By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2018
January 25, 2018
Recently a very close friend passed away. 87 years old. That affected me. He and I were involved in investments for over 60 years. So, because of this, I once again think of my own life. In 19 years, 2 months, I will be 100 years old. That is my investment horizon. My involvement in the stock market is based on making money and spending it too. With no mortgage and an 8-year old Genesis 4.6 car, no debts, one should always be setting goals as to life and to investments.
Consider those unfortunate investors who are now locked mentally into General Electric. Institutions hold 54.4% of the outstanding shares. That company is not a wipe-out like General Motors. The stock price is bleeding all over the place. There is real panic in this stock. However, I believe the sum of the parts is worth much more than the whole. I look at the stock price as a value of the company and not just as a number. The current value of the company based on the stock price of $16.26 is $145.4 billion. I feel that based on its assets and earnings power, I think it is easily worth $174 billion. That would give it a stock market price of $20.00. Don’t forget that the company is profitable. The reduced current dividend may have to be cut again, which would increase the funds the company can use to reduce debt while it reviews its operations. The previous management seems to have totally mismanaged operations so as far as I am concerned the Board members should be hung (sued) for gross negligence of fiduciary responsibility. In Russia, they would be sent to Siberia or be shot. However, my real interest in GE is not justice, it is to make money. So, this week, I did the following
I set up what is called a Credit Put Spread. Feeling that by March 19th of this year the dust should begin to settle in the GE matter, On Tuesday I sold the March 19 put at $16.00 and bought the March 19th put at $15.00. That position allows me to layout just $100 per set of contracts as that is my maximum exposure. I did it for a gross gain to me of $10 per contract. That equals a potential annualized return of 60%. I did some more the same day for a gross of $13.00 per contract, a potential 78% annualized gain. As the stock price headed swiftly south like a comet whacking the earth, I changed tactics to buy the $13.00 March 19th put and sell the March 19th $14 puts for a $10.00 gross income. Again, my potential annualized gain is 60% of my investment and I was able to reduce the chance of needing to buy the stock. Frankly, I do not care about GE, but I am using it to make short term money. Using Put Credit Spreads limits loses and can give you great annualized returns. Did you know that 54.25% of the GE stock is owned by institutions? I wonder how many of them bought puts to protect their positions and how many sold covered calls to increase income. Heck, it really isn’t their money, so I am guessing they most of them did nothing. Now, here is a secret. When the contracts expire, do take a percentage or the whole profit out of your trading account and SPEND it. Say what you want, but this money is gambling money. Respectable? Yes, but you can lose it to. I take out money to spend on travel, taxes and move some of it into my investment account, which holds various ETFs. The ETFs provide me with a monthly income. The more ETFs I own, the greater my income.
I also use Call Credit Spreads to make money by setting up bear market situations such as I have been doing on Tesla (TSLA). I consider TSLA to be one of the greatest over priced stocks on the market. The value of the company based on the number of shares outstanding multiplied by the current market price ($350.02) is $57.9 billion. Last week, I set up a call credit spread by selling short the $350.00 call and going long the $352.50 a credit of $30.00 per contract. Normally for TSLA, I have been selling one-week options. Although the majority of options are of a monthly nature, some companies have weekly options. TSLA is one of those. My exposure is $250 per option set. So, $30, divided by $250 times 52 weeks, gives me an annualized return of 624%. For this past week, I did my Call Credit Spreads selling the $360.00 call and buying the $362.50 call for $25.00 per set of option contracts. These also expired worthless so all of the premium I got became a profit. For this week, I have bought TSLA calls at $372.50 and sold the $370 calls for $22 per contract.
There are sets of rules that the brokerage firms have, and you really need to understand them. Then there is the “danger” of a stock price ending in the middle of your option spread or of the sold part of the option being exercised early. You may need to eat the position and understand how to reverse it or roll it out. This gets a bit “tricky” in an IRA or Roth.
For more information, I suggest strongly that you buy Michael Sincere’s Understanding Options for clear explanations of using options. I don’t know the people, but there is a money management firm in Tampa using options in commodities. Go to Optionsellers.com for more details. I only handle the money from my immediate family.
By the way, if you want to cruise or tour, you can use my family’s agency. Go to ronelcruisesandtours.agentstudio.com for a lot of great travel news, tips and deals.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone. This article was written for informational purposes only.