Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
Yesterday in part 1 of our trade analysis on crypto miner Marathon Digital Holdings (MARA), we saw how using a bought-option strategy (in this case a put option) enabled us to make a tidy profit even when the trade initially went against us.
When we finished off yesterday, we had just closed out of our put option position. We sold the puts we bought on November 1 in two halves – the first half on November 16, and the remainder on December 3 for an average gain of 66% on both trades.
However, selling the remaining half of our MARA puts wasn’t the end of the trade. With MARA still vulnerable to a fall, and our options expiring in December, we decided we wanted to take advantage of any further potential fall in the stock price…
So, while selling those remaining put options closed out our original trade, we rolled our MARA position into a new trade.
If you haven’t heard of a roll, it’s simply what the name implies. You’re rolling out of one trade (closing it out) while simultaneously opening a new position.
And that’s what you can see in the chart below…
Marathon Digital Holdings (MARA)
On December 3 (Friday), we closed out our original put options (with a December expiry), and opened a new position by buying MARA put options with a later (January) expiry.
Unlike stocks, options always have an expiry. And that means when you have an open option position, you always need to be watching it closely… and be ready to act.
Last Monday (December 6), MARA opened down and we saw an opportunity to capture a quick profit as our new put options increased in value.
I often mention that traders need to be alert and always ready to capture a quick move.
After entering the trade last Friday, we closed it out on Monday for a quick and tidy 32.6% gain.
While we initially planned to hold the position longer – and capture a bigger move to the downside – we saw the chance for a quick profit and took it.
A part of the reason for doing so is the nature of options. As you know, with options the clock is always ticking. Once an option expires without being exercised, it ceases to have any value.
So, whether you decide to close out a position (including a roll) prior to expiry or ride it to the end, one way or another you’re always dealing with a limited amount of time.
However, it also has to do with how options premiums are calculated.
When volatility increases (from bigger swings in the underlying stock), so does the value of the option. If that volatility then drops off, then so does the value of that option.
So as an option buyer, when the market moves in your favor you need to make a choice…
If you believe that volatility is going to stay high and the stock will continue to move in your direction, then you stick with the trade…
Or, as we did, see a nice quick profit and bank it. It’s purely a judgment call that you must make at the time. Remember, you’re not always going to get it right. But as a trader, you always need to be opportunistic.
Sure, sometimes it’s worth holding on to see whether a bigger move pans out… But like this MARA trade, when we were up around 33% in just three days (with a weekend in the middle), my experience told me to take the profit.
Editor, Trading With Larry Benedict
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