The $100,000 Portfolio: A 65% Gain Year-to-Date

Includes: AAPL, LULU, NFLX
by: StockSaints

By Rocco Pendola

When we last spoke back in May, I was posting under Seeking Alpha profile, Rocco Pendola. Now, you can read my Seeking Alpha articles under Paid2Trade, a joint venture with Robert Weinstein.

I left the $100,000 portfolio in the able hands of Apple (NASDAQ:AAPL) alongside a bearish Netflix (NASDAQ:NFLX) options trade and a very bullish move with Lululemon (NASDAQ:LULU) stock.

Here's a look at the portfolio's slate of holdings with updated prices and cash positions, as of this past Friday's close.

  • Long 100 shares, AAPL. Cost basis: $565. Value: $680.44 ($68,044). (+11,544).
  • Long 3 AAPL October $530 calls. Cost basis: $69.75 ($20,295). Value: $152.00 ($45,600). (+25,305).
  • Long 7 AAPL October $700 calls. Cost basis: $11.35 ($7,945). Value: $16.27 ($11,389). (+3,444).
  • Long 2 NFLX January 2013 $47.50 puts. Cost basis: $4.40 ($880). Value: $4.00 ($800). (-$80).
  • Long 500 shares, LULU. Cost basis: $71.50 ($35,750). Value: $77.14 ($38,570). (+$2,820).
  • Cash: $280.
  • Portfolio value: $164,683.

That's a return of 64.7% since inception, which is basically year-to-date.

In the interest of full disclosure, I did the AAPL option trades - one relatively conservative ($530), one aggressive ($700) - to experiment with how in-the-money and out-of-the-money options react to stock price fluctuation.

Of course, with AAPL catapulting about 20% since late May, that experiment tells us very little. It would have been much more instructive - and proven a point - if AAPL was sitting somewhere between $520 and $625-$650 right now.

That said, we can learn something. Simply put, you would be an absolute raging lunatic to not exit AAPL October $700 calls right now for a profit. As options expiration day approaches, time decay starts to erode the value of that premium. To mitigate these effects, you would need AAPL to not only clear $700, but do it fast and with authority.

The closer we get to October options expiration, the less time value (extrinsic value) we have in our out-of-the-money call premium. Until AAPL crosses $700, we have no intrinsic value (the difference between the option's strike price and the stock's market price). So, in theory, AAPL could trade for $705 days before expiration, but the October $700 call could be worth less than the $11.35 cost basis, holding variables such as implied volatility constant. This dynamic plays it self out rapidly.

Meantime, the deep in-the-money call does not start losing money until AAPL drops below $600. If AAPL closes at $600 on expiration, the October $530 call is, theoretically, worth about $70.00, $0.25 more than the cost basis of $69.75. The entire premium at that point consists of intrinsic value.

That's too risky, particularly when you're sitting on considerable profits. Greed can get you killed.

So, with that in mind, I am exiting all three AAPL positions. And, for good measure, I will cut my very small losses on NFLX and take profits in LULU.

That leaves the $100,000 portfolio with a cash balance of $164,683. That's lots of cash to invest. And we'll do it between now and the end of the year in both stocks and options.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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