DryShips (DRYS, $58.47, down $3.06) has plunged through $60 and I wanted to update the trade from August 25. I mentioned quite a few stocks within the sector but targeted DryShips as a strangle option trade. This option strategy is created when you buy both a call and put with different strike prices but with the same expiration date on a stock. This play is profitable only if there are large movements in the price of the stock and that is what has happened with DryShips.
The stock was right around $70 and I penciled in at least a $10 move in the stock within a few weeks. At the time I said “the stock is volatile and it could test $60 before it tests $80 again.” Knowing this I put us in a trade to take advantage of the price move.
The October 80 calls DQRJP ($0.50, down $0.20) were trading for $3.60 and the October 60 puts (DQRVL, $6.30, up $1.70) were trading for $2.60 at the time. Together the total cost for both contracts was $6.20. The stock made it to a high of $74 a few days later which is when the calls should have been sold for about $5.50. The puts were showing a loss but we took profits on the calls. All we had to do was wait for the stock to fade which is exactly what is happening.
Now, if you sold the puts today for $6.30 our total for both options would come out to $11.80 ($5.50 for the call, $6.30 for the put). Our entry price was $6.20 so if you did close the put side of the trade today you would nearly double your money. Don’t make the mistake of holding out for a little more profit. Sure, the puts could keep going higher if the stock continues lower but the stock has already reached our target. Some people hold on to these types of trades because there is so much time left until the options expire.
What usually happens is that the stock remains volatile and investors give back a lot of their profits waiting for a 200% gain instead of taking the 100% gain. Don’t make this same mistake.
Here’s how the other stocks from the sector are doing for the day and since August 25: Diana Shipping (DSX, $23.22, down $1.01) was at $29, Eagle Bulk Shipping (EGLE, $21.55, down $1.00) was at $25.80, Excel Maritime Carriers (EXM, $25.98, down $1.37) was at $32.77 and Navios Maritime Holdings (NM, $8.22, down $0.36) was at $9.90. We’ve seen violent moves in many stocks this week and you gotta love the action.
Rick Rouse
Rick@OptionsMentoring.com
