Initial & Closing Transaction - Lockheed Martin (LMT) (10/21/2009)

As goes the mantra of good investing, you must always invest logically and not emotionally. Unfortunately, I think this is one thing that most people find difficult to do, whether it be selling a position which has fallen precipitously and is no longer a good company, or not selling a position when you have made a lot of money but the company is now overvalued because you are being greedy. In this case it was neither, it was what I consider to be somewhere in between those two issues, and that is selling a position because it took a big hit one day, and though the fundamentals didn't change, it made me jumpy, so I sold it. This position was in Lockheed Martin, and though it only existed for one day, I felt it necessary to put it on the blog as it is a good investing lesson. I mentioned a few weeks ago after my position in LMT was called away at $75 that I would consider re-entering the stock if it fell below $72. The company released lackluster earnings for the latest quarter, and so the stock fell from near $78 down to $73 in one day. I chose to enter at this point in one of my long-term dividend covered call positions, similar to the one I had in ConocoPhillips. The idea here is to sell a fairly ITM call which is at least 3 months in the future, and shoot for about a 10-20% return regardless of whether the stock gets called away at any of the ex-dividend dates or at expiration. Unfortunately, the stock continued to fall the following day underneath $70 which it had not fallen below in quite a while, and I got spooked so I closed out the position. Of course, once I did so the stock rebounded somewhat, but I had already taken my loss. The lesson here is if the company is a good fundamental investment, you should not let a decline scare you away, you should instead consider it an opportunity to purchase more, or in this case possibly buy back the call and wait for a rebound t sell a new one. The profit/loss info is below:

10/20/2009 -- Bought 100 LMT @ 72.76
10/20/2009 -- Sold To Open 1 LMT March $70 Call @ 5.80
10/21/2009 -- Bought To Close 1 LMT March $70 Call / Sold 100 LMT @ 65.50

Loss = $135.00

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: 66.85

Potential Gain If Called At Expiration: 4.43%
PotentialAnnualized Gain If Called At Expiration: 10.70%