Selling Puts – Google
A couple of weeks ago, I put on an options trade that made me exactly $5,369 in one day with very little risk. You read that right. One day.
Since Brian’s off to Detroit this weekend to investigate Real Estate Investment Trusts or something, I thought you might like to hear about one of my favorite ways to quickly generate some extra cash in the options market.
Although this situation does not present itself everyday, when it does occur you know you have a great chance to make a quick buck (and we know that’s not easy to do in the financial markets). Let me explain.
Everyone and their brother knew that Google was going to report their 3rd quarter earnings on Thursday, October 18th after the market closed. By pure coincidence, this date happened to fall one day before the October options on Google expired (options always expire on the 3rd Friday of every month). In this case, the October Google options expired on Friday, October 19th.
Now, I don’t have to tell you that Google is one of the most followed stocks on the planet these days. Due to its meteoric rise, Google is the subject of intense speculation on both sides.
And, as many of you know, it is this speculation that pushes up the price of options. And on this day, the speculation was off the charts. So I thought to myself, “How can I make some money off of this speculation?”
So, I decided to sell some put options on Google. I ended up selling 15 October 590 puts (symbol: GOOVR) for $360 a piece. With commissions, $5,369 was deposited into my trading account that instant. When I made the trade, Google’s stock was at $638.
Now, here are the scenarios of what could have happened from there. First, my breakeven was $586.40. So the only way I could lose any money was if Google’s stock fell below $586.40, in one trading day.
But here’s the good part, if Google’s stock closed anywhere above $590, I would pocket the entire $5,369. So, for me to lose any money, Google’s stock would have had to fall over 50 points in that one trading session. If it didn’t, the option would expire worthless, and I’d get to keep the premium.
To tip the trade even more in my favor, it was common knowledge that Google was going to report a good number. Google had been firing on all cylinders quarter after quarter and the word on the street was that this one was going to be particularly good.
So, what exactly did happen. Well, after the close on that Thursday, Google reported a good number, the stock price went up 10 bucks, and I made a very quick, and very easy $5,369. Its always nice finding a trade where you make money if the stock falls, does nothing, or goes up!
Although this one worked perfectly, there are some things to watch out for when selling puts. First, you’ve got to keep a fair amount of margin in your account in case the stock falls below your strike price and you end up having to buy the shares (the margin requirements are especially high for higher-priced stocks like Google).
Second, your losses could be substantial if the stock you’re targeting plummets past your strike price. So, lets say Google had reported a bad number (yeah right) and the stock had fallen 100 points that Friday. I would have lost my shirt.
So, although selling puts can be an extremely profitable proposition, you’ve got to be careful where and when you place your trades (like any other investment!). And, as always, make sure the probabilities are stacked in your favor before making any trade.
By the way, Hyperion is looking into launching a new options research service that identifies trades like this before they happen. We’ll keep you updated but be sure to let us know if that’s something you’d like to see…
Category: Options Trading
