I’m disheartened this morning. We just got an email from a long-time customer, Let’s call him John, about fixing a position he’s in. You owe it to yourself to understand his situation so you can learn from his mistakes.
Back in October 2015 he bought a call leaps options on AAPL.
He didn’t buy the stock.
I don’t think he bought a put option for protection.
I’m not sure why he would do this! He’s been to almost 50 of our free webinars. That’s right… 50. He’s not alone… there are many of you out there that come to our free webinars week in and week out. But… how did we not communicate the danger of buying unprotected leaps options? What are we doing wrong? How could anyone sit through 50 of our RadioActive Trading webinars and still purchase leaps options in lieu of stock and put option protection?
If you are doing this too… please reconsider!!
Didn’t the guys at compound your stock earnings get sued over this?
Buying long options is SPECULATIVE! It’s a gamble! You are fighting the loss of time value and you are fighting the leverage against you if the stock declines.
Here we are about 6 months later and John is panicking and trying to figure out how to fix his position… if you haven’t been following AAPL stock.. it’s down. It’s not down a ridiculous amount over the last 6 months.. but it’s down… Depending on when in October he bought in, the price of the stock was between $108 and $120 per share. His leaps option was purchase for $14 per contract… now it’s trading at a little over $1.
That’s not a typo…. that’s not a $10… It’s a $1.
Whats’ worse?? He traded WAAAYYY TOOOO MMAAAANNYYY contracts. Like 120 of them. So now John is looking at trying to repair a $160,000 loss. That’s over a 90% drop.
Do yourselves a favor… make sure you consider the leverage that you might be using in the options market. Leaps options prices can drop 90% if the stock drops 20%.
The safest way to participate in the market and the safest way to insure that you will be able to preserve capital and profit over the long-term is to buy stock and protect it with put options. If you are buying call options in lieu of stock because you can’t “afford” stock… then consider getting out of the market altogether… save up some capital. Purchasing options because you are broke is GAMBLING… NOT INVESTMENT.
Our Blueprint gives you an easy to use plan to invest in the stock and options markets with safety. Please get it if you are in the market at all. Please DON’T come to all of our webinars and think that you will be able to “figure” it out. Entering the market with an incomplete plan is DANGEROUS.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
hi
I have nflx stocks, now I losing 10% of my investment, do you know how to get some money back?… Y trying to sell call options weeklies , do you have another Idea?… thanks
Hi Kurt.. this is meziggy and you could have been talking about me for all I know. in 11-2015 I bought 1 contract of AAPL with Jan16 expiration. tho it was a little down, THIS WAS APPLE. always going up and up APPLE and I thought with the holiday buying season and the I Watch, no way would there be an APPLE SMASHING!. I too was wrong having bought a call with no idea yet about RAT and needless to say it almost immediately went into an options premium death roll and I was out $1330.00. I wish I learned about spreads earlier and especially about you and RAT/PowerOptions. I hope to be able to afford the Blueprint, but after this loss and another $2000.00 of losses over 6 months from a different “mentoring company” I signed up with, that I mentioned to you at Tuesday’s webinar, I am going to have to papertrade for a while until I get some funds together.
Hope this finds you, your wife, dog, and ninja cat all well.
Sincerely,
jay n. segal
(aka: meziggy)
I’m not sure why you wouldn’t consider buying a deep in the money AAPL January Leap (stock price 108, Leap strike 55) for around half the price of the stock with a small premium (about .65) to act as a stock surrogate and buy a married put for protection. Only difference is the additional premium to overcome.
Benefits = Potential gain if the stock were to drop below the Leap strike and less capital tied up.
????
Hiya Al,
We’ve actually handled this question a number of times, mainly in the context of automating your position size.
A “stock surrogate” is not stock. It’s a leveraged position and frankly not the best when it comes to protecting your account as a percent of amount wagered.
Happy Trading,
Kurt
Kurt, I understand what you are saying but quite frankly if someone doesn’t have the discipline to properly manage the amount of leverage they use they shouldn’t be trading with options in any capacity. Deep in the money call (not even a leap) gives you the advantage of having a point where your protected position can make money as it goes down (strangle). Unlike the stock which you will own to 0.
guessing your buddy john bought those $130 calls expire jan 2018? If he didn’t sell and held them. He would be rich now lol.
Hello Cameron,
I am sorry for the delay in response. There was an issue with the blog notifications, and I did not see your comment until last week.
If memory serves, the position was the 2017 JAN 110 call on AAPL. I am not sure of the exact dates when ‘John’ wrote in, but let’s take a look at the break down:
On October 15th, 2015, AAPL was trading at $111.86. the 2017 JAN 110 (463 days out) call was priced at $14.95 ($14.85 bid, $15.10 ask). The 2018 110 call was priced around $20.00 per contract.
On May 12th, 2016 when this article was posted, AAPL was trading at $90.34. The 2017 JAN 110 call was trading at $1.92, or a loss of -87% from the purchase price in October 2015.
On JAN 20, 2017, AAPL was trading at $120.00. The 2017 JAN 110 was worth $10.00 intrinsic, but still a loss of -33%. On a side note, the 2018 JAN 110 call that could have been purchased for $20.00 per contract was priced at $16.20 on JAN 20, 2017, or a loss of -20% after 463 days.
The key here is not that the option is question was down -87% when the customer wrote in and needed to know how to fix it. Nor is it that the position still would have been a -33% loss if held to expiration. Nor is it that the 2018 JAN 110 call would be profitable now, to the tune of 120% gain, though it would have been at a loss of -75% on May 12th, 2016.
The key here is the need to avoid the Lie of Leverage, especially with large positions in your account. Sure, everyone wants the home run trade, and why pay for the stock when you can pay 1/5th or less of the cost using options? Well, you get what you pay for.
Would you have stayed in either position with a -33% loss? Or a -87% or -75% loss? No, you likely would have closed the position prior to those values, or adjusted the position Hoping the stock would recover sometime in the future.
With LEAPS, as with any long call (even weeklies) there is always the chance that you can lose high percentages of the investment. Sure, you can make high percentage gains, but at a cost.
What RadioActive Trading offers is a setup that controls risk, forces investors into an ideal sized trade and proper position sizing, and a structure that avoids the Lie of Leverage where so many investors get caught.
Yes, the JAN 2018 110 call would have a profit of $24.00 today if it was purchased on OCT 15th, 2015. That is a gain of 120%! BUT…
If John had invested $10,000 into the 2017 trade and took the loss of -33%, he would have $6,700 left.
If John invested that $6700 remaining and had a 120% gain, he would now have $14,740. The 120% gain countered the -33% loss, and the account is up 47%!
BUT, If John had closed his initial position when he emailed in, at the -87% loss, the 120% gain would not be enough to get anywhere near break-even. After the -87% loss he would have only had $1,300 remaining. With the 120% gain, he would only have $2,860 left…or a loss of -71% of his starting value. That is the Lie of Leverage.
AAPL Jan 2018 110 call now worth $65 with a profit of $45 over original purchase of $20.
Yup, and still holding that price as of today (sorry for the delay in response).
Referring to the previous comment, would YOU have stayed in that call when it was at an -87% loss? Or even a -50% loss?
Possibly, or you would have possibly adjusted the position: sold a call in a panic to create a Calendar (then had to manage the short call) doubled down on your bet, created a complex 3 or 4 legged butterfly to repair the long call…who knows?
Honestly, if we could all go back in time 1 or 2 years we could have dumped all of our money into long calls and been looking really good.
However, long term in a portfolio, is that the proper approach?
The Married Put on AAPL would have only showed a small single digit loss when the call was down -87%. It too could have been managed…but with no fear of losing more than 8% or so of the investment. Ability to sleep at night, control risk, and not worry about closing too often or too soon when -35, -50, or -75% losses appear on a position…or worse…are realized.
Wow ! That’s one hell of a gamble ! Did he hold or bail ?
Gambling? Proper use of Leaps and structuring of can produce good benefits