Today I want to share with you a recent option trade I made. To give you a bit of background, in addition to consulting with entrepreneurs and investors about asset protection strategies, I also manage a small investment partnership.
In 2008, we had a -10% return. While negative is never good, it significantly beat the market indexes. In 2009, we had a return of just over 100%. Of course we blew the indexes out of the water.
A significant part of my strategy is to reduce risk and increase returns using options. Many people view option trading as a 'risky' investment vehicle. Actually, if done properly, options can significantly reduce risk.
Critical to my strategy is to only trade options on companies I have done the research on and have decided the company is a good value. Last week, I traded a company called Silver Standard Resources Inc, ticker SSRI. SSRI is a metals miner, primarily silver. I won't go into detail on the company research, but suffice to say I am very bullish on commodities with all of this money printing that is going on lately.
I bought SSRI at about $17/share. I had previously determing SSRI to be a good value at this price. Even the average analyst opinion calls for a $33/share price target in 12 months. In addition to buying the shares, I sold call options with a $19/share strike price with a June expiration for about $1.50/share. I also sold put options with a $17/share strike price with a June expiration for about $2.00/share.
What this means is that if at option expiration, SSRI is at or above $19/share, I will sell all of my shares at that price, booking a $2.00/share profit ($19-17). It also means that if SSRI is at or below $17/share at option expiration, I must buy SSRI for $17/share.
But, keep in mind, I have already collected $2.00 + $1.50 or $3.50 in option premiums, thus lowering my cost basis to $13.50/share for SSRI. So in order for me to lose money, SSRI must be trading below $13.50/share in June. As you can see, I have significantly reduced my risk by reducing my cost basis.
Plus, the option premiums are credited to my account immediately. So, in June if SSRI is trading between $17 - $19/share, both the put and call options expire worthless and I keep 100% of the premiums. If SSRI is trading between $13.50 - $17/share, I buy more SSRI, but still at a profit and I still think SSRI is a great value. At this stage, I would just sell more call options to gain addtional premium. If SSRI is trading above $19/share, my SSRI shares are called away and I sell them at $19/share gaining an additional $2/share in profit, giving me a total of $5.50/share on a $17 investment for a 4 month period. If SSRI is trading below $13.50/share I lose money, but I would sell additional call options to regain some or all of my loss.
As you can see, option trading if done properly can reduce risk and increase your returns along with provide cash income. My biggest risk here as I see it is if SSRI is trading at $30/share in June and I give up the additional profit.
If you are serious about asset protection and wealth creation, option trading should be on your radar. It's worth the time to learn how to do it effectively. Until next time, trade well.
No comments:
Post a Comment