Several subscribers wrote in and told me that my numbers were off on the Google spread. I apologize. At least I know that some of you read these ideas, so that is encouraging.I have fixed the numbers and repeated the words. Here is the trade fill:
As you can see, I actually did better than the $10.30 I reported below – I sold it for $10.46. I had placed a limit order at $10.30 and assumed that was the price I got – it ended up being better than the limit price.
Google Vertical Put Spread – Corrected Prices
To repeat, my 2014 bet on Google is even more interesting, mostly because Google has moved higher over the course of the year 9 times out of 10. Only in the market melt-down in 2007 did it end up lower than when it started out the year.
GOOG was trading at $1108 today, Monday, I sold a Jan-15 1120 put and bought a Jan-15 1100 put. (You could also trade the minis on GOOG which are one-tenth the value of the regular options). I collected $10.30 ($1027.50 after paying $2.50 in commissions – the rate that Terry’s Tips subscribers pay at thinkorswim), from selling the vertical put spread and my maximum loss is $972.50.
There will be a $2000 maintenance requirement on this spread, but since I collected $1027.50, my maximum loss and the amount it required to place this trade is $972.50.
(Note: There is a big range between the bid and ask prices – it is important to place a limit order when trading these options rather than a market order.) I will make over 105% on my investment for the year if the stock is at $1120 or any higher January 17, 2015 (it only needs to go up $12 over the course of a full year and a month). After note: GOOG is now trading at $1114 and only needs to go up by $6 for me to make 100%.
If I made this same bet every year for 10 years and Google behaved like it did over the past 10 years, I would collect a total of $9247.50 in the 9 winning years and lose $972.50 once, for a gain of $8275 over the decade, or an average of 85% a year on my money. Again, this is a pretty good return in today’s market.
Critical to the success with these trades is the assumption that markets in the future will behave like they have in the past. While that is not always the case, the past is usually a pretty good indicator of what the future might be. These trades are just an example of how you can make superior returns using options rather than buying stock if you play the odds wisely.