I used my recent AMGN swingtrade to compare stock vs. options. For this example, I will position-size with 500 shares vs 5 Calls. Since last week was options expiration, I actually levered up the week before and bought a few Jul 50 Calls but I have not included those trades in this example for simplicity. Which way would you prefer to trade it...?
Entry @ 45.50 on 6/23
STOCK - Buy 500 shares @ $45.50 with initial stop at $44.50, or $1.00.
Total Position - 500 shares
Total Cost - $22,750
Total Risk - $500
OPTIONS - Buy 5 Jul 42.5 Calls @ $3.25 with initial stop based on stock at $44.50, or $1.00
Total Position - 5 Jul 42.5 Calls
Total Cost - $1625
Total Risk - $500
Pyramid @ 47.10
STOCK - Buy 500 shares @ 47.10, moved stop to 46.00
Total Position - 1000 shares
Total Cost - $46,300 ($22,750 + $23,550)
Risk - $300 (if stopped out at 46.00, $250 profit on 1st 500 shares, $550 loss on 2nd 500 shares)
OPTIONS - Buy 5 Jul 42.5 Call @ 4.75, moved stop to 46.00
Total Position - 10 Jul 42.5 Calls
Total Cost - $4,000 ($1,625 + $2,375)
Risk - $500 (if stopped out at 46.00, $125 profit on 1st 5 Jul 42.5 Calls, $625 loss on 2nd 5 Jul 42.5 Call)
Sell 1/2 position at $48.80 to lock in profits, Roll Jul 42.5 Call to Jul 47.5 Call, move stop to $46.50
STOCK - Sell 500 shares @ 48.80
Profit - $1650
Current Position - 500 shares
Current Cost - $23,550
Current Risk - $0 (if stopped out at $46.50, $250 loss on remaining 500 shares but $1650 profit already locked in)
OPTIONS - Sell 10 Jul 42.5 Call @ 6.30, Buy 5 Jul 47.5 Call @ 1.65
Profit - $2300 ($1,525 profit on 1st 5 Jul 42.5 Calls, $775 profit on 2nd 5 Jul 42.5 Calls)
Current Position - 5 Jul 47.5 Calls
Current Cost - $825 (5 Jul 47.5 Calls bought @ 1.65)
Current Risk - $0 (if stopped out at $46.50, assume Jul 47.5 Calls still retain extrinsic value at $0.50 resulting in a loss of $575 but $2300 profit already locked in)
Pyramid @ 49.01, move stop to $48.00
STOCK - Buy 1000 shares @ 49.01
Current Position - 1500 shares
Current Cost - $72,560
Current Risk - $0 (if stopped out at $48.00, profit $450 on 500 shares and lose $1010 on 1000 shares, net loss of $560, but $1650 profits already locked in)
OPTIONS - Buy 10 Jul 47.5 Calls @ 1.80
Current Position - 15 Jul 47.5 Calls
Current Cost -$2,625 ($825 on 5 Jul 47.5 Calls, $1,800 on 10 Jul 47.5 Calls)
Current Risk - $0 (assuming there is still time premium on the calls at $48.00, and you can sell the calls for $0.80, you would lose about $1425 on 15 Jul 47.5 Calls but still have $2300 profits already locked in)
Sell entire position @ 51.50
STOCK - Sell 1500 shares @ 51.50
TOTAL Profit - $4690 + $1650 locked in = $6,340
OPTIONS - Sell 15 Jul 47.5 Call
Total Profit - $3375 + $2300 locked in = $5,675
As you can see, with a little slippage, the OPTION profits are lower than the stock. However, at one point it cost me over $70k to carry the stock position while at most, it cost $4k for the options. With options, I was able to participate in the entire move while maintaining cash for other positions. Also notice that I maintained similar risk parameters for both stock and options throughout the entire trade. Managing your risk is crucial whether you're trading stocks or options.
Lastly, you'll often hear that trading options is risky...well, so is trading stocks. If AMGN came out with unexpected clinical trial news before I could exit at $51.50 and the stock dropped to $40, I'd be out nearly $15k on the stock but only $4k on the options. Regardless of your preference, be sure to always position-size according to your capital, place your stops and continuously monitor your risk throughout the trade.
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