Option Accounting
The market hit record highs today. The strong showing of Salesforce (CRM) and Marvel (MRVL) helped push all the averages up and tech stocks in particular soared.
It was gratifying to get my MRVL bonus, the premium on the put I wrote yesterday dropped from $11.00 to $6.50, so I closed it at a profit of $4.50 per share. I also able to close 4 other tech puts in the first few minutes of the market open. By the end of day, I had closed another 3. I did not write any new contracts (other than reopening a put I had closed on Ulta Beauty (ULTA)). I already have too many calls that are very negative and I do not write puts when the market is up.
Accounting is one of the frustrations of trading options. The market can be up as it was today, but that can result in your account having a lot of red in it, particularly if you have calls. Calls become more negative as the market rises because the premiums you sold an option contract for get richer as the underlying stock price rises. The price you got paid when you sold a call contract is now greater, so it appears as a loss in your account, even if the stock has not yet reached the contract’s strike price. It can be confusing for people new to option trading.
The way is works is that when an option contract is sold, the cash appears immediately in your account. The contract, however, represents a liability and it appears in as a negative in your holdings. For example, if you sell a contract agreeing to buy 100 shares of Marvel at a strike price of $90 in Sept of 2025 (as I did yesterday) and get paid a premium of $11.50 for it, $1,150 appears in your account (remember, each contract represents 100 shares). Satisfying. The contract then appears under the ‘options and futures’ section of your account. The value of that contract is recorded as a negative (-$1,150). If the option premium stays at $11.50, the gain/loss shown on the contact is $0 but its value is still recorded as a negative. The cash you got for selling it offsets this negative so the overall value of your account stays the same as long as the premium price stays the same.
Option contract premiums, however, to not generally stay at the value you sold them at. They change due to three things: 1) the value of the underlying security changes, 2) the volatility of the market changes (the greater the volatility, the higher premiums go) and 3) time decay (as the option gets closer to expiration the value may rise or fall based on the probability the option will be exercised.) So, on any given day, if the premium I paid for a stock goes up, it will show as a loss in my account under the gain/loss column. For example, I was paid $11.50 for my Marvel put. If the premium had gone to $12.50, my account would have shown a loss of $100. If the premium dropped to $10.50, it would have shown a gain of $100.
Today the premium on MRVL opened around $7, fell to $6 as the stock climbed higher in trading, then went back up to $7 as the stock stuttered a little bit. When the premium was trading at $7 at market open, I saw a profit of $400 appear in my account under that option line. The profit rose to $500 as the stock began to climb and the premium dropped to $6. The contract seemed to want to trade in a range of $6-7 dollars, so I decided to close it at $6.50.
I could have, and perhaps should have, put in a limit order to buy back the contract to close it at $6. As I have said though, I am a bird-in-the-hand type of person and so I went with $6.50. It closed shortly after I entered the order, and I collected a profit of $450 for each contract I had sold. By the end of the day, the premium was down to $5, so I would have made another $150 per contract if I had waited to close it. I didn’t wait because I have seen an earnings bump disappear before the day is out and I already had a nice profit. Not being greedy seems to work for me. I would rather take a gain and hope I get a chance to re-write the contract again that same day or the following days. Still burns a little to have left money on the table though.
I have a good many option contracts appearing in my account as losses. The calls get very negative if the market jumps like it did today. Most of these calls, while negative, have strikes well above where the stock is trading so I am unlikely to get called on them. They look like a loss, but chances are the stock will not reach the option strike price, and they will just expire. I will keep the premium was paid, the contract vanishes from my account and the profit I made (the premium I collected when I sold it) shows up in my realized gain section as a profit. I usually write calls at a price at least 20% above where a stock is trading.
It is not always so easy; I have some calls that I will have losses on. I wrote them to match contracts on stocks that looked like I would be put, only to have the stock soar beyond the put price. Now I must either buy the stock when the call expires and be called out at a loss (the contract strike price is less than the stock is currently trading at) or hope that the market or the underlying stock drops enough that I can get out at a profit before the expiration date. Surprisingly this does happen about a third of the time.
If you are trading options, try and get your head around the accounting and do not panic when the market is up, and you see a lot of red in your option account. It makes you feel better if you get a good pullback and all those negative calls go positive. Something to look forward to if the market corrects. Meanwhile, be patient.