MSFT Time Decay Spread Look Back Trade

MSFT – 06/17/2016

I debated not including this trade in the book but after some thought decided to include it. This trade is another debit spread trade where I am trying to take advantage of time decay. The problem is I traded this one backwards. That is what happens when you do not double check before making the trade. In these trades you are supposed to buy the further out expiration and sell the closer expiration to take advantage of the fact that time decay in options closer to expiration decays faster than options further from expiration. I trade these types of options quite often, usually as a Calendar but sometimes as a debit spread.

As I said I traded this one backwards, I bought the closer expiration and sold the further out expiration without realizing it. I did not realize what I had done until a week later when I could not figure out why the position was not profitable even though it was trading about where I purchased, which is what you want in a range bound strategy.

On 6/17 with MSFT trading at $50.05 I bought the June week 4 $51 Call and sold the July week 3 $52.50 Call. Again, this was backwards so DO NOT copy this trade. I used seven contracts, got $0.27 for my sold Calls and paid $0.28 for my purchased Calls. Give me a net debit of $28.33 on about $1,057.00 in risk. Sounded pretty good when I placed it, since I had not realized I traded it backwards yet.

On 6/24 MSFT was trading at $50.29 so I expected to make money on this trade but for some reason it was showing about a $200.00 loss. That is when I finally started looking at it and realized what I had done. I thought about ways I could try to adjust to make it break even perhaps even profitable but there was no way to do that in my opinion, so I just closed.

Date

Sym

Action

Exp.

Stk

Price

Contracts

Type

Cost

Balance

06/17/16

MSFT

BTO

6WK4

51

-$0.32

7

Call

-$206.66

-$206.66

06/17/16

MSFT

STO

7WK3

52.5

$0.35

7

Call

$178.33

-$28.33

06/24/16

MSFT

BTC

7WK3

52.5

-$0.27

7

Call

-$199.66

-$227.99

06/24/16

MSFT

STC

6WK4

51

$0.05

7

Call

$24.33

-$203.66

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