We did something this morning we absolutely hate to do, take a loss, a nice sized loss at that.
The scenario was simple we sold an option to buy 2400 shares of Baytex Energy back in March of this year for $816. The strike price at the time looked quite good at $40 with the stock at that time selling at around $45. The stock has a solid 7% or so dividend backed by a huge oil inventory in the ground and a nice spread in the margin of cost of extracting versus market crude price. Frankly we figured the option would never get assigned and the $800 premium was safely in our bank account.
Once again politics reared it's head and Obama instead of approving the Keystone XL pipeline like most figured he would shortly after the election decided to put the decision off again. This meant for the time being all that oil Baytex is producing will get bottled up in Oklahoma and Illinois until rail cars owned by Warren Buffet, Obama's cronyism buddy in this case, can move it to refineries mostly on the Gulf Coast. The resulting glut of oil and no hope of any long term relief means Baytex can produce all they want but only as much as can be transported will get sold.
Add in the resulting drop in price due to the glut cut into Baytex's profit margin and you get a drop off in stock value. The stock price has been as low $35 in the recent month which meant we were sitting on a $12000 loss in capital if we could find no upward move in price. Fortunately for us the Egyptians decided to have themselves a government overthrow that sent oil futures moving up and Baytex stock price up with it. Today the stock is selling for just under $38 with options at around $2.50 for the $40 strike price. Not knowing where this revolution in Egypt is going and sensing a chance to cut our loss in half we bought back the option at just that $2.50. A $5200 net loss, but it looks good compared to the $12000 we were seeing just a month ago.
The point here is something you can read back over two years ago in my trading and investing rules. I call it the "Jefferson Strickland rule". Many years ago my old car dealer friend told me one of he worst things to deal with is a bad car trade where you sit underwater in a car value. Each day you come in thinking about the loss to come is like a bad tasting medicine sitting in a bottle on your desk.
Every day you come is another day you taste the bad medicine even if you do not actually take it. So the best remedy is to take the bad tasting pill sooner rather than later getting it done and moving on with a brighter outlook and looking for better opportunities. Therefore today we took the bad medicine and already feel better thinking about using the now open resources for better trades ahead.
Taking a loss is the hardest thing most investors and people have to do, but it is a must do and something best learned sooner in your life so as not own depreciating assets and missing on better opportunities. This rule can apply to your old car or bad real estate buy as well. The asset each day depreciates, sell the asset, take the loss, and save your capital.
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