Options are a great way to control a large number of shares of a stock for little money. There is also a great deal of risk in buying put options, as there is time limit. In other words, they eventually expire and if you are not able to meet the strike price you expect by the time of expiration. you loose.
As explained in the previous post, it makes sense to take a risk of buying put options into the weekend on Apple (AAPL) . These will profit if the share price goes down. The idea is to buy a heap of options out of the money as the volatility is now helping the call premiums. That being the case, there is very few that are buying the puts and this means that the intrinsic value of the puts are trading cheap.
In layman‘s terms, this means that the population for investors believes that the stock I headed higher, much higher. Only the mega-contrarian will loom to buy puts which is what makes this strategy so appealing. Usually you would not want to stand in the way of on oncoming train. Sometimes you just want to blow it out and risk it all in hopes of fame and glory (translated to $$$$$).
Realize this conflicts with Disciplined Investing. It is more of a speculative play than investing. So here we go.
On Thursday, we traded the $115, $110 and $105. Yes these are way out of the money, but the total investment was about $5,000 for:
1) 10 of $105 Puts
2) 20 of $110 Puts
3) 10 of $115 Puts
If Apple shares move down $8 on Monday, this investment should begin to be profitable. The $110 an $105 will be the better performers as they become much more valuable since traders will look to buy the cheaper, near out of the money puts.
If the shares cross $110, the profits would likely be:
1) $105 Puts will be worth ~ $ $2.00
2) $110 Puts will be worth ~ $ 3.75
3) $115 puts will be worth ~ $ 6.75
The profit calculation would be:
1) (10 X $.40) = $ 400 cost, (10 X $2.00) = $2,000 value
a. Profit = $2,000 – $ 400 = $1,600
2) (20 X $.95) = $1,900 cost, (20 X $3.75) = $7,500 value
a. Profit = $7,500 – $1,900 = $5,600
3) (10 X $2.05) = $2,500 cost , (10 X $6.75)= $6,750 value
a. Profit = $6,750 – $2,500 = $4,250
Therefore the total profit may be $16,250 – $4,800 = $11, 450 (238%)
Pipe dream.. Maybe, but not improbable. Sometimes going against the hype can be very profitable (Remember CROX last week?) Remember, with options, if you do not hit the strike price prior to expiration, you lose. In this trade that would mean a loss potential of $4,800
Option chains from OptionsXpress and MSN Money