I've written a bit about maximum pain on Seeking Alpha. In fact, I had the most fun writing a two-part series last year that focused on Apple (AAPL).
Come options expiration day this month (March 17), I could be feeling some pain in the $100,000 portfolio, but it's not related to the theory of maximum pain. In several instances, I might have to deal with option contracts I am short getting exercised. Before I dig into that, here's a review of where things stand, as of March 7, from Robert Weinstein's Paid2Trade Website:
- AAPL January 2014 $600 call. On-paper profit: $3,934. Position value: $7,214
- NFLX January 2013 $130 puts. On-paper profit: $2,050. Position value: $19,800.
- 250 shares of AMZN at $184.52. On-paper loss: $205.50. Position value: $45,924.50
- 150 shares of AMZN at $177. On-paper profit: $1,015.50. Position value: 27,565.50
Add it all together and you have a total portfolio value of $110,749. That includes a cash balance of $10,245.
I have several option credit trades open in addition to the AAPL bear call spread. They include AMZN covered calls, a NFLX bull put spread at under $100 and some short P March $11 puts, which could get exercised come expiration. We'll see if I am the proud owner of a whole bunch of Pandora at $11 come expiration.
By and large, my open trades look pretty good, particularly the AAPL LEAPS call, the Netflix (NFLX) puts and the 400 shares of Amazon.com (AMZN). If things stay as they are, as of March 8th's close, OpEx could bring some craziness to this simulated portfolio. That's a good thing, however, because it will help realize goal number one of this venture - to learn something. Here's a rundown:
AAPL bear call spread
Short 10 AAPL March $500 calls/Long 10 AAPL March $510 calls
Potential loss: Up to $10,000 minus the $1,380 credit received
It's pretty simple. If AAPL closes above $510 at expiration, I am out $10K. If it closes between the strikes, I effectively get spared a grand for every dollar. For all intents and purposes, in isolation, that would bring this thing back to where we started at right around $100,000.
Pandora (P) short puts
Short 20 P March $11 puts
Potential outcome: Will have to buy 2000 shares of P at $11 for a total outlay of $22,000
I think this will turn out to be a solid trade. In fact, I hope I get put the shares. By year's end - and likely before - I will be able to flip the position for a profit. Here's a pretty complete synopsis of my P bullishness. Of course, I only get put shares if the P $11 put closes ITM come expiration. I'm guessing it will. If I buy shares at $11, I will probably set a mental stop loss of around $9.75.
AMZN covered calls
Short 2 AMZN March $180 calls
Short 2 AMZN March $195 calls
AMZN could save my butt here. As it stands, it looks as if I will have 200 shares of AMZN called away at $180. I bought them for an average price of $178.88. If I am forced to sell them for $180, that's a measly 0.6% gain, but cash proceeds of $36,000. Sure, I leave money on the table with AMZN on a run, but I still have 200 shares against the $195 call and I'll have enough cash to cover the P assignment and AAPL spread requirement.
And just a quick thought on AMZN. It's interesting to see the shorts silenced a bit as the stock continues to regain ground. It has been especially interesting to see AMZN in the green during moments and days of recent broader market weakness. (Of course, Friday morning provides an exception!) AMZN can sustain and then resume leadership after the dust settles for one simple reason - Wall Street has confidence in the company. But, why?
That answer should be equally as clear. This is a company that takes the long view as it continues to go through rapid growth and expansion. On that note, the Economist published one of the better articles you're going to find on any subject when it focused on the greatness of Amazon's visionary Jeff Bezos:
The founder and chief executive of Amazon has often ruffled investors' feathers by sacrificing short-term profits to make big bets on new technologies that, he insists, will produce richer returns for the company's shareholders in the future. He laid out this philosophy in his first letter to shareholders, penned in 1997, which was entitled "It's all about the long term."
Some of these gambles have paid off handsomely, transforming Amazon from an online retailer of books and other physical products into a technology behemoth with $48 billion of revenues in 2011 and strong positions in fields from cloud computing to tablet devices. They have also enhanced Mr Bezos' reputation as a technological seer. "In the last few years there has been a re-acceleration of the rate of change in technology," he says. His impressive ability to identify and profit from the resulting disruptions means he is widely seen as the person best placed to fill the shoes of the late Steve Jobs as the industry's leading visionary.
So very well-stated. And the rest of the Economist piece should scare any investor out of a short position in AMZN. Just like you do not bet against a start-up like Jobs developed in Apple, you do not bet against Amazon, another company that has proven repeatedly that it can "seize" the "huge opportunities" triggered by "rapid technological change."
In any event, that's how things stand in the $100,000 portfolio. The last day to trade March options is Friday, the 16th. They officially expire on the 17th. In the following week, I will reassess where we actually stand and act accordingly.
Additional disclosure: I am long NFLX June $40 put options.