This past Friday was the last day to trade April options, therefore it makes sense to update the status of the rather stagnant $100,000 simulated portfolio.
First, let's update the positions, as they stood at Friday's close:
- Long 200 shares of Amazon.com (AMZN). Short 2 AMZN April $190 calls (Expired Worthless). Value: $37,996 (+ $1,092).
- Long 3,000 shares of Pandora (P). Cost basis: $10.03. Value: $24,870 (- $5,220).
- Long 200 Wendy's (WEN) January 2013 $5 calls. Value: $10,000. (- $1,000).
- Short 5000 shares of Sirius XM (SIRI) from $2.28. ( +250).
- Long 5 Lululemon (LULU) September $75 calls. Value: $3,725 (+ $425).
- Long 25 LULU September $75 calls. Value: $18,625 (+ 375).
- Long 5 Krispy Kreme (KKD) August $10 puts. Value: $1,400 (+ 250).
- Cash balance: $2,500.
- Total Portfolio Value: $99,116.
As I have noted many times - though it seems to go over several heads - this portfolio is more about learning than winning. I often make low-probability and flat out bad trades in it. Sometimes, I even make rules that stack against me just to keep things exciting. I only do this because it's a simulated portfolio that aims to help at least a few of us learn a thing or two, particularly about options. I do my best to set up learning situations of the basics.
I believe this article accomplishes that goal.
In it, I take several of the positions and look at how to proceed. I focus on the ones that involve covered calls. I get deeper into covered call questions in Tuesday's Options Investing Newsletter. Because it's all about learning, I will use Friday's closing prices to initiate new options positions, even though April options, technically, did not expire until Saturday. Giving myself advantages versus disadvantages all evens out in the end. And, again, I conduct this exercise so we can learn together.
AMZN. I will run the risk of holding onto AMZN through its Thursday earnings report. I say "run the risk" because I expect the market to temporarily punish the company for continuing to execute a business model that has worked, through way too much second-guessing, for more than a decade. If AMZN pulls back - and it probably will unless its spending cycle is complete - I fully expect it to retrace highs over the course of the next month.
As such, I am keeping my 200 shares and writing 2 AMZN May $200 calls, taking in $4.60 apiece for a total of $920 worth of income, bringing the cash balance in the $100,000 portfolio to $3,420.
I do realize that AMZN ended up above $190 in after hours trading Friday, making it possible that my shares would have been called away, but, again, I bend the rules - in and out of my favor - from time to time - to suit the purposes of this exercise.
P. Holding Pandora through its May earnings report might just be one of the riskiest things I can do. The company finds itself in a similar spot as Amazon. It can talk about long-term opportunity all it wants, but the market only tends to care about the present. Long-term to the people who move stocks is generally no longer than the next three months.
A meaningful distinction exists between Amazon and Pandora, though. Amazon, based on its track record of execution, deserves the benefit of the doubt much of Wall Street gives it. As bullish as I am on Pandora, I cannot say - with a straight face - that it deserves the same type of treatment. The company has plenty to prove over the next couple of years.
As for the trade, I am writing 30 P June $11 calls against my 3,000 shares and taking in $0.25 for each. That generates total income of $750 and pumps the $100,000 portfolio's cash balance up to $4,170.
KKD. I have little faith in the turnaround at Krispy Kreme, however, I am not going to wait around for an implosion. I am closing the position and taking the incredibly modest $250 gain. That brings the cash balance in the $100,000 portfolio to $5,570.
Netflix (NFLX). Speaking of implosions, I am going scorched Earth here. I guess it's not actually "scorched Earth," but it sounded nice. Maybe it's better to just say I am going for broke. Netflix reports earnings after the close Monday. In real life, I still hold a few June $40 put options. They'll do or die on this report. Even if NFLX tumbles, they'll likely still die.
In any event, in this portfolio, I am taking the $5,570 I have laying around and spending $5,230 of it on 2 NFLX January 2013 $115 puts options. As of Friday's close, they're nearly $10 ITM. For the record, the cash balance drops to $340 and I picked up the two puts for $26.15 each.
As I have written recently, I would be a liar if I acted like I had any idea what will happen with Netflix's quarterly report and ensuing conference call. Good or bad I am still bearish, unless Reed Hastings pulls an incredibly attractive rabbit out of his pouch. At this point I do not see it happening. I expect the DVD business to get cut loose before the end of the year, but not on Monday. I expect the company to lose money this year, but a vile of smoke and mirrors that produces inline or better-than-expected results would not surprise me in the least.
In the spirit of playing this portfolio risky, loose and aggressive, I am going with the NFLX puts. At least they're ITM. Bearish NFLX bets brought last year's $10,000 portfolio to the dance - and to more than a triple - so I'm sticking with the run and gun (or chip and chase if you're a hockey fan) offense in 2012.
One thing is certain - after all of the exciting and critical earnings reports we have this week, expect lots of dust to settle, in not so orderly fashion, over the next few days and weeks.
Additional disclosure: I am long NFLX June $40 put options.