You have not bought new pants in 6 years. You have, however, saved up $5,000 for your first ever IRA contribution.
It is 9:30 am Eastern Standard Time Thursday June 14 and you are ready to go. You head over to Seeking Alpha. You click on the first article you see, it has Natural Gas in the title. It looks complicated, so you skip to the bottom where it says Conclusion.
You read a portion of a sentence.
fears that storage will be exhausted are presently clearly overblown
You have heard enough. Natural Gas is going to the moon! You have never been more sure of anything! You have never felt so alive in your life!
Now to invest. You google natural gas and get 193 companies.
Hmm. Lots of gas companies. You look at this first one, ATP Oil & Gas Corporation (NASDAQ:ATPG). A good no-nonsense name. Says Gas right there in it. Had the presence of mind to be alphabetically first too. That's the kind of efficiency you'll need in a company when gas prices explode.
A-T-P. Good, solid, letters. Nice and steady. But you can't judge a company - even one this great - on name efficiency alone, so you decide to have a deeper look. Its numbers look to be all there. And hey, they are based in Houston, you almost flew through Dallas once. Good, steady name and an area of the country you almost visited-- things are checking out. This due diligence is really coming along and that's good because you just peaked at the price of natural gas and it is indeed up, and rising by the minute.
All the pieces look to be in place for ATP to corner the energy market, but no due diligence is complete without thoroughly vetting management. The first name listed: T Paul Bulmahn. T Paul Bulmahn! What a name for a Texas energy Tycoon! Executive Chairman of the Board T Paul Bulmahn from Houston probably wears a cowboy hat and boots and chews tobacco and you do NOT mess with T Paul. No one does.
OK, management is an A+. Now you just have to finish up the investment process. You have $5,000 and ATP is worth $200 million, you figure you'll be able to buy about a 5% of the company. You do some calculations. You are going to need leverage. In order for your investment to equal the size of your conviction that (1) Natural gas is immediately going to the moon and (2) ATP is the only company that will benefit, you will need leverage by buying call options.
It's 10:15 am. You go to buy a call option. Let's see-- the stock is trading at $3.75, you can buy the right to buy it at $4. It expires tomorrow, ideally you'd like to be more aggressive than that, but at 6 cents the price is right. You buy $5,000 worth. And then you get up and announce your triumph to whomever will listen.
You watch the price of natural gas. It shoots up the most it has in 2 years! Of course it does you think, why do they even bother reporting it when you already knew it. You take the rest of the day off.
Now it's Friday. Your stock started the morning at $4 and has not stopped rising since. Your out of the money calls that you purchased for 6 cents are now in the money and have appreciated handsomely. At 12:27 ATP trades at $4.60 and while your calls have appreciated tenfold, they are now in the money and will grow more slowly as the stock rises. You swap out of the $4 calls for 69 cents and into the $5 calls, out of the money by 40 cents and expiring in 3 hours and 33 minutes they are priced at a penny each.
At 3:57, ATP trades at $6 and even though your calls have 3 more minutes to live you don't want to be greedy so you sell the calls for $1 each.
(click to enlarge)
How did you do?
Well let's see, it's been 29 hours and 42 minutes since you started investing. That's 1.2375 days.
The calls you bought for 6 cents you sold for 69 cents, making your $5,000 original IRA contribution $57,500. You spent that on 1 penny calls that you sold for $1 four hours later, so slide that decimal over two slots and you have $5,750,000.
Hmm. $5,750,000 divided by $5,000 is 1,150. You made that over 1.2375 days. That's 929.29 times your money per day.
So let's do the math, if you can keep up a 92,292% return for 4 days then $5,000 turns into $3,744,974,199,777,184.50. That number starts with a quadrillion.
You say to yourself you are totally getting some new pants.
Now not every day is going to be so good, so maybe you get about two-thirds of that you figure, 2 or 3 quadrillion.
Energy stocks are especially volatile by nature. As energy prices swing so do the companies in the industry. Indeed ATP peers Energy Partners (NYSE:EPL), Stone Energy (NYSE:SGY), Contango Oil & Gas (NYSEAMEX:MCF), McMoran Exploration (NYSE:MMR), Callon Petroleum (NYSE:CPE), and Cobalt International Energy (NYSE:CIE) all enjoyed big gains with the rise of natural gas. When you add to that very cheap options that are about to expire, you get astronomical numbers and daydream scenarios. Better than lottery tickets perhaps but they are both cheap for the same reason: they almost always expire worthless.