Bought 2 Options

Hi Main Street beats Walls Street, It’s been a while!

I hope all are doing well and enjoying the new year. I’m doing well but I am locked in my room right now with COVID lol. Don’t worry about me, I tested positive on Saturday and was blessed with a mild case. I’m in a separate room to protect my wife.

This little (forced) vacation gave me a chance to develop my stock market strategy for 2024. As you know, from my lack of posting, I haven’t been trading much during Biden’s presidency. I have had a bad taste in my mouth since he entered. Probably because I gave back much of my gains in 2020 from the previous four years; as most of you know, they were very good years for the market. Now, with the new election year getting into full throttle I have a good feeling about the market. I must say, 2023 was a very good year. I didn’t do much trading but my other investments did very well.

I’m very happy that I diversified. While I was in business and doing well in the market I was very happy I took money from my earned income and trading profits and invested in other areas. One of the areas also involved the stock market. For years I’ve invested in a mutual fund, as a non-retirement fund, and a Roth IRA as a retirement fund. Both were with the same company which is American Century Investments. With American Century I put money into two funds, one is called Ultra and the other is Heritage. With both of these funds my current allocation is 100% Stock Fund, however, on a simple phone call I can change this allocation. For example, if my outlook on the stock market is not as positive as right now I can change my allocation to something like, 65% Stock Fund, 30% Bond Fund and 5% Money Market Fund. If you are not a student of the stock market, companies like American Century are a great way to invest with a lot of flexibility and liquidity. Being an options trader, I guess you can say I have a little bit of a gambling chromosome. This is why my allocation is 100% into the stock fund. And this is why I had a great 2023. For the year my Ultra fund did 43.31% and my Heritage fund did 20.07%, which put me back in the game.

Being locked up in my room for the last week I’m working on a strategy to get my trading account back in the game. For the last year I’ve been working on a High Dividend Stock Portfolio and this week I’m working on my trading. My trading, of course, will involve trading options. My #1 strategy will always be selling options. This includes selling covered options and selling Naked options. When I feel the market is on the move I will go to my strategy of buying options. Always remember buying options can be very dangerous. You can read about buying options on my Buying Call Options page.

This leads me to two trades I made yesterday. Both were buying options. I bought one option of United Airlines (UAL) and one option of Micron (MU). I haven’t been trading much so I’m gonna start very slowly, especially when it comes to buying options. Let’s go over the trades.

United Airlines

I decided to buy a UAL option because they came out with good earnings on Monday. I watched the market’s reaction for a day and I feel like the stock can move up a bit. I pulled the trigger on Wednesday morning. Again, I’m starting very slow with Grasshopper Trades. With the stock at $40.75 I bought 1 contract of the UAL 6/21/24 $41.00 Call for a premium of $4.13. The one contract cost me $413.

1/24/24 – Buy to Open 1 UAL 6/21/24 $41.00 C @ $4.13 

I set a goal for my gain at 20%. This is a good goal but on a $413 investment it’s only 82 bucks. Remember, I’m starting slow with Grasshopper trades, Slow and Steady, Steady and Slow! My goal for the premium is to get to $5. If I get out with the premium at $5 my profit would be 87¢ ($87 on the 1 contract, 100 shares). If I get out with the $5 premium the gain will be 21%.

Notice the Expiration Date of this option, it’s 6/21/24. If my goal is to make $82 why do I want to be in an investment for 5 months? I don’t want to be in this position for 5 months. I want to be in for more like a few days, maybe a week. Going out to June with my Expiration Date gives me protection against Time Decay. With a short term option your premium will decay away much faster than an option with a longer term option. Example: a 1 month option’s premium will decay much faster than a 6 month option, so I like to buy the option with the time protection against Time Decay. It’s been a while, welcome back lol.

This morning the market opened in the green and UAL opened at $42.09, up $1.25. I watched it closely, excited because it’s the first option I bought in a while; I wanted to stick to my rules. The stock continued up and the premium went up to $5.25. I placed a Stop Loss order to sell the option at $5.10. At this point I knew I had my 20% locked in and possibly more. The premium continued up to $5.55 and I changed my Stop Loss up to $5.25. Now I have $5.25 locked in. As I was writing this article the stock fluctuated down to where the premium was $5.25 and my Stop Loss order was filled. This position is closed in one day.

1/24/24 – Buy to Open 1 UAL 6/21/24 $41.00 C @ $4.13 

1/25/24 – Sell to Close 1 UAL 6/21/24 $41.00 C @ $5.25

Profit +$112

My goal was to make 20% ($82) and I ended up with a gain of 27% ($112). I know this sounds like a small amount but it’s a great example of a Grasshopper Trade. I’m gonna start slow but we all know if this was 3 or 4 years ago I would have bought a 10 contract Call. Now the one day trade would have been a gain of $1120 on an investment of $4130. This is the power of options.

Remember, if you’re gonna buy options you better know what you’re doing! And you better buy options with Time Decay protection; buy with an Expiration Date further out. Yes, one week or one month options are cheaper but you need protection when buying options. Also remember, 80% of options bought expire worthless. If you want to buy options stay in contact with me via email and I will coach you as much as I can.

Let’s take a look at my Micron Long Option.

Micron

Micron (MU) is a hot tech stock and I’ve been in it with a long stock position for a few weeks now. I decided to sell the stock and buy an option as I work on my options buying strategy. Again I only bought 1 contract. With the stock at $87.80 I bought 1 contract of the MU 6/21/24 $87.50 Call for a premium of $8.55 ($855).

1/24/24 – Buy to Open 1 MU 6/21/24 $87.50 C @ $8.55

My goal for this position was also 20%. I want the premium to go to $10.30. A $10.30 premium will give me a gain of $1.75 which would be a gain of 20%. UAL being a $41 stock the premium was much lower. Here with MU the stock is at $87 the premium is much higher.

As I write, MU is also up. On the day the stock is up $1.75 and is at $89.83. The premium is at $9.83. Once the premium gets above my goal of $10.30 I will either sell or put a Stop Loss order in place. This very well could happen today. I am not worried because my Expiration Date for this position is also in June. This gives me plenty of time for this position to get to my goal without expiring. I will watch this position closely and report as soon as I exit. I’m also watching UAL for another possible entrance point. Their earnings were very good just a few days ago.

I will be writing about my High Dividend Stocks portfolio very soon.

If you have any questions on buying options send me an email. Make sure you read my Buying Call Options page.

It’s great to be back on Main Street beats Wall Street with you. I’m really hoping for a good year and if the election goes the way Wall Street wants we could get a nice 5 year run.

 

Successful Trading,

Steve

The Options Coach