This is the fourth out of four posts about dipping my toes into Options trading. My first post was about understanding the mechanics of trading an option, the second about a trade of Microsoft, and the third about Royal Caribbean cruise lines. In this fourth post, I decide to up the ante and make some real money.
I am an avid podcast listener. I listen in the car while driving, while I mow the lawn, or as I drift off to sleep at night. I listen to a handful of podcasts about the financial markets. One of them, Investor’s Business Daily, comes out on Saturday’s and talk about winners and losers of the previous week. In one episode, they discuss the upcoming earnings announcement for Chipotle Mexican Grill.
Chipotle has really been on a tear this year. The stock is performing quite nicely. Certainly good things will be coming out of the announcement, and I would expect the option price to rise significantly.
A little history about stocks I purchased based on the Investor’s Business Daily podcast. I made a mistake investing in one of their recommendations before (First Solar), but I blamed myself as I got out too early. You see, it tanked almost immediately once I bought it, and triggered by stop order (a way to get out of losing stocks before you lose your shirt). Afterwards, the sucker shot briefly to the moon, and I would have done quite well. I decided to jump on Chipotle.
I plugged some numbers into my option spreadsheet, and thought they looked pretty good. I should note that I review 10 to 20 stocks for each one I buy, so I do tend to be picky about what I invest in. I had a great price on an option for a stock that was doing well. I purchase the options one morning and then the price shoots up to almost double what I paid for it! I have the chance to double my money in just a few hours! Now, here is where the expression “timing is everything” comes into play. I work during the day on the West coast and don’t get to follow the stock market that closely. I noticed the price and decided to sell, however the clock showed that it was already 12:59 PST. I had 60 seconds to get in my order before the market closed and it took 65. Drats. That’s okay, though, I can always sell the next day.
Guess what? I came in the next morning and the DOW was down 200 points. My option was completely out of the money.
Wait, what does that mean? You can lose money investing in stocks, but most of the time you will be able to sell the stock for at least some amount of money. For example, if I buy at $10 and it drops to $1, I can still sell for $1 and at least get something back. If an option expires out of the money (the right to purchase a share for $45 when you can buy it for $40 on the open market), then you get nada, zip, zilch, nothing. You lose all of your money.
I probably checked on the market every two minutes all morning. Please, please, please, Chipotle, rally on your good news! The stock started to got back up, and my option came back in the money, barely. I could sell it now for a 99% loss. What should I do? I decided that a 99% loss was awfully close to 100% loss and and that the best course of action was to wait more day to see if it would go up. By the way, that next day? That was the day the option would expire.
As luck would have it, the stock did go back up that next day by quite a lot. My option was back in the money. However, it never did get back to my original price, let alone the sky high one. I was able to close out with a moderate loss rather than a large one. That moderate loss, though, was on a much bigger investment. All of my gains from Microsoft and Royal Caribbean? Gone!
I think it was probably worse for me that I was 5 seconds away from doubling my money, then ended up losing all of my gains. To feel that close to a third straight success only to have the market move against me. I think I know how best to trade options now. I’ve updated my analysis tools and adjusted my time horizons. I am more deliberate about locking in wins and not worrying about the big payoffs. I am not an adrenaline junkie and I don’t need to be paranoid about losing everything / doubling my money in short time frames. I’ll leave that game to people investing other people’s money.
My last item of the day? I unsubscribed from the Investors Business Daily podcast.