Way back when Google (GOOG) 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 $870. My $8000 investment would now be worth $87,000 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 GOOG, 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 GOOG, 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 $87,000 is real money.
Today I would like to share how I own the equivalent of 100 shares of GOOG for an investment of only $17,000, and the neat thing about my investment is that I get expect to get a “dividend” in the next two weeks of about $1300 if the stock just sits there and doesn’t go anywhere.
I own options, of course. Here is what I own.
How to Own 100 Shares of Google for $16,000: You would have to shell out about $87,000 today to buy 100 shares of GOOG stock. If you bought it on margin, you might have to come up with about half that amount, $43,500, but you have to shell out interest on the margin loan each month. I like money coming in, not going out.
A couple of weeks in this newsletter we talked about the Greek measure delta. This is simple the equivalent number of shares of stock that an option has. I own GOOG 800 calls that expire on the third Friday of January 2014. You could buy one today for $8600. I own 2 of them for a cost of about $17,200.
The delta for these Jan-14 800 calls is 75. That means if the stock goes up by a dollar, the value of each of my options will go up by $75. With these 2 options I own the equivalent of 150 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.
Since I own 2 call options at a lower strike price that the market price I am entitled to use them as collateral to sell someone else the opportunity to buy shares of GOOG at a higher price. I sold one Oct-13 890 call, collecting $13.50 ($1350) at today’s price. This option will expire in two weeks (October 18). If the stock is at any price less than $890, this call will expire worthless and I will get to keep the entire $1350.
This Oct-13 890 call option that I sold carries a delta of 38, making my net option value 112 deltas (the equivalent of 112 shares of stock).
Since I am aiming to own 100 shares of GOOG, I sold another Oct-13 call, this one at the 935 strike. At today’s prices, this one would go for $3.50 ($350). The delta on this call is 13, reducing my net delta value to exactly 100.
I now own the equivalent of 100 shares of GOOG at a cost of $17,200 less the $1700 I collected from selling the two calls, or $15,500.
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 $1300 over the next two weeks. Here is the risk profile graph for my positions:
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. (The stock popped up about $3 while I was writing this Monday morning so it is no longer trading at $870 as it was when I started).
There are two disadvantages to owing the options I do rather than the stock. If the stock falls 10%, I will lose about $9800. If I owned 100 shares of stock, I would lose only $8700. On the other hand, if the stock goes up by 10% in the next two weeks, I would only gain $7100 vs. the $8700 I would make if I owned the stock. I don’t think the stock will move by anywhere near these amounts in the next two weeks, so I am content to live with the slightly less I might gain (or the slightly more I would lose) at these extremes.