Blood on the Carpet

Its been an exciting few days. There is blood on the carpet for two reasons. Firstly, because my favourite energyy company has just had its results out and whilst they weren't bad, the market didn't like them and they are now trading at 414. If the management doesn't do something, there will be blood on the carpet for some of them I feel.

This is tantalisingly close to my breakeven point as the puts are now quoted at 7-11. That means I could sell them at 7p realising a 9p loss or hold onto them in the hope that they will fall further

On friday, the broker called me saying someone was bidding 10p for them as they needed to cover a position. As I was at the hospital at the time and not really thinking straight. I was tempted to try and sell half the position but in the end I demurred hoping for some more bad news.

In these situations, it is really a toss up whether you make money or not. The share could go either way on good or bad news and it is a bit too random for me. With hindsight I should have got rid of them and just taken a 6p loss (i.e 6*10*Number of contracts = A small family car) but the share doesn't seem to have much support and I am hopeful of another few pennies more.

The problem lies in the fact I have little time left. The contract expires in less than 5 weeks time and the time value expires rapidly in the last 6 weeks of a contract's life.

So should I sell them at whatever price or should I hold on and wait. Post a comment to let me know what you think.

Oh yes, blood on the carpet reason 2. I have had an operation on a deviated septum (a nose joint) it was broken and straightened by the doctor on monday and he removed a polyp too. Definitely a lot of blood on the carpet!!

It shines for some, but rains for others

"Bring me sunshine". As Eric and Ernie used to sing. The sun was definitely shining on the market today as the Fed kept interest rates stable, the UK market rose 90 points

I was actually wishing that the market would fall today. This is ironic as most of my positions are long but I have a very big position with a UK Energy stock will provide handsome returns if it falls

I bought some 3 month March 390 puts of this stock in late November 2006 which expire on the 3rd Friday of March 2007. If the shares finish above 390p on this day I lose my money, but if the finish below 390 I make money.

I bought them at 16p so my breakeven point is 390-16p i.e. 374p. They have been steadily falling over the last few weeks from 500p to today’s 429p.

As I mentioned previously, options also have a time value as well as an intrinsic value. So when I bought the options in November the share price was around 480p. The options had no intrinsic value i.e. if they expired tomorrow they would not be above the 390p so they would be worthless. Thus the 16p I paid was entirely time value

As you get closer to the expiry date i.e. 16th March 2007, the time value of the option erodes. So a march 2007 option bought in November 2006 when the price was 480p was worth 16p, but now at the end of February it is only worth 5p and the price is much closer to 390p than before.

In order to make my money back, the share will have to fall to around 400p in the next few weeks as the option value will increase the closer it gets to 390p.

But I’m hoping it will fall further and I think it will
1) A major broker has just given the share a downgrade to 360p. i.e. that’s all they think its worth.
2) One of their power plants has just suffered yet another outage. This gives little confidence to the market that their business is running well

Will the share fall further. Lets wait a few more days to see
So “bring me sunshine” could be the song I am singing soon !!