Before I begin this post, I want to stress that this is my opinion only and this post is intended for educational purposes only. This post should not be construed as investment advice.
I am a relative newbie to options trading. I only buy calls if I think an asset is going up, or I buy puts when I think an asset will go down in price. I am also aware that most options expire worthless.
One major thing I have learned about trading options is that time decay can decimate a trade that once looked good. The key, in my opinion, is to get in and get out when an attractive profit is on the table.
Let's take a look at Raytheon.
As the Russian invasion of Ukraine was in full swing it was announced that Ukrainian President Zelensky was going to make a speech before Congress on March 16.
I thought there would be no doubt that he make an impassioned speech requesting a massive influx of military and humanitarian aid. It got me making a list of assistance that I would want if I was asking hot help. One of those items would be Stinger Missiles, manufactured by Raytheon.
These surface to air missiles can be rapidly deployed into the field and are highly effective at shooting down helicopters and aircraft.
On March 15, I looked at the daily chart for RTX and I liked what I saw
The stock had pulled back from a recent earnings pop and looked like it was poised to continue heading up.
I placed an options order on March to buy the June 17 RTX $100 Calls for $4.70 per contract. Since 1 contract controls 100 shares, the cost for placing this trade was $470.
On March 16, Zelensky made his speech to Congress, and there were few dry eyes in the room. That day, RTX dropped down to the 50 MA and a trend line. My option declined in value from $4.70 to $3.60 in value. In my mind, there was no reason to panic on that trade.
On March 17, massive military aid was announced to Ukraine include the transfer of 800 Stinger missiles and 2,000 Javelin missiles, also manufactured by Raytheon and Lockheed Martin. Most recently, Raytheon just completed a successful test flight of a hypersonic missile, in conjunction with Northrop Grumman.
RTX moved up impressively after March 17. One week later, on March 24, the RTX contract I was holding was trading at $630 and I sold it for a 34% profit $160.
Why did I sell the option? Three reasons.
- Notice the relationship between the Green Line (3EMA) and the Purple Line (8EMA). Whenever the Green Line gaps too far away from the Purple Line, it snaps back like a rubber band.
- Time decay in options can spoil the best laid plans
- Greed kills
- RTX is moving back down to the Support trend line and the 50 . Will this area hold up as support as it has done in the past? We'll see.
- Stochastics are moving back to oversold territory. Looking at the chart for RTX, recent history shows that RTX does not remain oversold for more than a couple of days before moving back up.
- This war is continuing it's ugly path, and NATO is galvanizing in support of Ukraine. The Stinger, Javelin and other anti-aircraft/anti-tank missiles as well as other defense technologies will be rapidly deployed and fired, which will probably prompt replacement orders. Other NATO countries may stock up their arsenals as well.