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How to Own 100 Shares of Google (Worth $71,600) for $15,000 or Make 12% a Month With Options

Way back when Google (GOOGL) went public at $80 a share, I decided that I would like to own 100 shares and hang on to it for the long run. Obviously, that was a good idea as the stock is trading today at $716. My $8000 investment would now be worth $144,000 (the stock had a 2-for-1 split in November 2014) if I had been able to keep my original shares. Unfortunately, over the years, an options opportunity inevitably came along that looked more attractive to me than my 100 shares of GOOGL, and I sold my shares to take advantage of the opportunity.

Many times my investment account had compiled a little spare cash, and I went back into the market and bought more shares of GOOGL, always paying a little more to buy it back. At some point it felt like I just had too much money tied up in it. An $8000 commitment is one thing, but $144,000 is a major commitment.

Today I would like to share how I own the equivalent of 100 shares of GOOGL for an investment of less than $15,000, and the neat thing about my investment is that I get expect to get a “dividend” in the next month of about $1700 if the stock just sits there and doesn’t go anywhere.

I own options, of course. Here are two ways you can play it if you like Google.

Terry

How to Own 100 Shares of Google (Worth $71,600) for $15,000 or Make 12% a Month With Options:

You would have to shell out about $71,600 today to buy 100 shares of GOOGL stock. If you bought it on margin, you might have to come up with about half that amount, $35,800, but you have to shell out interest on the margin loan each month. I like money coming in, not going out.

Last week we talked about the Greek measure delta. This is simple the equivalent number of shares of stock that an option has. I own GOOGL 700 calls that expire on the third Friday of January 2017. You could buy one today for $8360. I own 2 of them for a cost of about $16,800

The delta for these Jan-17 700 calls is 60. That means if the stock goes up by a dollar, the value of each of my options will go up by $60. With these 2 options I own the equivalent of 120 shares of stock.

Since all options decline a little bit every day that the stock stays flat (it is called decay), simply owning options is just about as bad as paying margin interest on a stock loan. As I said earlier, I like money coming in rather than going out.

Over the course of the next ten months, the 700 call option will fall in value and end up being worth $1,600 if GOOGL is flat (trading at $716). That works out to an average monthly decay of $666 for each call I own.

One of the things I could do with these calls would be to cover this decay amount by selling two Apr2-16 750 calls for $700 each. The delta on these calls is 26. That means I would own the equivalent of 68 shares of stock worth $48,688 yet I only would have shelled out $16,800 less $1400, or $15,400. In other words, my option investment would cost less than 1/3 of what buying the stock would cost and I would not be paying any interest. Of course, it would take a little work on my part. In one month, if the stock were selling at less than $750, the calls I had sold would expire worthless and I would have to sell more one-month-out calls for at least $666 to cover the average monthly decay of the Jan-17 700 calls I had purchased. It will probably be at a different strike than 750, depending on what the new stock price was at the time.

If the stock were to rise above $750 in one month (I would be delighted because I would make a gain of about $2300 for the month – 68x$34), I would have to buy back the Apr2-16 750 calls just before they expired and sell May2-16 calls at a higher strike price, making sure I collected enough to cover the cost of buying back the Apr2-16 750 calls and the $666 each call will fall on average each month.

Instead of simply using options to own stock with only 1/3 of what it would cost to buy the stock, I chose a different way of trading. Most of the time, I would participate in the higher stock price, but I will make a nice gain every month even if the stock stays flat. Since I own 2 call options at a lower strike price than the market price I am entitled to use them as collateral to sell someone else the opportunity to buy shares of GOOGL. I sold one Apr2-16 725 call, collecting $15.40 ($1540) at today’s price. This option will expire in 30 days (April 8). If the stock is at any price less than $725, this call will expire worthless and I will get to keep the entire $1540.

This Apr2-16 725 call option that I sold carries a delta of 46, making my net option value (120-46) 74 deltas (the equivalent of 74 shares of stock). I also sold a second Apr2-16 call, this one at the 735 strike price, collecting $1150. This call has a delta of 39, giving me a 35 net delta value (60+60-46-39). I won’t own the equivalent of 120 shares of stock that I would have if I hadn’t sold calls against my Jan-17 calls, but I could possibly make even greater gains from option decay.

I now own the equivalent of 35 shares of GOOGL at a cost of $16,800 less the $2690 I collected from selling the two calls, or $14,110.

The neat thing about my option positions is that if the stock doesn’t go up (as I hope it will), my disappointment will be soothed a bit because I will gain about $1700 over the next month. Here is the risk profile graph for my positions:

GOOG Risk Profile Graph March 2016

GOOG Risk Profile Graph March 2016

 

The P/L Day column in the lower right-hand corner shows what the gain or loss will be at the price in the first column on the left. It shows that when the Apr2-16 calls expire on April 8, my positions will have a $1,742 gain in value (12% for the month on my investment of $14,110). If the stock were to gain just a little, I could make as much as $3000. If it went up 5% (about $35) I would make about the same amount as if it remained unchanged.

While a possible 12% gain every month sounds a little too good to be true, if you do it right, the actual gain would be greater. For the first few months, the Jan-17 700 calls I bought will decay less than the average $666 monthly amount. Theta (decay for a single day) is $12, or about $360 for the first month. For the last month just before it expires, the Jan-17 700 calls would decay about $1250. The best way to play this strategy would be to put some money back in (using cash you have taken out every month) when there is about 3 or 4 remaining months to the Jan-17 calls and sell those calls and replace them with calls expiring at a more distant-out month, such as July 2017 or January 2018.

There are disadvantages to owing the options I do rather than the stock. The biggest problem comes when the stock fluctuates by large numbers in either direction. If the stock falls 5% ($36), my options would lose about $2196. If I owned 68 shares of stock, I would lose $2448, about 11% more than the options loss. However, if the stock were to tumble significantly more than 5% in one month, the option loss would be considerably greater than the loss of share value. If the stock goes up by 5% in the next month, I would gain $2448 if I owned 68 shares of stock, and only $1884 with the options, or about $564 (23%) less than the stock would have gained. Using options rather than stock, I give up a little potential gain if the stock picks up 5% in one month but make a much greater gain if the stock is flat or moves moderately higher.

The major advantage to my options positions comes when the stock fluctuates well less than 5% in a month. As we showed earlier, an absolutely flat stock will result in a 12% gain while owning the stock would not make a penny.

I have just outlined two possible ways that you can invest in a company you like with options rather than buying the stock. One strategy allows you to have the equivalent of owning stock while having to come up with only one-third of the cash. A second strategy is designed to make about 12% in every month when the stock is flat or rises moderately. Either way seems smarter to me than just buying the stock.

 

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