Northern Trust – NTRS Sep10 55 Call – Long

In 2010, after much paper trading, I finally embarked on a campaign to trade options on my cash account. Over the next several weeks, I plan to report my trades, their results and what lessons, if any, I learned. Whether or not you accept the veracity of these reports does not concern me — these trades illustrate a lot of the things I did wrong, and should be instructive.

August 5, 2010 – At Options Profits, Mark Sebastian suggested his readers buy September calls of Northern Trust Bank (NTRS) with a strike of 55 at .30 or better. His justifications? At around $49, it was trading near its lows (upside move more likely…); the implied volatility for NTRS was relatively low, making the options cheap;  following the paper, Mark noticed someone buying a lot of 50 and 55 calls on NTRS; and finally Mark likes NTRS, knows people who work there and likes the institution. Personally, I’ve worked with people from Northern Trust, and also like the institution, but I don’t consider that a great insight on which to base a trading or investment decision. Then again, I’m a computer programmer, not a professional investor/trader.
August 6, 2010 – This was my first trade based on a suggestion from Options Profits. I bought 3 Sep 10 55 calls on NTRS at $0.35. The most I could lose was what I paid for the calls plus the commission for opening the trade, about $120.
August 11, 2010 – I sold my calls for $0.65. After commissions, I netted a profit of $60.03, about 44% in a week.
This was my second trade, and my second “success”. I think I was getting cocky.
What I did wrong:

1. I seem to remember doing this trade on the day before NTRS announced earnings, and the price going down a bit the next day to $0.25. The point of the trade was not a catalyst-induced price action, so I should have waited to see what happened after the earnings announcement.
2. I also jumped the gun because I had just gotten my trial subscription to Options Profits and was anxious to let the rubber meet the road. I bought in at $0.35 even though Mark said $0.30 or better.
3. I was too timid in position sizing for this trade; in retrospect, I should have bought five calls, rather three — the larger a position, the less impact commissions have on profitability.

What I did right:

1. I set up an exit strategy as soon as the buy order was filled — a limit sell at $0.65. I set it up to cover commissions and still give me a good profit cushion.

I probably left some money on the table for this trade too, but I’m happy with it.
Looking at the price action for NTRS between 08/05/2010 and 09/17/2010 (the expiration date on these calls), the highest that NTRS got was $50.50. The action on this out-of-the-money call was all based on increasing volatility and premium — it never got close to the strike, so there was no intrinsic value to the call, ever.
Sometimes, the paper is wrong.