Here it is, the last day of February 2014. I cannot help but wonder “who” was born on February 29th. Hmmm, if I was, I would be only 16 years old. Would I
have counted the year as another one that made me older, since there was no birthday unless it were a Leap Year? This may be a puzzling question for anyone
born on February 29th. That makes me wonder if they might have FEAR. Would they be frightened by old-age? Death? Not being able to celebrate their
birthday? What was I doing when I was 16 years old? I wasn’t at all prepared to be a Coach to teach others how to trade options.
When I think about “fear” as an investor, I recognize potentials that may block my trading success. Is the fear within my own self or is it being pressured
on me by family and friends? What am I afraid of? How does it affect my investing? Can I do something to prevent this obstacle from ruining my
day/week/year? How do I start working on it? Alternatively, should I just not think about it since I have no control?
My “self” easily falls into a habit of looking at those open positions that are draining the portfolio balance. I almost always have others that turn it
green. Why would I concentrate on those that run red? Are they trying to “tell me” something? Can I learn from them? NOT if I just stare at them and feel
blue at their sell-off! What should I do?
I respond best by setting up a goal and a time limit. At a certain point, I’ll stop other activities and concentrate on what would bring a resolution to
that obstacle. Example: I have made monetary gains on SALE (ticker symbol) since it was introduced in the summer of 2013. I had carried naked short puts in
the month of February, that brought in a nice reward of 2% in nine days, 88% annually. Upon investigation about RetailMeNot, Inc. I wanted to trade it
again. Since I wasn’t assigned the long stock in February, I considered other options trades.
One that struck me as a good choice was the Protective Put. SALE does not offer LEAPS, so on Monday, February 24th, 2014, the October expiration appeared.
The fair market value on SALE was $42.85. The October 45 strike LPs were Bid – $7.70 and Ask – $9.40. If I were to buy the long stock plus the long put my
net debit would be $42.85 + $9.40 = $52.25 (or at about $9.00 per LP share, or $51.85 net debit.) As the week progressed, I watched the GTC order to open a
Put Calendar Mar/Oct 45 @ 5.20 debit. The Net Debit for my account would be $50.20, which is $1.65 lower than the straight costs of the Protective Puts
strategy. I do not mind taking the long stock into my account, as long as the long put protects it at the same price ($45.00 with a 10% risk through
October 2014.) The GTC order was filled today, as SALE dropped more than 12%! My first emotion was “Oh No! Did I want to get into that long stock at the
$45.00 price?”
By reviewing my process about why I set a GTC order on the Put Calendar at strike $45.00 on Monday, I am reminded of my risk in this position. If I choose
to exercise my right to sell the equity at $45.00, my net loss will be around 10%. Is there any other way to reduce my loss? Yes! Once I am assigned the
long stock, I have the long put protecting me, and I can add a short call in order to reduce my cost in the position. This will turn it into a Collar
Trade, which may be approached as a Dynamic Collar trade. [Dynamic Collar means that there are times when the LP and/or the SC are not needed or kept in
place.]
The Dynamic Collar trade is a crown-jewel. In fact, I traded one of these through the 2008 Bear Market on an equity. I sold the stock for less than half of
what I had paid for it, but still made a profit due to the options added and maintained throughout the five-plus months of the open position.
So, at this point comes the big question: What should I DO when fear grips me? The clear answer for me is this: “Remind yourself WHY you placed that GTC
order!” It may take more time, but since I know how to manage my trades, I am not truly frightened!
Emilu
OptionsANIMAL Instructor
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