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Six-Month Review of Our Options Strategies:
We have a portfolio we call Better Odds Than Vegas. In January, we picked three companies which we felt confident would be higher at the end of the year than they were at the beginning of the year. If we were right, we would make 100% on our money. We believed our odds were better than plunking the money down on red or black at the roulette table.
Today we will discuss the first company we chose - Google (GOOG). This company had gone public 10 years earlier, and in 9 of those 10 years, it was higher at the end of the calendar year than it was at the outset. Only in the market melt-down of 2007 did it fail to grow at least a little bit over the year. Clearly, 9 out of 10 were much better odds than the 5 out of 10 at the roulette table (actually the odds are a little worse than this because of the two white or yellow possibilities on the wheel).
In January 2014 when we placed these trades, GOOG was trading just about $1120. We put on what is called a vertical credit spread using puts. We bought 5 January 2015 1100 puts and with the same trade sold 5 Jan-15 1120 puts for a credit spread of $5.03. That put a little more than $2500 in our account after commissions. The broker would charge us a maintenance requirement of $5000 on these spreads. A maintenance requirement is not a loan, and no interest is charged on it – you just can’t spend that money buying other stocks or options.
If you subtract the $2500 we received in cash from the $5000 maintenance requirement you would end up with an investment of $2500 which represented the maximum loss you could get (and in this case, it was the maximum gain as well). If GOOG ended up the year (actually on the third Friday in January 2015) at any price higher than where it started ($1120), both put options would expire worthless, the maintenance requirement would disappear, and we would get to keep the $2500 we got at the beginning.
Then GOOG declared a 2 – 1 stock split (first time ever) and we ended up with 10 put contracts at the 560 and 550 strike prices. Usually, when a company announces that a split is coming, people buy the stock and the price moves higher. Once the split has taken place, many people sell half their shares and the stock usually goes down a bit. That is exactly what happened to GOOG. Before the split, it rose to over $1228. We were happy because it could then fall by over $100 and we would still double our money with our original put spreads. But then, after the split, following the pattern that so many companies do, it fell back to a split-adjusted $1020, a level at which we would lose our entire investment.
Fortunately, today GOOG is trading at about $576, a number which is above our break-even post-split price of $560. All it has to do now for the rest of the year is to go up by any amount or fall by less than $16 and we will double our money. We still like our chances. If we were not so confident, we could buy the spread back today and pay only $4.25 for it and that would give us a profit of about 15% for the six months we have held it.
Next week we will discuss the two other vertical put spreads we sold in January. After you read about all 3 of our plays, you will have a better idea on how to use these kinds of spreads on companies you like, and return a far greater percentage gain than the stock goes up (in fact, it doesn’t have to go up a penny to earn the maximum amount).
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
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I look forward to having you on board, and to prospering with you.
Terry
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