The Beauty of Options


As many of you know I love to buy and sell options.  However, due to the fact that an option contract on a stock is like an ice cube left out of the freezer and it starts to melt on day one … the longer you hold it the faster it melts.  I’ve written several articles about this in the past and explained this is why I mostly do long-term options known as LEAPs.

Today I had an opportunity to get out of two options I purchased back in 2018.  I will explain these one at a time.

Verizon – January 17, 2020 – $52.50 Strike Price

The graph below shows the price of this option over the past 244 days.  Since there were only 98 days left to expiration I decided to close this one out today.  Remember:  “Pigs get fed and Hogs get slaughtered” when it comes to investing.

VZ

The white circle indicates the various prices on the day that I made the purchase of these options.  On 10/17/2018 I purchased 2 contracts (200 shares) at a price of $4.79 per share.  This means I invested $958.03.  I sold these contracts (200 shares) for a price of $8.63 per share today and netted proceeds of $1,725.92.  Therefore my total gain for the 244 day holding period was $767,89 or 80.15%.

On October 17, 2018 VZ closed at $53.96 and today as I write this it is selling for $60.78.  So the stock is up about $6.82 or 12.63% — which is not bad for a holding of a little less than a year … but I think you will admit a gain of 80.15% is a whole lot better.

Apple Computer – January 17, 2020 – $210.00 Strike Price

The graph below shows the price of this option over the past 242 days.  Since there were only 98 days left to expiration I decided to close this one out today.  Remember:  “Pigs get fed and Hogs get slaughtered” when it comes to investing.

Apple Option 210

Again, the white circles represent the day and prices where I made purchases.  The first purchase was for 1 contact (100 shares) at a cost of $25.85 per share or $2,585.00.  The second purchase was for 2 contracts (200 shares) at a price of $18.75 per share or $3,750.03.  How many could do that after seeing the price drop from $25.85 to $18.75 – a decline of 28%.  My third purchase was for 3 contacts (300 shares – giving me options on 600 shares total) for a cost of $9.30 per share or $2,790.03.  Again how many could invest another $2,800 after seeing the original contract decline by 64% and the second purchase decline by 50%.  Keep in mind … this did lower my overall cost to about $15.21 per share.

When I sold these today I netted the following returns:

  • Contract 1 purchased 11/02/2018 = 29.71%
  • Contract 2-3 purchased 11/13/2018 = 78.82%
  • Contracts 4, 5 and 6 purchased 11/26/2018 = 260.52%
    • Overall Gain = $10,992.42 or 120.46% 

During this time the price of Apple Stock increased from $207.48 on 11/02/2018 to a price of $240.69 as of this writing … for a gain of $33.12 per share or 15.96% over the past 11 months or so.  Again, not bad … but we must remember the price also dropped to a low of $142.00 on 01/03/2019.  How many people would have held onto the stock at that time?

My only regret on this one is that I did not load up on the options again on 01/17/2020 when I could have purchased for as little as $2.25 per share.  However, it would have been quite easy for many to sell their options back then and captured at least $1,320 of their money … but that was not my thought.  My thought at that time was, “OK I determined before making each of the investments that I could afford to lose the money invested … and I still have close to a year before the options expire … I’ll just hold for now.”

TRUST ME THOUGH … I did learn something and that is next time … on a quality company like Apple … with this much time to run … I will load up on more options.  To me that is a Pig Getting Fed!

My options account today …

Options today

Of the 9 options I hold now … 7 are up nicely in value and two are down slightly in value.  Over all I am up about 48% on these options I purchased March through September this year.  I have 243 days remaining on all of them … plus will be investing my cash (about $64,000) between now and the second quarter of 2020 in other options.

Folks, I started this options account in the fourth quarter of 2015 with an initial investment of $10,000.  I added another $10,000 in 2016 and today the account is worth over $83,000.  That is not bad considering I’ve only been doing it for about 4 years now.

I would never put 100% of my investments into options … but if you have some extra money sitting around that you would like to make work harder … talk to your financial advisor about considering some long-term options in quality stocks.  Buy them at or slightly in the money and have patience.  Do not invest more than you can afford to lose and still sleep at night.

Go make some waves,

Jerry Nix | Freewavemaker, LLC

Disclaimer:

The information shared in this article is not meant as investment advice.  Before acting on any of these investments referenced herein that was meant for education only, please check with a qualified professional like a financial planner or broker that you may be working with.  These investments may not be right for you at this time.

The writer of this article owns investments in the following currently:  Those shown in the article for this particular account.

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