My Darden Puts were heading into expiration this week and I elected to close out the position with a decent profit.  I sold for $2.85 and bought for $2.25 for a gain of $60.  The profits were not enough to cover the loss on the Nasdaq Puts, but I learned many valuable lessons, which I will share below.

There are several reasons why I decided to take my gains last Friday and not get greedy:

  • Even though I am still bearish, I feel uncomfortable spending money in a market that is as distorted and manipulated as our current one.  There are too many examples to go into right now, but there are excellent examples of overt manipulation here, here, here and here.
  • Maximum Pain dictated that I sell before expiration and lock in my gains.   In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group.
  • Technical analysts were broadcasting a head and shoulders pattern break (see below), which leads me to believe a lot of CNBC followers (non-institutional investors) are piling onto the short side for the “easy money”.  It makes sense to bet against the “easy money” crowd and not expect a decline.  On Monday, the market rallied very sharply.  Glad I got out.
Head and Shoulder - DJIA
Head and Shoulder – DJIA
  • My price target had been hit and the price was unlikely to go much lower.  Darden filled in the “gap” between $29 and $33 like I thought it would.
Darden Restaurant Group Chart
Darden Restaurant Group Chart
  • As a wise man told me, you never go broke taking profits!

Epilogue:  I have decided not to continue buying options since the market is clearly not a normal, healthy one.  Unrealistic balance sheets, excessive program trading and monetary manipulation have turned me off from the market.

Options buying is extremely difficult since it involves both forecasting the market and timing it.  I am proud I made money on the Darden trade, but I realize I got impatient with my Nasdaq trade.  Overall, a great learning experience.

Since capital gains are difficult to lock in without being an active trader, I am considering doing covered call writing on certain stocks.  If I decide to buy some shares and write calls on them for income, I’ll post it here.

I will continue to add to my RWM position, which I feel comfortable holding for the long-term.

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