Chipotle Mexican Grill – or why I no longer listen to Investor’s Business Daily

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.

Royal Caribbean Cruise lines – can history repeat itself?

This is my third of four posts about my experiences diving into option trading. In my first post, I discuss how I’ve been investing for a few years and wanted to dip my toes in the option trading market. My second post was about the MSFT roller coaster, and how I managed to earn a 30% return in a week. Coming off of that high, I really think option trading is for me.

I understand how the mechanics work, but researching good opportunities is still an open field. How do I find these options to invest in? Should I just keep investing in MSFT over and over again? This time, I decided to look for companies that were about to have an earnings call. My thought was increased scrutiny of a stock around earnings season creates extra volatility, which leads to greater options returns. Checking online, and plugging various options into my custom built option pricing spreadsheet, I found Royal Caribbean cruise lines (RCL) and decided to put in a buy.

So, Monday morning rolls around and my buy option executes. Last time, the prices would fluctuate constantly, so I decided to put in a limit order. Essentially, I put in an order to sell high above what it is trading at now. I don’t expect it to execute, but if the price rises I can get out quickly and lock in a profit.

I put in my order, thinking that there is no way this will execute today. My routine is that once I put in an order, I go look at the order status to make sure everything was entered correctly. By the time I got to order status (maybe three seconds after I sent in the order) it had already sold. I couldn’t believe it. I made a 15% return with about 10 minutes of effort.

I am the king!

I have figured out how to print my own money!

In next week’s episode, pride goeth before the fall.

MSFT call option – one week of nervousness

As I mentioned in my last post, I decided to dip my toes in the option trading market. I did some searching, put some numbers into a homemade spreadsheet, and decided that a call on MSFT was pretty appealing. Specifically, it was an option to buy MSFT at $45.50 a share.

I quickly snatched it up and started the process of watching the price fluctuate. I didn’t give myself a lot of time here, which may have been a mistake. It was going to expire in less than a week, and the price of the option went down every day after I bought it. Isn’t this just the way of things? It feels like whatever trade I attempt to make, the market moves against me.

Then, one day before the option was going to expire, the market had a banner day. All stocks seemed to rise and the DOW closed at a new high. I sold my option immediately and made a 36% return on my money.

Haha, and Hell yeah! I am a market timing maven. Look out world, there is a new player in town.

There was a little voice in my head, though, whispering “did you sell too soon?”

Oh Greed, how are you today? Unfortunately, greed, the market is now closed so I can’t do anything about that. Let’s just take our winnings home and call it a night.

The market dropped the next day. Boo Yeah! I got out when the getting was good.

What a great way to invest. I did some research, placed a good bet, and harvested at the right time. This is fun, and I should do this again.

In my next post, I attempt to sail the seven seas with an option position in Royal Caribbean Cruises (RCL). Will it be smooth sailing or abandon ship?

My first option post

One of the things I’ve learned as an adult is how to think about finances. Growing up, we didn’t talk about money, or how to grow your finances. For the most part, I heard “try to save” and “you’ll have more expenses as you get older.” I also heard “find a good job.” This is actually all good advice, but I know there is more to it than just that. My kids are still a bit too young to understand a lot of subtlety around finances, but we are talking about money, they earn their own money to spend how they want, and I hope they can hear me when I try to impart wisdom on money management.

So, with this post, I am starting to write about money. In some ways, this is merely a document of where I am in life right now, it’s also practice for me to get my thoughts written down so that I can eventually share them with the kiddos. I’ve recently dipped my toes into the option trading waters, and I thought it’d be fund to share some of those experiences. Before I dive fully into options, though, let me share my level of investing (non?) sophistication.

I work at an online stock brokerage. I work on the technology side, where I am less concerned about the business rules are more concerned about performance and reliability of our systems. At work, though, I have zero guilt about logging into my investment account, checking out the market, and placing trades. I’ve been adding funds to my account monthly and trying out various trades. To note, this is my learning or play account. Most of my investments are in a balanced portfolio of funds that I never touch. There, that was my disclaimer. To reiterate, this is my play account that I use to learn about investing. It’s money I can afford to lose without risking my retirement or livelihood. However, I didn’t get into this activity to lose money, so let’s bring in the dollars!

Once a month, I buy fractional shares in 9 different stocks and ETFs. This is called dollar cost averaging, and I will cover that in a later post. One of the products my firm offers is an easy to use tool for dollar cost averaging, and it’s been fun to use this tool over the years. I say “fun” because over time, all my stocks have risen in value and I’m in the green (made a profit) on everything. This doesn’t mean that I’m in the green every day. I check my portfolio a couple times a week, and check on how the market is performing daily. I’ve learned that some of my stocks are highly volatile. Just in this past month, I’ve been both down $200 and up $200 on just my shares of Netflix alone. A different, more industrial stock, PPG, doesn’t tend to change much on a given day and tends to reflect whatever is happening with the market in general. This is exactly the bahavior of stocks I learned in Finance class in business school. It’s been interesting to see this happen in real life, though, now that I have a stake in the game.

I remembered learning that the greater the volatility, the greater the potential profits from trading options. So, let’s trade some options!

What does trading options mean? In the simple case, buying an option means buying the right to purchase a stock at a fixed price in the future. Let’s say I like a stock, called “Extremely Awesome Corp” ticker symbol EAC. Let’s say I buy an option to buy shares for $45/share. If the stock is trading for $47/share, then I have the option to buy those shares and can choose to resell it right away to make a profit. It can get more complicated, but this is the simple “call” option type of trade.

I logged into my account, and tried to figure out pricing. Brokerages don’t usually trade for free. It turns out, that instead of buying shares, you buy option “contracts.” One contract is worth 100 shares. So, if I look at options to buy EAC for $45, I see that they are trading at $1.75. Does this mean if I pay $1.75 I can buy 100 shares of EAC for $45 each? Nope! I have to pay $175 ($1.75*100) for the right to buy those shares. Plus, I also have to pay a commission to my broker and an additional fee per contract. Let’s just assume that works out to $200 total. To make money on this trade, I need to price of EAC to go up enough so that the profit I get from exercising my option covers what I paid to buy the option and what I paid later ($4,5000 or $45*100 + commission) to get the stocks! That tends to be a bit more funds than I typically have sitting around in idle cash in my play account. However, there is another way to make money, which is just to sell the option. If I bought it for $1.75/contract and sell it for $2/contact I can make money that way without ever owning the stock itself.

This is exactly what I intend to do as I dip my toes in the option trading market. My next post will be about that first trade, 1 contract in Microsoft (MSFT), and how I fared.