. Boeing does that sometimes on Fridays. It's 10:15 a.m. and
here are the slightly "out-of-the-money" $215.00 series of Puts which are just over $1.00 "out-of-the-money". The stock is at $216.21. These Puts will expire in less than three hours.
If Boeing started to give back some of it's gains these Puts could be worth big money.The stock is at $216.21 and the striking price of $215.00 isn't really all that far away. Look at how cheap these Puts have suddenly become. What ended up happening? Here is a summary of how Boeing end up trading on the day.
Boeing never ended up selling off to below the $215.00 price range. The 215 Puts ended up expiring worthless.
*** There was other action to consider. As Boeing charged upward the action wasn't in the "out-of-the-money" Puts. Can you guess where the real action was? The real action was in the slightly "in-the-money" Puts as the stock was heading for it's high of the day. I am talking about the $217.50 series of Puts. To better explain what I am talking about scroll back up at the chart showing how Boeing traded on the day.
Boeing hit it's high of the day around the 10:30 a.m. time period. At that time the $217.50 Puts would have traded down to it's lows of the day around $.65 cents. That was a buying opportunity which ended up tripling in price.
#2) Let's now look at a different situation. This time the stock is Caterpillar and it's Puts at 10:41 a.m.
Once again, if Caterpillar gives back it's early morning gains these Puts could be worth big money. Notice some Puts did sell off to only $.02 cents? One has to realize that these Puts are about four dollars "out-of-the money" so the odds of a selloff of that magnitude is not likely.
Here is how things turned out.The stock did not close down below $297.50. It came close to it but not close enough. The Puts we where looking at expired worthless.
The real action was in buying the $402.00 Puts between 10 a.m. and 10.45 a.m. as the stock did drop off about $4.00 during the last two hours of trading.
So what is there to learn from this blog? For starters don't purchase "out-of-the-money' Puts on the last day they expire. Consider instead finding a stock like Boeing shooting up and when you think it might be topping out consider purchasing a Put close to or slightly "in-the-money". In that way you are at the top of a roller coaster before it hopefully starts to fall. In this instance, the DJIA closed up 344 points on the day. This shows that it doesn't really matter which way the markets are going. It does however take a little bit of luck to catch situations like this.
Think about this blog next Friday afternoon when you are watching the markets.**
I realize that not many people care to follow or attempt to understand or believe in this kind of option trading, I see it as being the study of probabilities. I also know that the stock Boeing is prone to wild price swings. Why not learn to make the days the markets close early one of your best friends?
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