Conclusion at the bottom.
I’ve been curious and interested in trading options for a while, but always found it more complicated than my “buy and hold” strategy allows for.
With yesterday’s drop in share price, Netflix would allow for an interesting options trade.
Netflix was almost at $200 and dropped to $185, a $15 drop in price. Given that most people seem to think it will be back over $200 relatively soon, taking a look at the options chains reveals this.
Selling an April 20th, 2018 covered call right now, it pays me $12.30. One option is 100 shares, so I get an immediate $1230 in my account.
(“I have these shares, I sell you the option to buy a chunk of them for $x at a future date. If they’re higher at that date, you buy the shares. If they’re lower, you DON’T buy them and I keep the money you paid me for that option-to-buy”)
Jumping in to the Scottrade platform gets me to this screen where I enter the following values;
NFLX for the ticker.
SELL TO OPEN (SELLING an option to OPEN the transaction/contract)
QUANTITY of options: 1, which equals 100 shares. If I did two options, I pocket $2460, etc. I pocket $1230 for each option I sell, with the commensurate risk of having to sell each 100-share option for $212.30 on or before April 20th.
A limit order is a far better option than a market order here so as to ensure you don’t get paid less between the time you click “execute order”
Why do I say $212.30 above? Because if you buy the option to buy the stock at $200 for $12.30, that means that you expect it to be at least $212.30 on April 20th – the stock price PLUS the premium you paid to me for the option.
Once you click REVIEW ORDER, it takes you to the confirmation screen before you place the actual order.
Here you see a confirmation of what I’m doing.
The numbers are slightly different in the screenshots here, but the short of it is that these FIVE OPTIONS equals a total of 500 shares. The options sold indicate that on or before April 20th, 2018, someone believes Netflix’ share price will be above $212.30 (price plus the premium paid for the option.
What this means to me is the following scenarios will play out;
A, I collect $6150 (12.30 x 500 shares) right now!
B, If NFLX is 212.30 or above on 04/20/2018, the option buyer can buy 500 shares from me for $20000 (of course he already paid me $6150 for the options).
or
C, If NFLX is BELOW $212.30, the buyer won’t do anything and I keep the shares on top of having gotten the $6150 he paid me for the options.
Update:
It’s May 3rd and I totally forgot about this. So let’s see what happened.
On April 20th, Netflix was worth $327.77! This far exceeds the $212.30 options, meaning that I would have collected the $6150 premium back in November and then on April 20th, I would have collected another $20K, for a total of $26150.
The downside would be that right now I’d have 500 fewer shares and lost out on the upside of (327.77 – 212.30) = 115.47 for each of the 500 shares I had to sell.
That would be a loss of $57735!
This is why I don’t do options.
I would have to close/roll/alter my options continuously to ensure I don’t lose money, and since I totally forgot about this blog post, I could imagine this having turned into “I forgot and lost $57K!”, so no. I remain a happy buy-and-hold investor.