Friday, February 22, 2008

Bought back put options in SiRF Technologies (SIRF), swayed by emotions or smart trading?

I closed out my Mar 7.5 naked puts in SiRF Technologies (SIRF) today at 1.10 right before the end of day market rebound. I have been trying to close it on the ask for two days (chased it at 0.85 to 0.95 to 1.10) and finally decided to hit a small 10 lot that was splitting the bid/ask. I still managed a small gain. I lost money on the 1.00 of intrinsic value (delta) but that was more than canceled out by the money I made on vega (i.e. the decrease in implied volatility). The small gain came from theta (i.e. time decay).

For reference, I first sold Feb and Mar puts in SIRF when it dropped 50%+ (Added delta to SIRF and WB amid market freefall). I closed the Feb puts on expiration day for a small gain (Last minute juggling of SIRF and BBBY).

I am not sure whether this was an emotional trade or a smart trade. So I will give both view points.

I thought this was a great business with a large cash reserve with a market leading position in GPS chips. I don't doubt the cash on the books but the recent Garmin conference call has led me to doubt myself on the second point. There was a small hint that Garmin is shifting away from SIRF chips.

I am also becoming of the similarity between SIRF and NLS. I sold some NLS puts a while back at the 10 level and now the stock is around 4. I believe in NLS and I am buying more at these levels but it taught me the market can take a long time to recognize value. SIRF can go a lot lower before it bounces back. I don't want to get caught in a downtrend. I need to save buying power to add delta to the rest of my positions on the way down. (Can't decide whether this is fear talking or risk management.)

As outlined in my trading plan (A naked put selling focused options trading strategy explained), I generally try to sell time premium. When SIRF hit 6.50 today, most of the value of the option was intrinsic value and I had earned all the time value I could. Therefore, there was no reason for me to be in the option. I should either take delivery (artificially by buying the stock and the put at the same time) or just close out the position (by buying back the put).

I shouldn't go against the trend. It was relatively stable at the 7.25 level while buyers added more positions to average down their costs. However, capitulation hasn't occurred and SIRF can go much lower (although it is supported by its cash position).

Going Forward:
I am going to keep a close eye on SIRF. I was interested in selling the Apr 5 puts at 0.20. That would give me a cost basis of 4.80 which is much closer to the cash value of the company. However, if I assume I am a smart trader and my pseudo-technical sentiment analysis is correct, it should go lower and I should be able to sell it for more premium.

The other reservation is also from my experience with NLS. Selling puts with tiny time premiums are a bad idea. It is the equivalent of selling super-catastrophe insurance. And if you believe in the black swan theory, markets have catastrophic swings more often than the options models would predict.

I am going to sleep on it and then we'll see what happens next week.

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