Author Topic: CASE: Anatomy of a CALL / PUT investment  (Read 2589 times)

Mother Fussbudget

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CASE: Anatomy of a CALL / PUT investment
« on: October 15, 2015, 12:03:57 PM »
As a part of *my* overall strategy, one element I use is to invest around $5000 per month in CALCULATED but RISKY investments - attempting to profit from the risk/reward ratio - via CALL and/or PUT options.  This is an amount I am willing to LOSE.  However, I typically get back between .5x-to-4x my initial investment. I have known this strategy to do far better than 10% returns, but it requires a great deal of research for a good deal. And sometimes no matter how much good research you do, the open-market does something unexpected. 

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NOTE:  there is only one low-risk way I know of to invest in CALL / PUT options, and that's by SELLING COVERED CALLS against stocks you own, and would be happy to sell at a specified price, at some future date - that topic is covered well elsewhere, and not what this post is about.

I read the weekly investment newspaper - Barron's - online without paying by searching from news.google.com for the article titles in this week's print edition of Barron's.  I follow technology, and momentum stocks because of my industry, and interest in these companies:  AMZN, AAPL, NFLX, FB and MSFT.

In Sept, I made ~$1150 investing in Nov-20 $95 CALLS on NFLX (+23% over 2 weeks).  I've seen NFLX spike up on NO NEWS, and trickle back down on NO NEWS - symptomatic of a momentum stock.  In researching NFLX's Q3 earnings report (released yesterday, 10/14), I read nothing but GLOWING REPORTS.  That made me suspicious.  As a natural contrarian, I researched and noticed that NFLX had MISSED their subscriber growth goals in 3 of the last 4 Q3 reports, and in each case the stock dropped >$10/share each time.  I even saw an article with a glowing report that included an upward trending chart, and that's when I knew I had to bet against them. 

The Investment:  After weekend research, Monday, I bought 10 contracts of NFLX Nov20 $100 PUTS (@$5/contract - $5*100 shares *10 contracts=$5000).
The Plan:  sell all contracts just after earnings - if earnings missed expectations, sell Weds morning (today) for a ~$10/contract profit.  If earnings met, wait for the stock to drop, and try to get some of my $5K back by selling sometime before 11/20.
After earnings:  I *could have* sold for a ~25% profit this morning.
Reality:   BUT... I got cold feet yesterday when I saw the 'whisper numbers' report that NFLX was expected to exceed the Q3 earnings estimate.  I sold, Weds early making $885 (17% one-day-earnings). 

Do I kick myself?  A little.  But not much - I made $885 in 3 days.  This weekend I'll research my followed-five, and pick a strategy... OR NOT... based on the week's news.

As a strategy - this is NOT for the feint hearted.  It can generate short-term capital gains/losses, therefore adding to taxable income.  But this is something I've done well in the past with LOTS of research - and ALWAYS with a limited amount of funds - never bet-the-farm.   Face punches?  Anyone else do something similar?
« Last Edit: October 16, 2015, 10:06:39 AM by Mother Fussbudget »

YoungInvestor

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Re: CASE: Anatomy of a CALL / PUT investment
« Reply #1 on: October 15, 2015, 12:38:52 PM »
I've been paper-trading this type of deal with pretty good success, but I'm having some trouble justifying the risk in my current situation.

Perhaps when I cross 100k.

Thinkum

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Re: CASE: Anatomy of a CALL / PUT investment
« Reply #2 on: October 15, 2015, 12:44:22 PM »
This is something I need to learn more about as I can most definitely take advantage of this sort of thing. Where would you suggest I learn about this? Any books or sites? I'll check out Investopedia in the meantime. Thanks for the most interesting topic!

Kroaler

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Re: CASE: Anatomy of a CALL / PUT investment
« Reply #3 on: October 15, 2015, 01:35:15 PM »
I agree with the above poster,   where is information on options acquired?  Its not as talked about as the other financial instruments.

index

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Re: CASE: Anatomy of a CALL / PUT investment
« Reply #4 on: October 15, 2015, 01:37:53 PM »
IP. This was a terrible trade. You never want to be a net buyer of options. Always be a net seller. If you were confident nflx was going down, you should have sold 10 110-115 call spreads for a net credit of $240 per spread. Max loss was $3600 and you would have made 2400 right now. If your trade had gone south (is gone up 10% instead of down 10%), you would be looking at a 4k loss today.

Mother Fussbudget

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Re: CASE: Anatomy of a CALL / PUT investment
« Reply #5 on: October 15, 2015, 01:50:00 PM »
IP. This was a terrible trade. You never want to be a net buyer of options. Always be a net seller. If you were confident nflx was going down, you should have sold 10 110-115 call spreads for a net credit of $240 per spread. Max loss was $3600 and you would have made 2400 right now. If your trade had gone south (is gone up 10% instead of down 10%), you would be looking at a 4k loss today.

+1.  Great face punch.  Thanks.  I've never done much SELLING of naked calls / puts, but I understand the strategy. 
Most people reading this sound like they want basic information on option trading, and won't understand covered vs. naked options.  Lots of places on-line discussing options trading - including http://www.theoptionsguide.com/
« Last Edit: October 15, 2015, 01:54:36 PM by Mother Fussbudget »


Mother Fussbudget

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Re: CASE: Anatomy of a CALL / PUT investment
« Reply #7 on: October 16, 2015, 04:52:59 PM »
Thanks index.  I've researched option spread strategies, applied for, and been approved for level 3 options trading.
Today I set up my next play on AAPL:  Sold 20x - AAPL Oct-30 $110 CALLS,  Bought 20x - AAPL Oct-30 $115 CALLS.

I'm basing this next play off the wide-spread reports that Apple hasn't sold as many iPhone 6s's in this fall as they sold iPhone 6 devices in the 2014 fall iPhone cycle. 

I'm betting this 'miss' will cause the stock to move down after earnings are reported on Oct 27.  Normally I like to buy more time on option investments, but in hindsight, I *should* have put in a call spread on NFLX this week, using Oct16 contracts (instead of the Nov20 contracts I selected).