Try this strategy for getting into the market on your terms. Check out $ZM and $SPY. (March 27, 2020)
ZM SPY
Zoom ( NASDAQ: ZM ); one of the things I pointed out yesterday, on Thursday, in our Strategy Session for members, was kind of how to turn back time, so to speak, and put yourself in a position to buy stock where you wish you had but you didn’t. One of the examples I used was Zoom Video ( NASDAQ: ZM ). On Thursday the April 130.00 puts were trading at 8.60.
Now, a put option, if you don’t know what those are, most people don’t, a put option is something that if you sell the put option, you can sell the April 130.00 put, not anymore but at that time you could sell the April 130.00 put for $8.60. That applies to 100 shares of stock, meaning that you get $860.00 if you sell one put. And in return the obligation you incur after you have sold 1 put for $8.60 multiplied by100 for each share, is $860.00. The obligation that you have is that between now and the 3rd Friday in April, which is April 17th. Somebody can make you buy the stock at $130.00, that is called a put option, you have the stock put too you. You have taken in $8.60 and in return you can be forced to buy the stock at $130.00.
Now, I would love to be forced to buy the stock at $130.00 because here right now the stock is trading at 140.00 so that’s not going to happen. But the idea is that you didn’t buy it here on the breakout or maybe you wish that you had bought it at 120.00 so you obligate yourself to buy the stock at 120.00. This was a trade that I actually suggested on this day.
So let’s see how this played out because this important. This is a chart for Thursday; then today the stock is up another 7 percent so you could have bought the stock, fine don’t sell the put just buy the stock and make money here this way. And that would have been certainly, a profitable trade. You bought it at 140.00 now it is at 150.00, that is $10.00, that’s good. But that is not the trade that I was talking about.
Also, what would have happened, you are buying it here and the stock had fallen to 130.00 or something? Well, that would have been a bummer because you are taking a loss. But if you are selling the put, the $130.00 put, this move today in the stock changed the price on that put option from $860.00, now it is trading at $6.50. And so you have essentially made $2.00, which is, by the way, what, 20-25 percent of the maximum here but I am not calculating it that way.
You have made, basically, $250.00, we’ll round a little bit, you made $250.00 by doing nothing other than obligating yourself to buy the stock at a price that you would love to buy it at. And so this is a way, just selling put options, I am not trying to goad you into being a put seller, I am just giving you something to think about. If you learn how to sell put options you literally can kind of turn back the hands of time and go back and do something that you wish that you had done before.
You can do stuff like this ( NYSEARCA: SPY ), you can look out and say, “Well, I think we are going to have a retest of the lows. But do you know what? I will go ahead and sell; the SPY ( NYSEARCA: SPY ) bottomed here at 220.00. And so if the SPY ( NYSEARCA: SPY ) gets back there to 220.00 then I will go ahead and buy that.” So do you know what you can do? Right now, literally, the May 220.00 puts on the SPY ( NYSEARCA: SPY ), those options expire in the middle of May, May 15th, the 220.00 puts are trading for, we will round up slightly, $10.00.
So you can obligate yourself right now when the SPY ( NYSEARCA: SPY ) is trading at 230.54, you can obligate yourself to buy the SPY ( NYSEARCA: SPY ) at a 13 percent discount to where it is right now, at $220.00, and you get $10.00 for your trouble. So you are basically obligating yourself to buy right here on May 15th, but your cost basis is actually going to be down at 210.0. It would actually be down about there because of the value you are getting.
So you can be taking in money right now, making a bullish bet on the SPY ( NYSEARCA: SPY ). And by the way, if the SPY ( NYSEARCA: SPY ) doesn’t fall down here then you just keep that $10.00, and you know, what are you? You are out a month and a half of money, of margin. So this is the type of way, and don’t sell puts if you are not willing to take delivery, don’t just go sell a bunch of puts because you broker will let you. You sell 10 puts, 210.00 here, you can have 1,000 shares of SPY ( NYSEARCA: SPY ) dumped into your account anytime you want, that’s going to be a bad day if that’s not what you are willing to do.
So you have to have some kind of control, some kind of risk management in doing this kind of stuff. But this is a strategy that you can use when implied volatility is so, so high, these options are really, really expensive. So think about that when you are sitting here looking around waiting for your boat to come, waiting for your ship to come in on some kind of trade that does really not exist. Instead, move forward and extrapolate and say, “What would I be willing to do in the future?” And then go ahead and obligate yourself to do that and get paid for doing that.
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