Speed Retirement System at MarketAuthority.com
After taking a massive one day gain of more than 476% gains on Netflix calls, I received the following question:
“Ian, why would Carl Icahn load up on call options so far out.”
For those unaware, this is in reference to Carl Icahn’s disclosed 10% stake in Netflix yesterday. Icahn believes NFLX will get bought out over the next two years and picked up a 10% stake, which included a massive buy on September 2014 call options.
Netflix won’t be bought out by then, or any time soon, though.
Amazon isn’t likely to buy them. And Microsoft, the latest rumored suitor, won’t buy them either. It’s a bad bet in my opinion.
But just why did Icahn buy call options so far out?
To begin, Icahn bought LEAPS, which allows him to avoid “time decay” issues.
Note: The closer to expiration an option gets, the less chance there is for a particular stock to make a move in your favor. Therefore, the value of the option will begin to decay, or lose value.
Say you’re anticipating an advance in the price of a stock in the next two years, but don’t want exposure to time decay.
You’d buy LEAPS.
Say stock ABC, as of today, is trading at $50 a share, and a two-year LEAPS call with a strike price of $50 is trading at $5.
You could buy five of these LEAPS call contracts for $2,500, (initial cost $5) x # of shares in an options contract (100 x 5 contracts equals $2,500).
These five calls now give you the right to buy 500 shares of ABC between now and expiration at $60, no matter how high the stock rises.
Now, say your LEAPS, with a strike price of $60, soars to $75 by expiration. You have two options: You can exercise the five call contracts and own the stock by paying $60 a share, or you can exit the LEAP position for a gain.
If at the time of expiration, the stock traded at $75, you’d have a gain of about $7,500 (five contracts multiplied by 100 minus the total of your cost per contract, multiplied by the price increase of, in this case, 15).
The best part about trading LEAPS is that your risk is known, and there’s very limited time decay.
Options Myths Trashed…
I also want to dispel some of the most laughable options trading myths out there.
For example, I’ve heard that 70% to 90% of options expire worthless. This isn’t true. This is a gross exaggeration. It’s harmful, incorrect information.
Only about 30% of all options, as explained by the CBOE, expire worthless. The idea that a greater percentage of options expire worthless is from a famously flawed SEC study… which didn’t account for exiting options prior to their actual expiration.
Options are only for professionals with years of experience.
False. If this were true, beginner options sites and the Speed Retirement wouldn’t exist.
Options Trading isn’t popular
False. As many as 15% of trading accounts are approved for options trading. That number is growing rapidly.
Options’ trading is far more risky than stock trading
False. Options allow you to invest with much less money for greater returns than stocks. Nice try with that one, though.
It’s too difficult to understand options strategies
If you know the difference between a put and a call, it’s not too difficult to understand strategies. Once you understand the basics, you can understand even more.
I’ll reveal even more laughable myths as we move forward.
Take good care…
And Stay Ahead of the Herd.