AbbVie Put/Call Combination Produces 400% Greater Return

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction and Set-Up

Below I’ll discuss my year-long call/put combination using AbbVie as an example. I’ve successfully been able to obtain a 15.3% return based on the current stock price while the buy and hold strategy would've only yielded 3.6% return. This is greater than a 400% difference in overall returns for this given stock over the past year. Leveraging the coupling of calls and puts around a core position over time can accentuate total returns and mitigate risk on a given stock. As discussed in more detail below, covered calls and covered puts can be combined to one's advantage. This is especially true in large-cap, dividend-paying stocks that tend to trade within a narrow range for long periods of time. AbbVie Inc. (NYSE:ABBV) is a prime example that fits this narrative and thus the stock of choice for this piece. Over the past two-plus years this stock has traded in a tight range between $55 and $65 per share while paying a dividend of ~4% on an annual basis (Figure 1). The company has strong fundamentals, financial stability and a robust pipeline for potential growth and sustainability. The goal here to initiate a position in AbbVie using a covered put to purchase the stock at a lower price than it's currently trading at a future date while collecting a premium in the process. If the stock isn't assigned then walk away with the premium and freed up cash that was earmarked for the potential purchase. If the stock is assigned, then shares are purchased at the agreed-upon price (strike price), less the premium for the actual purchase price. Now we've entered the position via leveraging a covered put, now the shares can be leveraged for covered calls to extract additional value throughout the holding of the stock while collecting the dividend. Ideally, we want to enter the position via a covered put and endlessly sell covered calls while collecting the dividend. However if the stock is called away during the selling of a covered call then this process can be repeated while being cognizant of the x-dividend dates to enhance overall returns.

Chart of AbbVie Inc. (NYSE:ABBV)
Figure 1 – AbbVie’s tight trading range over the past 2-plus years
Continue reading "AbbVie Put/Call Combination Produces 400% Greater Return"

Realizing Gains Without Owning Shares Via Leveraging Cash

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

I’ve written many articles highlighting the advantages options trading and how this technique, when deployed in opportunistic or conservative scenarios may augment overall portfolio returns while mitigating risk in a meaningful manner. Here I’d like to focus on leveraging cash-on-hand to engage in options trading, more specifically selling covered puts. In laymen’s terms, I’ll cover option variables, an example, strategy and empirical results with commentary.

The Questions

1. Why buy a stock now when you can purchase the stock in the future at a lower price while being paid to do so?

2. Why buy stocks at all when you can make money on the underlying volatility without ever owning the shares?

Overview

Timing the market has proven to be very difficult if not altogether impossible. However creating opportunities to lock-in downward movement in a given stock one is looking to own is possible. If a stock of interest has substantially fallen to at or near a 52-week low, then one has an option to “buy” the stock at an even lower price at a later date while collecting premium income in the process. Alternatively, it's also possible to make money on the option itself without owning any shares of the company via realizing options premium gains as the underlying stock appreciates in value off its lows. This is called a covered put option, covered in the sense that one has cash to back the option contract. Leveraging covered put options in opportunistic scenarios may augment overall portfolio returns while mitigating risk when looking to initiate a future position in an individual stock. In the event of a covered put, this is accomplished by leveraging the cash one currently has by selling a put contract against those funds for a premium. It's also possible to make money on the option itself without owning any shares of the company via realizing options premium gains as the underlying stock appreciates in value. Continue reading "Realizing Gains Without Owning Shares Via Leveraging Cash"

Realized 14% Gain After Netflix's Recent Beat - Without Owning Shares

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

Netflix Inc. (NASDAQ:NFLX) recently reported stellar quarterly numbers alongside robust subscriber growth that propelled the shares from ~$100 to $120 by the next day and ultimately to $130 within a few days (Figure 1). Netflix announced that it brought in 370 thousand net subscribers in the U.S. during Q3 while posting only 160 thousand net subscribers during the previous quarter. Furthermore, its international strength was very robust, adding 3.2 million against a 2.0 million consensus. Netflix’s guidance was higher than most estimates as well coming in 520 thousand and 3.75 million subscribers domestically and internationally, respectively. I’ve written a series of articles highlighting ways to leverage options trading to augment a long position or potentially entering into a position in Netflix. I’ve highlighted ways in which one can layer in covered calls to mitigate risk in a long position as well as utilizing secured puts to enter into a position at a lower price or avoid owning the stock altogether while making money. I’ll discuss my covered call/secured put combination strategy to unlock additional value, mitigate risk and generate income. I’ll break this strategy out into segments to exemplify the power of options when dealing with an intrinsically volatile stock with significant upside potential such as Netflix. In brief, I’ve realized a 13.2% gain relative to a -3.1% loss based on the traditional buy and hold strategy based on the closing price on 11Nov16 of ~$115.

Netflix Inc. (NASDAQ:NFLX) Chart
Figure 1 – Netflix’s upward movement after announcing numbers that beat analysts’ expectations

Overview

Netflix is a highly volatile stock with a 52-week range of $80-$133 per share or a $53 per share range. Layered within that range are swings of $10 per share or more (~10%) throughout the course of any given day. These swings to the upside or downside can be difficult to stomach especially after the most recent earnings announcement where the stock cratered by $15 per share in one day (~$100 to $85). There’s no disputing the fact that Netflix has an outrageous valuation and a wide range of intrinsic volatility. Case in point, a $20 move per share was witnessed the day after Netflix beat expectations when they announced Q3 numbers. This intrinsic volatility is more pronounced during any major news story (i.e. expansion into international markets or subscriber price increases) and specifically around earnings announcements. As a result of the nosebleed valuation and volatility, in my opinion, options are a great companion when committing capital to Netflix stock. Continue reading "Realized 14% Gain After Netflix's Recent Beat - Without Owning Shares"

Netflix Losses Mitigated By 86% - A Covered Call/Secured Put Strategy

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

I’ve written a series of articles highlighting ways to leverage options trading to augment a long position or potentially entering into a position in Netflix Inc. (NASDAQ:NFLX). I’ve highlighted ways in which one can layer in covered calls to mitigate risk in a long position as well as utilizing secured puts to enter into a position at a lower price or avoid owning the stock altogether while making money. Whether you’re investing or trading in Netflix, it’s difficult to own the stock without an options strategy to augment the long position or prospective position. I’ll discuss a covered call/secured put combination strategy to unlock additional value, mitigate risk and generate income. I’ll break this strategy out into legs to exemplify the power of options when dealing with an intrinsically volatile stock with significant upside potential such as Netflix. Continue reading "Netflix Losses Mitigated By 86% - A Covered Call/Secured Put Strategy"

Trading or Investing In Netflix - Options Are Your Friend

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

Whether you’re investing or trading in Netflix Inc. (NASDAQ:NFLX), it’s difficult to avoid a discussion surrounding an options strategy to augment this position. Netflix has an outrageous valuation and a wide range of intrinsic volatility, where swings of $10-$15 in one day are fairly common. This intrinsic volatility is more so pronounced during any major news story (i.e. expansion into international markets or subscriber price increases) and specifically around earnings announcements. As a result of the nosebleed valuation and volatility, in my opinion, options go hand-in-hand when committing capital to Netflix stock. Netflix is high growth stock thus investors are willing to pay a premium for this growth. However, the tradeoff is that traditional metrics such as the price-to-earnings multiple (P/E ratio) and the PEG ratio do not apply. Due to its rapid growth, expanding original programming, wrestling market share away from big cable companies, expansion into international markets and its overall ubiquity, it's easy to see why investors are willing to pay a premium for this media disruptor. Due to these aforementioned factors, an options strategy may be an effective way to leverage and hedge this high growth stock while mitigating risk. Netflix offers high yielding premiums on a bi-weekly or monthly basis whether one owns the stock or attempting a good entry point. This bodes well for those who are willing to leverage options trading to augment returns and mitigate risk throughout the volatile nature of Netflix’s stock. This could come in the form of covered calls and/or secured puts or a combination of call/put strategy. Netflix’s recent second earnings disappointment highlights the value of an options strategy to mitigate losses and smooth out drastic moves in the stock price. Continue reading "Trading or Investing In Netflix - Options Are Your Friend"