Tomorrow is forfeited day, and one of our puts is just on the money.So it could be that we will be exercised if the price continues to fall tomorrow. The probability is 0.447, i.e. almost 50:50.
I could have slicked the position today with a win (most breastfeeders would have done that).But we remain at risk. Because the worst thing that can happen to us is that we have to buy a stock that we would like to see anyway.
Because the shares are fundamentally undervalued (it’s Micron Tech., ticker: MU) and I expect prices to rise in the medium term.
In other words, as a risk-reduction mechanism, we only write options on stocks that we would buy anyway because they seem to us to be undervalued.
We like to write (sell) put options on days with increased implied volatility when premiums are correspondingly higher.
Silencers (those who like me sell options) assume that price fluctuations are within a standard deviation.
So you roughly estimate the risk of being exercised at 30%.
In the majority of cases, options expire worthless.So I wouldn’t buy calls if I expected prices to rise (unless I had inside information, but then it would probably come out).
Breastfeeding businesses are therefore generally very conservative.However, if you expect a crash, you are the one who picks up the penny in front of a steamroller.
So you must definitely have the cash ready in case you are exercised.Or you can (additionally) get away with other options, such as a different exercise date (spreads). Then, of course, your net premium income will decrease.
If I actually have to buy them because the price has dropped sharply, I’ll sell you calls and take back premiums.In 70% of cases, however, you will look into the tube while I collect my small premiums.
If you consider the stock exchange to be a casino, then you are the bank as a silencer who sells options.Sometimes you have to pay out big, but by and large the probability is your friend.
I would never come up with the idea of playing lottery or putting money at the roulette table, but I love our casino and lottery shares in our depot the most.Because the turnover of such companies is mathematically predictable. Which is not to say that it is not, for example, politics or the economy that can make a big dent in the bill. Without such shockers, it would be boring.
A very good book about breastfeeding business is that of Peter Putz.
Supplement of 30.6.
How did the matter go?
At 8 p.m. we were sitting in Shakespears Twelfth Night, the price of MU was at ’53, and the value of the option was still 19 cents.
During the performance, the share price fell by 1% to $52.48.
The option was exercised this morning.
That is not the desired result.
If I had been a disciplined breastfeeding keeper, I would have been smooth the day before yesterday.
Now, of course, I feel like the unhappily in love Trottel Malvolio in Shakespear’s play, who falls for the love letter faked by Maria and tries to impress his adored with ridiculous yellow stockings and permanent smiles, where the melancholic Olivia hates that.
Maria: I have dogged him, like his murderer.
He obey does every point of the letter that I dropped to betray him. He does smile his face into more lines than is in the new map with the augmentation of the Indies. You have not seen such a thing as ’tis. I can hardly forbear hurling things at him. I know my lady will strike him. If she do, he’ll smile and take ‘t for a great favor.
Morale: The stock market slaps you in the face until you laugh.
Malvolio: Jove, I thank thee!
I will smile.
But fortunately you are smarter than me and learn from my mistakes.
My risk with the put exercised now is that MU will drop to ‘0 next week.
More about Malvolio’s terrible perpetual smile: Volatility Smile.