Tuesday, October 13, 2009

Closed UNG - Great little Experiment and Lesson

In my previous post I mentionned that my breakeven was brought down to 10.95 because I wrote Nov 11 calls for 0.9 against my position. Since UNG tanked below the ascending trendline, the short call position dropped to 0.5, which would make a 0.4 profit on the short side. So I decided to buy back the Nov 11 calls to lock in some profits on the down side. So that made my new breakeven to 11.35.

So the long short of it was...
Bought at: 12.05
Short Nov 12 calls at: -0.50
Covered Nov 12 calls: +0.30
Short Nov 11 calls: -0.90
Covered Nov 11 calls: +0.40
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New Breakeven: 11.35

... Then I sold it at: 11.45... which makes 11.45 -11.35 = 0.10

So all that work for 10 cents:). But at least I didn't loose any money.

The moral of the story is that hedging your bet is better than not hedging at all. If I didn't write calls against my position or even bought puts, I would lost from 12.05 to 11.45. That's a 0.60 loss. Now imagine if you had 500 shares, that wouldn've been a loss of $300 in a few days. It's not the kinda risk I like to take.

In addition, another important lesson learned was that I should've picked an uptrending stock with decent yield. I guess that part completely slipped my mind.

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