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Jan 19  / Stocks - JNJ
Question From A Reader On A "Squeaker" Option Trade On JNJ

Strategy Article

A "Squeaker trade" is one of those trades where you have sold an option (or bought one) and the stock is hovering right at the Option Strike Price by expiry. So what's the best thing to do. Today I received a question from a reader that I thought was worth sharing as it shows why I believe a plan is so important:


QUESTION: I was wondering how you approach the upcoming decision on handling Jan ’11 JNJ puts, expiring this Fri. Like you, I have some Jan ‘11 62.50 puts and since the current JNJ price is moving back and forth ITM/OTM around that strike price over the last week or more, in a case like this are you more likely to wait ‘til nearer to Fri to decide whether to BTC and roll them forward or try to allow them to expire worthless? Or do you let the chart tell you what to do in this case? From T.

My Answer: You question and my answer falls right into the category of having a plan. Yesterday on the forum, I posted a comment regarding the importance of a plan: Here is a short summary of that post:

"The importance of putting in place a strategy and knowing why you are applying that strategy is what makes for good investing. I have said so many times the same thing over and over,  I guess I am sounding like a broken record – “treat your investing like a business”. When you run a business every decision you make has consequences. A business plan puts together outcomes and strategies for handling consequences. In this manner the consequences are dealt with long before they may appear. Therefore you should already have the answer before you even place a trade. Markets and stocks can turn on a dime. I urge anyone who invests to take the time to consider paper trading to learn how to invest. You literally can write down on a piece of paper your strategy so you know what you are going to do, as you have already worked it out. There is no emotion involved, because you already have the answer to any problem that could develop."


So how does this relate to JNJ and the squeaker at $62.50? If you read through my comments on the JNJ trade by going here and following it along from its beginning, you can see that I have a very long term plan for JNJ. I want to someday own shares but use the earnings I have made to pay for them. I therefore am in for the long haul with JNJ, perhaps 5 to 7 years. If you look at my comments throughout the trade last year, I was selling $65.00 naked puts which were in the money, in order to follow the stock higher. Okay - so we know the plan. Now the answer is simple - by Friday if I am not assigned before close of trade, all those naked puts that are in the money will again be bought back and rolled out. Those out of the money will expire. The stock is hovering around the $62.50. Because of my plan, I really don't care.  Come Friday I will buy the put and roll it out. If the stock is trading at $62.66, I will still buy and close the $62.50 puts and roll. If the stock is at $63.00, then I would let it expire. If it spends the day in and out of the $62.50 strike, I will buy and close it because my plan is firm: keep rolling for income - some day own shares, but not today. So the decision is without emotion. But that's my goal. It may not be yours. If you don't mind owning the shares, then you could wait and see if you get assigned. Then you could either place them up for sale for perhaps .50 cents more and wait to see if you get taken out within a few days and therefore have a capital gain and then go back to selling naked puts, OR you could consider covered calls. My plan doesn't call for that. So unless I am prematurely assigned, I will close and roll out if Friday is a "squeaker". Having a plan makes all the difference.

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Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. is a private website. Everything presented and discussed are the author's ideas and opinions only.
By using this site, you agree to be bound by its terms of use. The full terms of use can be read here. If you do not agree to the terms of use, do not use this site. The author of assumes no liability for topics and ideas discussed, errors and omissions, ads and their content and external links. Any corporate insignia used are registered trademarks of their respective company or corporation and are being used for identification purposes only. All material copyrighted by Reproduction in whole or in part prohibited. Copyright © 2008

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