Monday, October 27, 2014

Sometimes less is more

In an options world, where the lingua franca includes such esoteric terms as condors, butterflies, calendars, split-strike butterflies, double diagonals, etc., a simple stock-with-put seems hopelessly elementary.

Yet it can be an effective strategy, perhaps more so than others that are much more complicated.

Take AAPL, for example.  In the past two+ months, it has gone from the low 90s to the low 100s to the low 90s and back again to the mid 100s.  Those acquirers who included mid-dated puts (say January 2015 or beyond) in early August were provided with the financial stamina to weather the usual Sept-Oct stock market roller coaster ride, not upchuck the stock, and best of all, stand in with a profit (as of late October).

Using round numbers:  On 200 shares of AAPL, bought around 95 in early August, the Jan. 2015 ATM (at-the-money) put was selling for 6.5.  Funds at risk then came to about 6.5 vs. 95.  The return since then, after several round trips from the 90s to the 100s?  The stock advanced to 105.22, so a 10 point gain.  The put declined to 1.11, so a 5+ point loss.  Net gain, 5 points, risking 6.5 or so. 

Something like 75% return on funds at risk.  Derived from +10% or so on AAPL itself.  From a simple strategy that many in options education find too simple to even mention.....