Trading any equity can be a double edged sword, but it can be even more so with options. Options, as you know, are a derivative that gives the buyer the right, but not the obligation, to purchase or sell an underlying asset at a given price.
Options require those trading them to be right not just on the direction the stock is moving but the time in which it will move in that direction. And each option that is purchased controls 100 shares, so any movement in the underlying is magnified. However, they do provide traders with a way to profit quickly or to lose money quickly.
We've made a few options trades recently where we actually traded them instead of just writing covered calls. The results show how options trading can send those trading them on an emotional roller coaster which resembles the one that Chargers and Giants fans went through in the last two minutes of their game on Sunday.
We purchased December calls on Vale S A, which is a Brazilian raw materials producer. The calls we purchased had a strike price of $28, and we purchased them on October 26 for $1.65. This was a play on continued infrastructure investment by governments throughout the world. Infrastructure development requires lots of raw materials and companies like Vale can profit from this.
Today, we closed out our position and sold the options for $2.00. That gave us a return of 21 percent in two weeks, for an annualized return of 552 percent.
We also purchased Broadcom February calls with a strike price of $26 for a price of $3.31. This was a play on the tech sector as a whole and more specifically, the chip sector. We saw the roller coaster ride that options can provide with this one. We saw the options drop down to less than $3.00 an option but then the options rebounded to $3.90. We'll close out this position and take our gains of 17.8 percent in two weeks. That works out to an annual gain of 463 percent.
On the other hand, we entered a vertical spread on the S&P retail SPDR (XRT). We thought that retailers had come too far, too fast, and with consumer spending weak, we figured that retailers would drop. This trade was one where we just got beat down. The spread involved buying a $34 November XRT put and selling a $30 November XRT put. This set us up to make money if XRT drops in price. However, both our losses and gains are capped using this strategy. We paid $1.80 for the $34 put and we received $0.49 for selling the $30 put. That means that we need the price of XRT to drop to $32.69 by the third week of November to break even.
That looks unlikely to happen. Instead of dropping, XRT has increased in value since we made the trade. It's currently trading at $35.62 so we're likely to see our maximum loss in the position of $1.31 per spread.
So, with Vale and Broadcom, our options trades worked out. For XRT, it did not. We'll learn our lessons and move on. But these three trades show how options trading can cause both despair and joy, do it quickly, and how those emotions can change direction on a dime.
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Options require those trading them to be right not just on the direction the stock is moving but the time in which it will move in that direction. And each option that is purchased controls 100 shares, so any movement in the underlying is magnified. However, they do provide traders with a way to profit quickly or to lose money quickly.
We've made a few options trades recently where we actually traded them instead of just writing covered calls. The results show how options trading can send those trading them on an emotional roller coaster which resembles the one that Chargers and Giants fans went through in the last two minutes of their game on Sunday.
We purchased December calls on Vale S A, which is a Brazilian raw materials producer. The calls we purchased had a strike price of $28, and we purchased them on October 26 for $1.65. This was a play on continued infrastructure investment by governments throughout the world. Infrastructure development requires lots of raw materials and companies like Vale can profit from this.
Today, we closed out our position and sold the options for $2.00. That gave us a return of 21 percent in two weeks, for an annualized return of 552 percent.
We also purchased Broadcom February calls with a strike price of $26 for a price of $3.31. This was a play on the tech sector as a whole and more specifically, the chip sector. We saw the roller coaster ride that options can provide with this one. We saw the options drop down to less than $3.00 an option but then the options rebounded to $3.90. We'll close out this position and take our gains of 17.8 percent in two weeks. That works out to an annual gain of 463 percent.
On the other hand, we entered a vertical spread on the S&P retail SPDR (XRT). We thought that retailers had come too far, too fast, and with consumer spending weak, we figured that retailers would drop. This trade was one where we just got beat down. The spread involved buying a $34 November XRT put and selling a $30 November XRT put. This set us up to make money if XRT drops in price. However, both our losses and gains are capped using this strategy. We paid $1.80 for the $34 put and we received $0.49 for selling the $30 put. That means that we need the price of XRT to drop to $32.69 by the third week of November to break even.
That looks unlikely to happen. Instead of dropping, XRT has increased in value since we made the trade. It's currently trading at $35.62 so we're likely to see our maximum loss in the position of $1.31 per spread.
So, with Vale and Broadcom, our options trades worked out. For XRT, it did not. We'll learn our lessons and move on. But these three trades show how options trading can cause both despair and joy, do it quickly, and how those emotions can change direction on a dime.
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