On Monday, I made the following move in the simulated $100,000 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.
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.
Yes, Netflix (NASDAQ:NFLX) is the gift that keeps on giving. America, thank you for being a land of opportunity where even Reed Hastings can be the CEO of a major corporation.
I am half-joking there. I truly believe Hastings is a bright guy and a true visionary, but he has, for all intents and purposes, run Netflix into the ground. As I noted in my Q1 earnings rehash last night on Seeking Alpha, hyper-growth at Netflix is gone. With revenue growth diving, the party is all but over.
As for the trade, I unloaded both puts this morning for $35.65 each. That brings in proceeds of $7,130 and an overnight gain of 36.3%. That takes the $100,000 portfolio's cash balance to $7,470.
I still have long positions in Amazon.com (NASDAQ:AMZN), Pandora (NYSE:P), Wendy's (NASDAQ:WEN) and Lululemon (NASDAQ:LULU) as well as a short position in Sirius XM (NASDAQ:SIRI). I will update the status of things in May after Sirius XM reports because ...
I am adding to my short position in SIRI (short 5,000 shares of the stock from $2.28) via a fresh position in long puts. Not that he would anyway, but I am convinced Sirius XM CEO Mel Karmazin cannot come up with anything new, innovative or earth-shattering on his company's May conference call. Why? Because he has this Liberty Media (NASDAQ:LMCA) fiasco hanging over his and his shareholders' heads.
With or without the takeover distraction, I expect more of the same from Sirius XM on the report and from Karmazin on the call. He'll do what he does best - speak it like a true CFO. Yes, I said CFO. He will yowl about free cash flow and other metrics that, at day's end, investors could not care less about. Even though they're very different types of CEOs, Karmazin and Hastings find themselves in similar situations.
While hyper-growth is fading at Netflix, revenue has never really increased by impressive percentages, relative to other new media peers, at Sirius XM. Without hyper-revenue growth or a clear path to produce some, you effectively weigh down your company's stock when you run in a space where the competition routinely posts high
double-digit and even triple-digit revenue growth.
All the share buybacks in the world will do very little to offset the impact of a slow-growth, AM Radio culture and billions of outstanding shares. Just ask Netflix what an ill-advised buyback accomplishes.
In any event, I am not expecting anything forward-looking - or exciting - that investors will be able to sink their teeth into on Sirius XM's next call. Honestly, in real life I probably would not make this trade at this magnitude, but we've got to be aggressive in this simulated portfolio.
After some modest rounding, I am taking my $7,740 in cash and buying 141 SIRI January 2013 $2.50 puts for $0.53 each. With SIRI trading at $2.18, the premium consists of $0.32 of intrinsic value, while the rest - $0.21 - represents time. Because I have a decent size position, a modest move down will generate a pretty nice profit. I am looking for SIRI to settle around $2.00 - give or take a dime - shortly after earnings.
How crazy are we? No cash at all in the $100,000 portfolio during volatile times and after a sweet overnight gain on NFLX. As I have tried to hammer home with this series of articles, this exercise is more about learning about options than it is about winning and scoreboarding. Sometimes, the best learning opportunities come out of the most extreme trades.
That said, the NFLX puts proved that going ITM on an option pays off just as nicely as going deep OTM. Had I gone deep OTM on NFLX, I could have won big, but I would have done it with a lot more risk. If I was wrong in my directional assumption, I would have had less of a chance of recovering and a greater chance of losing my entire investment. When you look at trading and investing as a series of disciplined and methodical events - not isolated booms or busts - it's difficult to argue against getting aggressive ITM rather than OTM.