ESRX

I want to share with you a little bit of a scary trade I made this week.  ESRX is a (PBM) Pharmacy Benefits Manager that has a very solid model, but currently is a bit volatile due to its pending merger with another (PBM) Medco Health.  Early in the week I sold contracts of March ESRX at strike price 42.5.  At the time ESRX stock was trading at around $52.  I sold the March 42.5 ESRX puts for .50.  What this means is that a $50 for each contract I sell, is credited to my account by the third Friday of March if the stock does not drop to this amount.

There was news regarding ESRX and the stock drop to a low of $47.5.  The option contract I sold for .50 more than doubled, my trade went bad.  If I bought back the put option I sold, instead of making the $50/contract in March, on Tuesday if I had to buy this contract back I would have to pay more than $100/contract.

I have some liberal rules, that if my trade goes wrong and I lose double on what I would earn I would get out of a trade.  These rules are liberal so even though this trade went against me, I was going to wait. A day later the stock has recovered and instead of losing $50 per each contract I sold, I am almost even.  I believe ESRX will be above the 42.5 strike price on the third week of March and that I will make money on this trade.  Traders who have good discipline are usually the great traders.  My discipline, is not too great but hopefully I will do ok in this trade.  Please let me know if there are any questions.  I understand this blog is a bit esoteric for option traders, but sharing my ideas is what I want to do.