Stock Option Strategies

This strategy calls for an investment equal to half as much of the capital you would otherwise like to allocate to a stock, and selling an equivalent number of puts to potentially buy the stock at a lower price if the share price continues to fall. 

In the article BlackRock is cited as one of the best ways “to monetize the rise of passive investing, risk management, and the use of sophisticated technology to optimize investment decisions.”

To apply the strategy to this stock, rather than buy 1,000 shares you would purchase 500 and sell five downside puts. “With the stock at $433.34, an investor could sell five BlackRock July $410 puts for about $42 per contract.”

The investor keeps the premium ($42) for so long as the share price is above the strike price at expiration. In the event that the share price drops below the strike price at expiration and the investor buys the stock “…the effective purchase price of the stock would be $336 (strike price less premium received, which provides a modicum of safety.”

An options strategy if you believe the following to be true:

1. The stock price is attractive.
2. The stock price will benefit from long-term trends.
3. The stock price is currently volatile / unpredictable.

The strategy involves selling high in the options market to buy low in the stock market.  As the article puts it, sell cash-secured puts to “monetize fear and get paid by the options market to buy stock.”

Using figures cited in Barron’s, and Facebook trading at around $175 at the time, the bet would be placed accordingly:

1. Sell the May $165 put for $5.70.
2. Buy the May $180 call for $6.75.

“The so-called risk reversal—selling a put and buying a call with a higher strike price but a similar expiration—is designed to catch Facebook’s first-quarter earnings report.”

For a total trade cost of $1.05, an investor will profit if the response to earnings causes the price to rise above $181.05. The risk is that the earnings report, or any other catalyst, causes the price to drop below $165. But, if you believe that on a long enough time horizon Facebook’s share price will outperform, then in your worst-case scenario you only need the cash long enough to ride out the pandemic.

Lululemon Acquisition of Mirror for $500 Million. Rationale for the strategy:

1. Long-term trend: “we have become a nation of walkers.”
2. Technology could be transformative and help Lululemon stay in front of customers.
3. Avoid concerns “about economics of the acquisition.”

Lululemon Share Price: $305

1. Sell the Sept. $300 put options for $22.30.
2. Buy the Sept. $320 call options for $17.90.

“The trade positions investors to buy Lululemon’s stock at $300 and to participate in any gains above $320.” The risk is that the stock plummets below the put strike price. The author, however, is bullish. On the subject of betting against management: “few people expected that anyone could charge about $100 for exercise pants and build it into a $38 billion company.”