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Another Interesting Options Bet on Google:
In my January 4, 2014 Saturday Report sent to Terry’s Tips Insiders, I set up a new demonstration actual portfolio that made long-term bets on three underlying stocks that I believe would be higher well out in the future than they were then. This is what I said about one of them – “The most interesting one, on Google, will make just over 100% on the money at risk if Google is trading at $1120 or higher on January 17, 2015, a full year and two weeks from now. It was trading at $1118 when we placed the spread, buying Jan-15 1100 puts and selling Jan-15 1120 puts for a credit of $10.06. The stock fell to $1105 after we bought the spreads, so you may be able to get a better price if you do this on your own next week.
GOOG has gained in 9 of the 10 years of its existence, only falling in the market-meltdown of 2007. If you were to make 100% in 9 years and loss 100% in the tenth year, your average gain for the ten-year period would be 80%. That’s what you would have made over the past 10 years. If the next 10 years shows the same pattern, you would beat Las Vegas odds by quite a bit, surely better odds than plunking your money down on red or black at the roulette table.
I have told many friends about this bet on Google, and most of them said they would not do it, even if they had faith in the company. The fear of losing 100% of their investment seemed to be greater than the joy of possibly making an average of 80% a year. I told them that the trick would be to make the bet every year with the same amount, and not to double down if you won in the first year. But that did not seem to sway their thinking. I find their attitude most interesting. I am looking forward to 10 years of fun with the spread. It is a shame that it will take so long for the wheel to stop spinning, however.
It is now almost two months later and Google’s latest earnings announcement has suggested that the company has continued to be able to monetize its Internet traffic better than anyone else, especially the social media companies who are drawing most of the market’s attention. GOOG (at $1204) is trading almost $100 higher than it was when I wrote that report and sold that vertical put credit spread.
In the demonstration portfolio account, I had sold 5 of those vertical put spreads, collecting $10.06 ($5030 for 5 spreads) and there was a $10,000 maintenance requirement charged (no interest like a margin loan, just a claim on cash that can’t be used to buy other stocks or options). My net investment (and maximum loss would be the maintenance requirement less the amount I received in cash, or $4970).
With the stock trading so much higher, I could now buy the spread back for $7.20 and pick up a gain of $1430. It is tempting to take a 28% profit after only two months, but I like the idea of hanging on for another 10 months and making the full 100% that is possible. Now I am in the comfortable position of knowing I can make that 100% even if the stock falls by $84 over that time.
Rather than taking the gain at this time, I am more tempted to buy more of these spreads. If I could sell them for $7.20 my net investment would be $12.80 and I could make 39% on my money as long as GOOG doesn’t fall by more than $84 in 10 months. This kind of return is astronomical compared to most investments out there, especially when your stock can fall by so much and you still make that high percentage gain.
Even better, since I continue to like the company, I am planning to sell another vertical put credit spread for the Jan-15 option series. Today, I will buy Jan-15 1110 puts and sell Jan-15 1140 puts, expecting to receive about $11 ($1100) per spread. My maximum loss and net investment will be $1900 and if GOOG manages to close above $1140 ($64 below its current level) on January 21, 2015, I will make 57% on my investment after commissions.
I like my odds here, just as I did when I made the earlier investment on Google. I believe that many investors should put a small amount of their portfolio in an option investment like this, just so they can enjoy an extraordinary percentage gain on some of their money. And it is sort of fun to own such an investment, especially when it seems to be going your way, or if not exactly going your way, at least not too much in the other direction.
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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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