This is what amounts to Part IV in the $100,000 portfolio series. For the thoughts and rationale behind previous trades and the entire experiment see the first three articles (I, II, III). For a log of the trades, as of the last update, see this entry at Robert Weinstein's Paid2Trade Website.
Here's what you need to know for this update. The portfolio holds $35,585 worth of cash.
Open Positions (Prices, as of 12:30-12:40 p.m., Monday)
- Apple (NASDAQ:AAPL) Jan '14 $600 call. Purchased one contract for $32.80. Holding at $49.05 for an on-paper profit of $1,625. Position value: $4,905.
- Sold 10 AAPL March $500 calls for $3.90 and bought 10 AAPL March $510 calls for $2.52. That works out to a net credit of $138 for each spread and a total credit banked of $1,380.
- Netflix (NASDAQ:NFLX) Jan '13 $130 puts. Purchased five contracts for $35.50 each. Holding at $33.58 for an on-paper loss of ($970). Position value: $16,790.
- Pandora (NYSE:P) Mar $11 puts. Sold 20 contracts for $0.50 each. Holding at $0.40 for an on-paper profit of $200. Credit banked: $1,000. (I would not mind getting put shares at all).
- Bought 2 NFLX March $120 calls for $13.45 each. Holding at $8.10 for an on-paper loss of ($1,070). Position value: $2,690.
- 10 NFLX bull put spreads. Sold 10 NFLX March $97.50 puts for $1.43 apiece and bought 10 NFLX March $77.50 puts for $0.27 for a net credit of $116 per spread and $1,160 total.
- Bought 250 shares of Amazon.com (NASDAQ:AMZN) at $184.52. Holding at $189.95 for an on-paper profit of $1,357.50. Position value: $47,487.50.
- Sold two AMZN March $195 covered calls at $2.76 apiece. Credit banked: $552.
Add it all up and the value of the $100,000 portfolio equals $107,457.50. That includes the $35,585 cash balance.
When I said this would be a learning experience, I meant it. I did not intend, however, for it to be such a nerve-racking experience. As happy as I am to see AAPL finally break out and sustain without any meaningful pullback, I'm shocked by this parabolic (?) move. After hitting an all-time high shortly after Monday's open, AAPL took a slight breather, but continues to aggressively flirt with the $500 level. As evidenced by my March $500/$510 bear call spread, I did not expect this to happen as quickly as it has.
Let's consider what's going on and what could go on with that spread. First, I entered it simply because I thought we had some time left before AAPL made the run to $500. My AAPL Jan '14 $600 call proves that I think it will happen. Again, I simply did not expect it so soon.
In that spread, I sell the AAPL March $500 call and buy the AAPL March $510 call. One of the things you lack in a simulated portfolio is the randomness of human decisions. When I do simulated portfolios, I only deal with option exercise/assignment on expiration day. While the $500 calls likely would not get exercised by the buying party until expiration day, they could move sooner. I've had it happen to me before when I least expected it. But, because we cannot predict how people will act, option positions in this portfolio will not exercise/get assigned until opex day.
On opex day, your broker will automatically exercise any contracts that sit in-the-money by $0.01 or more. The only way to prevent that from happening is to instruct your broker to not exercise a contract you own. Obviously, you have no control over whether or not you'll be assigned. As such, expect exercise/assignment on opex day if you are short (have sold) a contract that is in-the-money.
If AAPL closes over $500 on opex day in March, I will have to sell 100 shares of AAPL for every contract I sold for $500 per share, regardless of the stock's market price. I wrote the spread to provide not only income (which helps offset the loss in this situation), but to protect myself. I can exercise my $510 calls, which means I can purchase AAPL for $510 per share, regardless of market price.
Here's how the transaction shakes out ... I buy AAPL for $510 per share and sell it for $500 per share. For every spread, I buy and sell 100 shares. That comes out to a loss of $1,000 per spread. Because I executed 10 spreads, I am on the hook for $10,000.
For record-keeping purposes, I am not offsetting that loss with the credit I received (indirectly I am because it counts as cash in the portfolio) nor am I dealing in margin.
It will be interesting to track this thing. Of course, I am doing my best to expect the unexpected or offset being wrong in this portfolio, specifically on the AAPL and NFLX plays. I might ditch the NFLX calls, however, on the stock's next bit of strength.
Although my AAPL (sort of)bear(ish) call spread did not work out quite the way I thought it would at the outset, I'm still safe. Despite AAPL's strength, we should expect to see some of the market's recent leaders slow down. While I am generally bullish on the following stock, it makes some sense to expect it to cool off some or get caught in a broader market downturn.
This might turn into a somewhat regular near-term strategy, followed up by some aggressive bull put spreads and outright put selling.
Another Bear Call Spreads
- Sell 5 Ralph Lauren (NYSE:RL) February 2012 $175 calls for $0.80 and buy 5 RL February 2012 $180 calls for $0.20. That generates a credit of $60 per spread for a total credit banked of $300. I need to cover that with $2,500 worth of equity (I am using cash).
That brings the $100,000 portfolio's cash balance to $35,885 and the total value of the holdings to $107,757.50.
Additional disclosure: I am long NFLX June $40 put options.