Trades that don’t work out as expected can still be instructive in understanding the investment process. Back in early July, our Peter Lynch Put Writing Portfolio sold one contract of the Compass Minerals (CMP, Financial) Dec. 18 expiration $80 put.
We received $4.50 per share for taking on that obligation to stand ready to buy 100 shares of Compass at a net price of $75.50 ($80 strike minus $4.50 put premium). Compass stood at $82.64 at the time that trade took place.
The option’s expiration date is now just three days away. As of Tuesday afternoon, Compass, which spent most of the last five months well above our strike price, was holding at $76.15 placing it in-the-money and vulnerable to be exercised.
Despite dropping $6.49 per share since our trade inception date, we were able to buy-to-close for just $4.22 per share, booking a small profit, while extinguishing our near-term deadline.
Because I still like Compass, we simultaneously sold one new contract of the company’s June 17, 2016 $80 put for $8.00 per share. Our new break-even point becomes $72.00 ($80 strike less $8 put premium).
The December option will now show as a closed-out trade, while the June Put appears on our open options transaction list.
Here is what the stock’s fundamentals looked like back in July.
Disclosure: Long CMP shares in my personal accounts.
