Friday, September 21, 2007

Why I sold Oracle and how I wiped out my option profit

So the Oracle September call option I sold is going to be exercised this weekend since Oracle finished the day at $21.98 a share. Using the rules I established for accounting option gains and losses, selling the option cost me $1.98 a share. Since I only received 55¢ a share of premium and also paid a commission, I took a pretty ugly accounting loss on the transaction. In fact, this single loss would nearly wipe out all the premiums I've earned since I began selling call options this year. When adding in costs, my combined ratio is an abysmal 121.92%.

Without this single transaction, my combined ratio was an amazing 24.74%. I don't really have a large enough sample to measure myself yet, but this tells me that I'm settling for too little premium when I write call options. In fact, I was pretty surprised to see that Oracle's price had jumped from $19.36 to $20.13 on the day I sold the option. Rather than a 35% chance of losing, I sold a option that was nearly a coin-flip. If options were my full time job, I would have noticed the price change and adjusted my limit order to capture more premium. Options are so much more volatile than the underlying stock that the full-time trader has a distinct advantage.

But even if I had written the call for a reasonable price, I would certainly have lost this particular bet. Oracle's stellar earnings release, that came on Thursday, assured that the option would be exercised at a loss. The market's response to lower rates didn't help either. Now, I don't really mind too much because I still have plenty of Oracle shares that are worth more than when I sold the option. Part of the reason I sold in the first place was because Oracle was a bit overweight in my portfolio.

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