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You would have had to wait 3 years just to break even, instead of making a $24,000 profit.
Here’s another stock. I told you about the Starbucks stock that I took recently, but I also took a position in ActiVision. ActiVision – I looked at the stock. It looked like a fairly erratic stock that was moving up. Right in this period here, it was just doing absolutely nothing.
I initiated a position right in here, when I could see that there were larger dark bars. It looks like there was a very light accumulation of the stock in this period. I purchased the stock right in here, right around $27.24.
I didn’t have to wait too long – maybe a week, a week and a half, before the stock absolutely took off, and skyrocketed upwards. If it had fallen, I would have cashed into my insurance policy. I would have purchased additional shares of stock and held onto the stock, because I believed in the stock. I believed that the long-term value of the stock would have increased in price.
That’s the only kind of stock that you really want to put on, in these types of positions. You want to go in to buy stock that you believe in, that you believe has an absolute opportunity to increase in price. I would not have purchased the stock in this $27.25, if I didn’t believe that it would have a good appreciation over the long term.
Even if the stock did break down and go back into this lower trend line, the put that I had in place as insurance, would have protected me. I would have only lost about $400. I could have cashed in my put position in order to accumulate additional shares of stock.
Then, as the stock rose, instead of 1000 shares of stock, I would have had maybe 1500 shares of the stock. I would have made even more money on the future increase in the price of the stock. As the stock began to increase in price, then what I did was I simply rolled up my put position, using the profits I already had built into the position.
I used those put options. I just cashed in my put options, and rolled up my existing put options. Now, because I have a good deal of profit, the stock did prove itself to be a good performing stock. I didn’t have to have the put position as close as I used to have.
In other words, let’s say you bought Starbucks at $15. You have a built-in profit here on the stock. You don’t have to buy something that’s in the money anymore. You can go down a little bit. You can go down to the $16 strike price and buy those cheap options. Only after it’s proven itself, and moved up in price.
This is the way professional traders make money in stocks, whether they go up or down. If they go down, all they do is cash in their put insurance policies, and purchase additional shares of the stock. If it goes up, they make money, and the insurance really didn’t cost them that much, did it?
On initiating positions, you want to make sure that you purchase something that you feel comfortable with. In my case, I’m comfortable with a $400 loss in this position. I would purchase this stock with the put option as protection. I would have a maximum loss of $400. I don’t care where the stock went. This put option would increase in value. I would cash it in, to buy more shares of the stock, because I believe in the stock. I believe it has a future upside potential.
I’m not talking specifically about Starbucks, but let’s say any stock that you were interested in purchasing. Here are some of the stocks that I’ve been looking at lately. I’ve been looking at SWN as a short position. I’ve been looking at Urban, ADSK, Netflix, WDC, Starbucks, and a couple of indices.
Now, can you do this with indices? Yes, you can. Let’s say you thought there was really good potential for the Homebuilders ETF, XHB. They have gotten decimated. They’ve gotten absolutely killed with the credit crunch, and the problems with home prices, in the last few years here, in the market.
You could do the same thing. As long as there are options trading on a particular ETF… This is an ETF. It’s the Spider ETF. You can do the same thing. You can purchase put options on this ETF, which is currently trading at $18.13. You can purchase the $18, or even the $19 in the money put option as insurance.
Now, let me just show you something else. The TOS platform does make this extremely easy. What it doesn’t tell you is how to adjust these positions, which I just went through an exhaustive, detailed study of.
You go to “Buy,” “Covered stock.” It automatically brings up the stock, with the strike price that you just selected. If you wanted to purchase 700 shares or 600 shares, it would automatically calculate the number of put options that you need to purchase.
The important thing is to analyze the trade. You want to go over and analyze the trade, so you know exactly what your maximum loss is on the trade, when you initiate it.
On 1000 shares, my maximum loss would be 7$90. I’m not particularly happy with that. I might go to the $20. The $20 put would give me a maximum loss of $500. That’s only when I initiate a position.
It does cost a little bit more when you initiate a position, but guess what? Let’s go back to the chart again. If XHB does increase in price – let’s say it goes up to the $21 level.
At the $21 level, if I was doing 1000 shares, I have approximately $3000 in profit. It cost me $2400 for my insurance, but now that I have a $3000 profit locked into my stock position, my ETF position – now, when I go to roll over my put position, because the stock has already proven itself, maybe I can go to the $18 level, or the $20 level, at that time. It would be a little bit cheaper.
I can purchase a put option as insurance, slightly under the market. I already have a profitable position built into it. However, this is not an attractive proposition for me. I’m not recommending XHB, and I’m not doing this, for one reason. The volatility level of this particular stock is 50%. That is way too high. That’s much higher than I would be comfortable doing.
If we took a look at the XLF, which is another ETF that I’m taking a look at, that has a volatility level of 43%. Why is that important? It’s important because, the higher the volatility level – this is not the Delta. The Delta is this column here in the yellow.
The volatility level here is the numbers that I’m looking at. This volatility at 43%, affects the value and the price of the options, especially the put options that you’re buying. It increases the price of the options.
In other words, you’re paying a huge premium in order to protect your investment. I would not pay that much in order to protect this investment. I would look for other opportunities.
Let’s take a look at a stock that has been going up recently, just as an example. Let’s take a look at Netflix. Netflix has had a pretty good run. It dropped off a little bit, but it’s starting to stabilize here, in this area.
Let’s say I had a good idea that Netflix was going to increase in price here. Let’s take a look at the volatility for Netflix. The volatility for Netflix is still pretty high. It’s 53%. That’s a little bit too high for me.
Let’s take a look at another stock. Let’s go to Urban, Urban Outfitters. That’s another stock that has been increasing dramatically in price. It has fluctuated pretty good in here, but it has, on the whole, generally increased in price.
Let’s take a look at the volatility of Netflix. Netflix, again, the volatility is up around 45%. That may be the result of the market as a whole declining. I don’t know. Those are pretty high volatility levels.
Let’s take a look at something like the QQQs. You can do this on an index, like I mentioned. The QQQs, the volatility level is only 26%. That’s a little bit more manageable. At this point,