CSX May 2008 40 Put
Position: CSX May 2008 $40.00 Put
Size: 6 percent*
Opened: 10/16/2007
Closed: 03/17/2008
Profit (Loss): (76%)
trade thesis
Despite jawboning by prominent economists, I suspected the United States was in a recession and certainly headed towards one. Because freight companies are often impacted first by a downturn, I figured shorting them would pay off. Additionally, based on my fundamental analysis of freight railroads, CSX Transportation (CSX) performed poorly on several key measures compared with its competitors.
mistakes, flashes of brilliance, and lessons learned
This was my first trade at Optionsxpress and also my first money losing option trade. Key issues resulting in the loss were my lack of understanding of technical analysis, volatility, and money management, along with a limited knowledge of the effect of time decay.
Even though economic reports during the holding period were generally negative, the CSX share price never dropped below the strike price of the option. However, there were a few opportunities to take a modest profit, notably November 21st through the 26th, and later on January 8th.
Instead of closing out the position when it was profitable at those points, I chose to hold with the expectation the option would soon be in the money. Instead, CSX rallied off the lows. I closed the position two months prior to expiration, while the option still had some time value, for a loss of 76 percent.
While the initial trade thesis turned out to be incorrect, knowledge of technical analysis would have helped me choose better entry and exit points, increasing the probability of profit. An understanding of how volatility affects options pricing would have also provided insight to entry and exit points, again increasing the my chances of profiting. Better money management would have resulted in a smaller loss.
request for input from the peanut gallery
What would you have done differently? Was the initial trade thesis correct? If so, how could this be traded in the future?
notes
* of total account equity.