Friday, March 27, 2009

Market Update - Still Duking it Out With AZO

An update on the status of my short with AZO:

My prior trading update noted I had sold some Bear call spreads which is basically option talk for selling options at one strike and buying options at a higher strike price. I used March options to take advantage of the time decay effect which reduces the value of out of the money options.

As AZO continued to climb, I also sold a few naked calls as well. This selling a call without owning the stock or buying a higher priced call for protection, and is therefore more exposed to risk. I sold some 165 and 160 calls as AZO was in the low 160's.

Options expire on the 3rd week of the month which was March 20, so I was at my station to make any adjustments to my trading positions, such as buying back any of the calls that were in the money- otherwise the option will be exercised meaning I'd have to sell stock I don't have.

So that Friday,. AZO starts moving up then begins to track down past 160 to the mid 150's. That means my 165 calls and 160 calls I sold will expire worthless and I get to keep the money I sold them for - sweet!

Then AZO starts moving back up....past 157...158...159....and over 160 again...doh! Now my 160 calls are back in the money so I'll have to buy them back if the stock stays there.

Then all AZO does from that point on is hover near 160...sometimes a little above...then slightly below. There's only 1/2 hour left until the markets close and the stock is still hovering to a little above 160 to a little below. The option is priced at $20 which I think is ridculous for an option with less than a 1/2 hour before expiration that's fluctuating around zero gains. I decide to keep waiting to see if the price get lower. With 10 minutes remaining, the price drops to $15/option, which I still think is too pricey and AZO is moving from 159.90 to 160.07.

Five minutes left and the price is still holding at $15 and AZO is still hugging the 160 line moving the option slightly out of the money to slightly in the money. I don't want to buy back the options if I don't have to so I keep an eye on the stock to see if it will stay under 160.

With two minutes left I have to make a decision soon. The $160 options are still priced at $15 and AZO is at 159.50...159.8... 159.9, 159.8......159.7....

One minute left and I feel like I'm in Vegas...will AZO close under 160? The stock is fluctuating in 159.7 range and higher but it looks like it will close below so I decide to not close my $160 calls and go for it!

20 seconds left: 159.8,...159.9,.....159.8,...159.7.......159.8

As the closing bell sounds....the final price is......


Yes! The $160 options have expired out of the money and I didn't have to spend any cash buying the options back.


Twenty seconds later a late trade confirmation comes in and the closing price is upated to $160.03...doh! In the money by 3 measly cents!

Did the options get exercised for 3 measly cents? Yes they did. For each 160 call I sold my account was shorted another 100 shares of AZO at $160. So now I had a much bigger short position than I wanted so I was a little nervous thinking I could get stung if AZO started moving up on Monday. I was ready to buy some calls or close up the extra shares quickly in that situation.

When the morning bell rang on the following Monday, AZO pulled back below 160 to the mid 150's again so I was able close my additional short position for extra profit...whew!

This month I've got both bases covered with with long calls and puts so my position will make profit as long as AZO moves alot in either direction, although my current bias is still more bearish than bullish- meaning my profit will be greater if AZO falls instead of climbs.

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