VIP - Making me feel important again

In session, Money Management

Discouraged at the recent market, but even more discouraged at the prospect of working for a living, I reviewed my watch lists today. I pulled out VIP from my “backburner” list and it looked pretty good. Company fundamentals are still strong, and the stock has been rising. A recent pullback in the last few days was not quite strong enough, but desparate to make a trade, I plunged in and purchased this option:

VIP Feb 08 45 Call for $2.45

I immediately put a sell stop order in at 3% below a recent support line.

Here is my risk calculation:

Current price: $41.74
Recent support: $39.20
Difference: $2.54
Option Price $2.45
Option Delta: .42
Total Risk: $1.06
Actual Risk (minimum contract of 100): $106

Current account balance: let’s pretend it’s $4000 for the sake of this discussion on risk (it’s not, but that’s a different post)

Total account value at risk with this trade: $106/$4000 = 2.65%

That’s a little high for an account of this size, it’s better to keep risk at 1% with each trade. But an account of less than $10,000 is considered small for options trading and extending that risk to 2% is reasonable in this case.

Worst case scenario is a total loss of the option price, or $245, but with a sell stop in place, this risk is mitigated, and limited to wherever I decide to set it.

Suzanne @ January 9, 2008