The workers of the idea factory in my head have gone on strike this morning. Little buggers probably can’t read a calendar and think it’s already Labor Day. But that’s okay. I’ve come up with a workaround for anytime I have to churn out content and am out of ideas. TALK ABOUT TRADES!  There’s no substitute for getting in the trenches and looking over a trader’s shoulder to see how they’re thinking and managing positions. Let’s pretend I have the following trades and walk through how I might manage them.

DAL – Naked Put. Delta Airlines had a beautiful oversold setup late last week and had a high probability of rebounding. Suppose we sold the Oct $42 puts for 63 cents. Given the past two day pop, the puts have now dropped in value to 44 cents. What’s the game plan? First, if we can get a strong enough bounce, we could buy back the puts quickly at 30 cents. That will enable us to exit swiftly with over half the profits in tow. That way we won’t get caught holding this for weeks on end if the downtrend continues.

Second, if DAL rolls over and heads toward $42, I could scale into more puts around, say 90 cents or $1.00, to raise the average credit. Then, I’d bail on any subsequent stock rallies at break-even.

Third, if DAL completely bites the dust, I could simply roll out at October expiry if the Oct 42 puts sit in-the-money.

FCX – Naked Call. Freeport McMoRan had the opposite setup as DAL – it was overbought, a little too hot to trot. Suppose we sold the Oct $17 calls for 38 cents on Friday. What’s the game plan? First, if we get a strong down move allowing me to buy these back near 19 cents quickly, then I will. That way we won’t get caught holding this for weeks if the dip gets purchased and FCX keeps trending higher.

Second, if FCX rips higher then I could scale into more calls around, say, 55 cents, to raise the average credit. Then, I’d bail on any subsequent pullbacks in the stock if the short calls return to break-even.

Third, if FCX goes ape to the upside, I could simply roll out at Oct expiry if the Oct 17 calls sit in-the-money. I’d be extending the trade’s duration in hopes that by November FCX settles back down allowing me to exit at a profit.

Notice how the explanation for both trades is virtually identical? Only it’s the inverse since DAL is bullish and FCX is bearish. What it shows, however, is if you’re systematic in your approach the trade management is similar in each trade. The only thing that changes are the prices and the tickers.

GDX – Naked Put. Gold mining stocks have finally awoken. The early-August breakout is coming to fruition. Suppose we sold the Oct $22 puts on Aug 24th for 40 cents. What’s the game plan? Well, you ready for some repetition? First, if GDX rips quickly allowing me to exit near 20 to 15 cents, then I’ll bail. Why? Because when I entered the trade there were 57 days to expiration. If I can exit within the first ten days or so with over 50% of the max profit, shouldn’t I bail?

YOU BETCHA! If the market is kind enough to front-load my returns, then I’m ringing the register. Besides, I’m confident that over the next 40+ days GDX will probably setup again, and I can re-enter some type of October trade.

Am I a double dipper? Oooh yeah! I’ll triple dip if the market gives me the opportunity, baby!

VZ – Naked Put. Since popping on earnings, Verizon has been consolidating in bullish fashion. Let’s say due to Friday’s intraday breakout we sold the Oct 48 puts for $1.02. With the puts now trading at $1.15, we’re down 13 cents per contract. What’s the game plan? Well, how about just copy/paste the GDX commentary. But, just for kicks, I’ll add in one more idea.

If we’re wrong and VZ plunges, sell the Oct 50 calls to hedge. This morphs the trade into a short strangle. I wouldn’t pull the trigger until we break a support level though. Right now $47.50 should do the trick.

Now, let’s look at a long premium play.

BIDU – Bull Call Spread. Unfortunately, Baidu decided to get a bit squirrely today. Suppose Friday, due to the intraday breakout over $227.50, we entered an Oct 230/250 bull call spread for $5.30. The position consists of buying to open the Oct $230 call while selling to open the $250 call. Because of today’s downdraft, the spread is now trading for $3.88 leaving us with a $142 loss per contract. What’s the game plan? Managing bull calls is obviously going to be different than credit spreads. First, we could just bail if BIDU breaks the $216 support level. This is the cleanest exit and leaves little room for screwing up. The fact is if BIDU breaks below $216 then Friday’s breakout attempt has been firmly rejected and reversed. The only thing we should fear with this tactic is whipsaw. There’s always a chance that BIDU breaks support just long enough to take us out before reversing higher.

An alternate idea would be selling a bear call to hedge, such as an Oct 250/270. That would bring in some credit, but right now it’s only worth 94 cents, and we’ll garner even less if we wait for support to break. So, I’m not sure I’m a fan of this particular tactic in this instance.

On the profit side, I’d be looking to bail around $7.74 if BIDU can right the ship in the days ahead.

Hopefully that brief discussion provides some food for thought on how to think through management of various option positions. Trade ’em well!