Options Sage submits:
Last week’s article discussed smart virtual portfolio management with respect to a $10,000 virtual portfolio. In this week’s article we will consider a fairly conservative managment strategy, using options to enhance returns in a $100K virtual portfolio as promised last week and next week we will look into a million dollar virtual portfolio.
The Simplicity of Stocks
Making money trading stocks is (or at least, should, in theory be) much simpler than making money trading options! Making money trading stocks simply involves being correct with respect to direction. You also have the luxury of time on your side should the stock fail to move as expected initially - you can always resort to trusting that your fundamental due diligence will trump any short-term technical analysis failings.
Making money with options, on the other hand, requires that you are correct with respect to direction AND TIME. Take the FAZ July $12/16 bull call spread at $1.10 that we mentioned last week as protection - up a healthy 36% in a week. The C spread they were protecting, on the other hand, was net $3.07 and is now net $2.94, which is a .07 loss on the C calls against a .40 gain on the hedges. Using last week's expamle 2:1 ratio, this play is still up .13 per C contract for a $65 gain on $475 cash used for the two positions or 13.6% profit in 5 trading days. That's what a well-hedged position does for us when the trade moves against us and those are the kinds of sensible trades you NEED to be making in a small portflio!
We also have to factor in another risk variable, implied volatility. WYNN traded as high as $96 prior to its earnings report this week and, with a P/E of 145, Phil came up with a couple of bearish plays to take advantage of the run while and reasoned that, if the stock didn’t report stellar numbers and forecasts, a correction was in the offing.