A Case for My Opportunity Lost Strategy

I would like to take a look at a trade I made last week and examine “Opportunity Lost.” You know I don’t worry about Opportunity Lost. I want to take a look at a trade I made last week involving Netflix (NFLX).

If you study stock options, I’m sure you own a few books. Take a look at what the author says, and what they thinks about Opportunity Lost. Most books I read the author says Opportunity Lost is your biggest risk when doing Covered Calls. As you might know, I do not agree with this. I feel my biggest risk, when doing Covered Calls, is the stock going down and staying down for a long time. Let’s take a look at my trade I made on July 5th with NFLX.

On Tuesday, July 5th I bought 1000 shares of NFLX at $94.75. Also on the 5th I sold 10 contracts of the NFLX $95.50 Calls expiring on Friday, July 8th. A 4 day option which was a Covered Call! This Call brought me in a premium of $1.05 ($1050). I was hoping the stock would go above the Strike Price of $95.50 and I get assigned. This is what happened and my total 4 day profit was $1800. The $1050 premium and the $.75 ($750) capital gain on the stock (1000 shares). The stock closed on Friday at $97.06 and I was assigned at $95.50. In this case, with the stock closing at $97.06, if I didn’t sell the Call, I would have made $2310. I didn’t make the $2310 because I sold a Call and had to deliver the stock at $95.50. I only made $750 on the stock sale! But I did sell the Call and brought in a premium of $1050; with the stock sale a total of $1800. My Opportunity Lost is the difference between what I made and what I could have made if I didn’t sell the Call. The Opportunity Lost in this case is $510. If I never sold the Call my account would be up an additional $510. This is what the “professionals” call the biggest risk with Covered Calls.

This morning NFLX opened at $96.19, down $.87. Since the opening the stock has been all over the place. The low was $95.05. If the “professional” bought the stock at the same time as me, and didn’t sell a Call, his account would have been up $2310 at the close on Friday. The question is, where or when does he sell? Maybe the stock would go up to $100 for him but maybe it go down to $90. When he gets out of his trade maybe he’ll be up or maybe he’ll be down. He will not know until he gets out. Me, with my deal, I’m already out! My profit is $1800 and it’s in my mattress. If the stock closed much higher on Friday I would have had a much bigger Opportunity Lost. The bottom line is I DON’T CARE! I made $1800 and I move on, and I’m looking for another deal right now.

My strategy is not for everyone! I’m a trader, I like getting in and out and I do very nicely sticking to my strategy. There are more than one strategy and many work. But it is very hard making money in this game. You must be disciplined and stick to your plan. Don’t get too complicated and don’t get greedy. Slow and steady, steady and slow. The tortoise wins the race.

Steve

The Options Coach