Back In Netflix
Earlier today I sold 100 shares of Netflix (NFLX). In that post I gave my reasons for selling the shares and I said I would probably be back in NFLX very soon. Well I’m back in! If you want to be an options trader this post is very important.
When reporting the sale of my 100 shares I mentioned I wanted to take money off the table with the big G-20 weekend coming. However, with a big NFLX upgrade coming today I wanted to stay involved to enjoy some more upside, while taking money off the table.
To put some money in my mattress, AND still make money with NFLX, I bought an option. Most Main Street beats Wall Street readers know I don’t buy many options. But, I must say, if you want to be an options trader you must know how to buy options, and understand all the terms that come along with the strategy. I believe buying options is not for Grasshoppers. Many traders who have been trading options for many years lose a lot of money buying options. We must be very careful and do our homework. Below are a few of the terms you must know.
When you buy an option you control shares of the stock without owning them. You have the right to buy the shares mentioned in the option’s contract, or you can sell the option. If the stock price goes up the option’s premium will increase. If the stock goes up you can sell the option for a higher price and make money without ever buying the stock. This action would be Sell to Close. If you buy 1 contract, you control 100 shares of the stock.
It’s very important to understand Delta. When looking at the Option Chain, if you pick an option with a Delta 100, the price of the option will move the same as the stock price. For every $1 move in the stock the option premium will move $1. If you look at an option with a Delta 50, with every $1 move in the stock the option premium will move 50¢. To buy an option with a Delta of 100 it would be very expensive. If you buy an option with an Expiration Date out 2 or 3 months there will be a lot of Time Decay, but this option will be less expensive because there isn’t much Time Value. These are few things you have to consider when buying options. I decided to buy a LEAP. I didn’t write my LEAPS page yet so please Google the term. A LEAP is a long term option which work exactly like any other option. A LEAP will be more expensive than a short term option because there’s more Time Value.
When I sold my 100 shares of NFLX I took $36,800 out of the market, and I took away the chance of making money with NFLX. I got back in the game with NFLX by buying the LEAP. With the stock at $369.10 I bought my LEAP option. If I wanted to make the same money, dollar for dollar, with an option I would have to buy an option with a Delta of 100. If I wanted to make the same money as my 100 shares with an option with the Delta of 50, I would have to buy 2 contracts (200 shares). When picking my option to buy I wanted to make the same money as my shares would have made and I wanted an option with very little Time Decay. Which would be a longer term option. I ended up buying the 6/19/20 option. This will not expire for 1 year. I picked an option with a Delta of 51. The option has a Strike Price of $400. (The upgrade NFLX received today gave a price target of $440) This option had a premium of $44.50. 1 contract would cost me $4450. I would control 100 shares of NFLX for $4450 until next June. For every $1 the stock moves I’ll make 50¢. If I buy 2 contract for $8900 I’ll control 200 shares of the stock and this position will move $1 for every $1 the stock moves. I just took 36,800 out of the market and I can make the same, dollar for dollar, as owning 100 shares by buying 2 contracts for $8900. Because the outlay of money was so much less than owning the stock, I decided to buy 3 contracts. I bought 3 NFLX 6/19/20 $400 Calls for a premium of $44.50. This option cost me a total of $13,350. Now I spent $13,350 and put a lot of money in my mattress. And I’ll make more money with every $1 move in the stock than if I still owned my shares.
Buy to Open 3 NFLX 6/19/20 $400.00 C @ $44.50 ($13,350)
If this move I made is new to you please do your research and send me an email with any question.
Let’s watch and see how this position workout for me.
The market just closed and NFLX closed at $370.02. When I bought the Call the stock was at $369.10. It’s up almost $1. The premium moved from $44.50 to $45.50 as I was writing.
Steve
The Options Coach