Investoid

Today the Fed did the (slightly) unexpected and dropped their target rate by a half percent. The market has subsequently rallied a couple percent off this news.

I was listening to BNN and watching the DIA options closely. Once the news broke, DIA went up about one dollar and hit resistance around 136. Meanwhile the 136 Sept call option was only up to an 0.80 ask price, so I thought that was a good exit point for this option given the potential upside on the Dow. I decided to hold onto the 138 option to see if DIA would break the resistance and if I could use my defensive measure to reduce the loss. A short time later the stock began to increase above 136. I looked at using my stated defense, but found that it was best to exit the trade entirely since the gains from the 138 option were greater than selling a 139 or 140 option, given that I’m not sold that this rally will last beyond the close. The 138 option could have been sold for 0.30-0.35 cents, depending on whether one took the bid price or went in the middle of the spread. The net exit for this trade was a 0.45 to 0.50 debit.

In the worst case this trade would have lost 0.10 per contract (before commissions, which are an important factor the smaller your lots are), which isn’t that bad given that the underlying went in the wrong direction. It was a good learning opportunity and made me reconsider whether I should stop looking at speculative trades and start focusing on more ‘income’ style plays that other option traders look for. The journey continues…