Options Portfolio Update: March Expiration Brings Major Changes

by: Bill Maurer

For those who have followed my writing, you know that I started a theoretical options portfolio in early November that I maintain on this site. The portfolio was aimed at those who are willing to take risks, and many of the trades involve considerable risk. These are trades I recommend, but I do not partake in myself. As always, when trading options, remember that there are serious risks involved, and always know the specifics of your trade before making it.

A couple of weeks ago, I made some major changes to the portfolio. The latest holdings are below, at their purchased/sold prices.

Name Date Type Strike Action Price
Apple (NASDAQ:AAPL) 7/20 Put $425 Sell $33.45
Interdigital (NASDAQ:IDCC) 3/16 Call $55 Buy $4.80
SPDR Gold Trust (NYSEARCA:GLD) 9/22 Put $170 Sell $12.05
Molycorp (MCP) 3/16 Call $22.50 Buy $3.65
Amazon (NASDAQ:AMZN) 7/20 Put $170 Sell $11.75
Boston Beer (NYSE:SAM) 3/16 Call $100 Buy $6.20

As you'll notice, three of the six positions expire were set to expire this Friday, so it is time to close them out and start some new positions. Now, I wrote on my instablog last week that I closed out the Molycorp call. I sold it for $8.30, realizing a very nice gain.

Now onto the two other positions expiring this week. Unless something dramatically changes, the Interdigital calls will expire worthless. That trade was based on the auction process the company was in, in a possible attempt to sell itself. The company decided not to sell itself, and the stock dropped. This is the first trade that has expired with a total loss. Considering that 5 of the first 6 trades were extremely successful, I'm not too concerned with one or two bad ones for now. The Boston Beer calls still have some value left, as the stock is above the $100 strike currently. I'll hold it through tomorrow, and close it out then. Because this is a theoretical portfolio, I'll round down to the nearest 5 cents. So if the stock ends at $102.02, I'll call it a $2 final value and record the loss. I'll update the final result on my instablog.

Before I start any new positions, let me discuss some of the current holdings. The Gold ETF put is down almost $2, but I still expect gold to be higher by September. If the GLD at expiration is at today's prices, the puts will only be worth $9. They were sold for $12.05, so that would be a $3 gain. The Amazon July $170 put is currently trading for $8.40, and I sold them for $11.75, so that's a nice gain so far. I'm going to hold that position for now.

The first move I'll make is with the Apple puts. Since Apple has run up, the $425 puts (July) I sold for $33.45 are almost worthless. I will buy those back for $4.25. I then will sell the July $570 puts for $37.95. The trade is simple. If Apple is above $570 by expiration, you pocket the money. If Apple is below $570, you are forced to buy Apple at $570, but since you pocketed $37.95 to start, your effective buying price is just $532.05. Given today's price, that sounds like a good deal. By closing out that position, I have recorded gains on 6 of 9 positions in this portfolio (assuming the Boston Beer call is a loss). However, in dollar terms, the first 8 positions have produced a profit of nearly $79 per contract of each traded. At my next update, I'll provide a full summary of all trades so far.

I said at the last update I was looking to enter a new position in Visa (NYSE:V), one of the prior holdings in the portfolio. I am doing that here. I would sell the September expiration (9/21) $110 puts for $5.75. This is based on the same strategy as the Apple one above.

The next trade is a bit complicated. It involves Zynga (NASDAQ:ZNGA), which is my play off of the Facebook (NASDAQ:FB) IPO. I would buy the $12 calls for $2.80, and then sell the $13 puts for $2.55, for a total cost of $0.25. I think that Zynga will definitely rally off the IPO of Facebook, and this trade sets you up nicely. If the stock ends at $13 or higher, you can make a ton. Now, if it doesn't, you can lose a fair share, but I think it goes higher.

The last trade is based off of Apple's iPhone, and the potential for the iPhone 5 to be released later this year. This trade involves Nuance Communications (NASDAQ:NUAN), the company behind Siri in the iPhone. For this trade, I will buy the October expiration (10/19) $25 calls for $3.80 and then sell the October expiration $34 for $0.70. The total cost of this trade is $3.10. If Nuance ends above $28.10, you make money, all the way up to $34, where your profits are capped.

The following table represents the current holdings of this portfolio, at the prices at which they were entered.

Name Date Type Strike Action Price
Apple 7/20 Put $575 Sell $37.95
Visa 9/21 Put $110 Sell $5.75
SPDR Gold Trust 9/21 Put $170 Sell $12.05
Nuance Comm. 10/19 Call $25 Buy $3.80
Nuance Comm. 10/19 Call $34.00 Sell $0.70
Amazon 7/20 Put $170 Sell $11.75
Zynga 9/21 Call $12 Buy $2.80
Zynga 9/21 Put $13 Sell $2.55

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL, MCP over the next 72 hours.