In 2016, I read a new story that I thought would make a great trade idea. It seems that Lumber Liquidators had been publicly smeared by the mainstream program 60 Minutes. They claimed that Lumber Liquidators had distributed “cancer-causing” (!) floor materials. The stock was trading around $14, down from a high of around $120 two years prior. The State of California was setting its sights on the company. To me, this was overblown and I thought I would make a play.
My approach was very simple. First, I understood that I might not be right. This is the first step to every trade I take. I can place a trade, and even place it confidently, with this understanding. I want to have something that seems to place the odds in my favor, but I know that anything can happen. But, if I happen to be right, I want to make a big win.
Next, I looked at the chart and thought: “Well, if it was at $120 before all the trouble started, and I think the trouble is overblown and the company will recover, perhaps it could go to half of that high ($60), or even less.” So, I set a target at $40 over the next 6 months to two years.
Then I started out with a long term position using options. Long term options are the appropriate play here, I believe, because of three main reasons:
- I expected the trade to take up to two years to develop
- At that time, LL calls were inexpensive compared to puts and the shares were not readily available to share.
- Long term options offer EXPONENTIALLY MORE PREMIUM WHEN YOU BUY MORE TIME TO EXPIRATION. This is a simple function of the options pricing models. Options price includes “the square root of time”.
The trade went in my favor.
The stock went from $14 to $40 over 18 months, a 290% increase. My position went from $2,800 to $16,767, about a 600% increase. However, management changes I made drastically affected the amount I had at risk and the “risk profile” curve.
As a position goes from $2,800 to, say $10,000 you run into a problem: you are now risking $10,000 where you were originally risking $2,800. This generally causes an overwhelming fear of loss in traders and leads them to take the trade off. In fact, most beginning traders would probably take off the trade once profits reached 40% or 50%. I have the same feelings so instead, I like to use options so I can: 1) take off risk (i.e. profits) as trades go in my favor and 2) scale IN by increasing the number of options I have at a higher strike.
This post is long overdue, as I was not sure how to express this. In fact, looking at a series of trade confirmations does not give the full story of the trade. You would also need to compare daily price fluctuations in the chart. Each of the trade management choices was made in order to reduce risk and scale in, where possible.
If you really want to understand under what conditions these trades were made, you’ll need to view a chart and also determine the value and risk of the position each day. This would be a great tool, but I don’t think it exists yet. Hold that thought.
So, here is the full set of trades along with my comments for why I made each move.
Till next time, keep managing that risk and looking for great risk-reward opportunities!
| DATE | DESCRIPTION | AMOUNT | Comments |
| 3/3/16 | BOT +10 -6 LL 100 19 JAN 18 17 CALL @2.82 CBOE | (2,820) | Opened with a long term OTM option with low theta / time decay. |
| 11/1/16 | BOT +10 LL 100 19 JAN 18 27 CALL @.50 BATS | (500) | Added to position |
| 12/13/16 | tIP SOLD -6 LL 100 19 JAN 18 17 CALL @3.60 CBOE | 2,160 | Booked partial profits from original position. |
| 4/25/17 | SOLD -5 LL 100 19 JAN 18 27 CALL @1.90 NYSE | 950 | Booked partial profits. |
| 4/25/17 | SOLD -2 LL 100 (Weeklys) 5 MAY 17 23.5 CALL @1.00 BATS | 200 | Sell some premium to offset time decay. This does not cover the entire position so I still leave upside potential. |
| 5/2/17 | tIP BOT +2 LL 100 (Weeklys) 5 MAY 17 23.5 CALL @.10 C2 | (20) | Closed short options, took 90% of premium. |
| 5/2/17 | tIP BOT +5 LL 100 19 JAN 18 27 CALL @1.00 ISE GEMINI | (500) | Adding to long term bullish position. |
| 5/2/17 | tIP BOT +5 LL 100 19 MAY 17 22.5 CALL @.30 BATS | (150) | Adding short term bullish position. |
| 5/3/17 | tIP BOT +4 LL 100 19 MAY 17 20 PUT @.35 NYSE | (140) | Hedging ITM options with short term puts. |
| 5/5/17 | BOT +7 LL 100 (Weeklys) 12 MAY 17 23 CALL @.16 CBOE | (112) | Adding very short term position. |
| 5/5/17 | BOT +3 LL 100 (Weeklys) 12 MAY 17 23 CALL @.19 CBOE | (57) | “ |
| 5/10/17 | tIP BOT +4 LL 100 19 MAY 17 22.5 PUT @.23 MIAX | (92) | Hedging with short term, cheap, long puts. |
| 5/10/17 | tIP BOT +3 LL 100 19 MAY 17 22.5 PUT @.23 MIAX | (69) | “ |
| 5/10/17 | tIP BOT +3 LL 100 19 MAY 17 22.5 PUT @.23 MIAX | (69) | “ |
| 5/10/17 | tIP SOLD -5 LL 100 (Weeklys) 12 MAY 17 23 CALL @1.55 NYSE | 775 | Closing out short term long calls at 500% return. Bought @ $0.30, sold @ $1.55 |
| 5/11/17 | BOT +20 LL 100 (Weeklys) 12 MAY 17 24.5 PUT @.05 ISE GEMINI | (100) | Very short term hedge with long cheap puts! |
| 5/12/17 | SOLD -1 LL 100 (Weeklys) 12 MAY 17 23 CALL @2.17 MIAX | 217 | Closing out very short term options positions for approximately 1,100% return (Bought @ $0.19, sold at $2.17) |
| 5/12/17 | SOLD -1 LL 100 (Weeklys) 12 MAY 17 23 CALL @2.17 MIAX | 217 | “ |
| 5/12/17 | SOLD -1 LL 100 (Weeklys) 12 MAY 17 23 CALL @2.17 MIAX | 217 | “ |
| 5/12/17 | SOLD -2 LL 100 (Weeklys) 12 MAY 17 23 CALL @2.17 MIAX | 434 | “ |
| 5/12/17 | SOLD -11 COMBO LL 100 16 JUN 17 25 CALL/PUT @.14 ISE | 154 | I’m long a lot of profitable calls at this point. I want to hedge but cannot short. So, I put on a SYNTHETIC SHORT POSITION for no extra margin and little risk. All this does is modify my risk at almost no cost. |
| 5/13/17 | REMOVAL OF OPTION DUE TO EXPIRATION -20.0 LL 100 (Weeklys) 12 MAY 17 24.5 PUT | – | Cheap puts expire. Ah well… |
| 5/15/17 | BOT +11 COMBO LL 100 16 JUN 17 25 CALL/PUT @.40 | (440) | Took off the SYNTHETIC SHORT POSITION hedge. |
| 5/15/17 | tIP SOLD -7 COMBO LL 100 (Weeklys) 26 MAY 17 25 CALL/PUT @.15 | 105 | Re-established a new synthetic short position to hedge. |
| 5/19/17 | SOLD -500 LL @29.13 | 14,565 | Actually shorted some LL to lock in long DITM calls for expiration, rather than closing them out. |
| 5/19/17 | BOT +4 LL 100 (Weeklys) 26 MAY 17 25 CALL @4.20 | (1,680) | Adjusted the hedge by removing some calls. |
| 5/20/17 | REMOVAL OF OPTION DUE TO EXERCISE -5.0 LL 100 19 MAY 17 22.5 CALL | – | Expiration actions |
| 5/20/17 | BOT 500.0 LL UPON OPTION EXERCISE | (11,250) | “ |
| 5/20/17 | REMOVAL OF OPTION DUE TO EXPIRATION -4.0 LL 100 19 MAY 17 20 PUT | – | “ |
| 5/20/17 | REMOVAL OF OPTION DUE TO EXPIRATION -10.0 LL 100 19 MAY 17 22.5 PUT | – | “ |
| 5/20/17 | SOLD -500.0 LL UPON TRADE CORRECTION | 11,250 | “ |
| 5/20/17 | BOT 500.0 LL UPON OPTION EXERCISE | (11,250) | “ |
| 5/26/17 | SOLD -2 LL 100 19 JAN 18 17 CALL @13.28 BOX | 2,656 | Closing out some of the original long term options @ $13.28, purchaed @ $2.82. 470% gain. |
| 5/26/17 | SOLD -2 LL 100 19 JAN 18 17 CALL @13.28 BOX | 2,656 | “ |
| 5/26/17 | BOT +300 LL @29.80 | (8,940) | Hedging ITM calls by shorting stock so they will close out automatically on expiration |
| 5/27/17 | REMOVAL OF OPTION DUE TO ASSIGNMENT 3.0 LL 100 (Weeklys) 26 MAY 17 25 CALL | – | Expiration actions |
| 5/27/17 | SOLD -300.0 LL UPON OPTION ASSIGNMENT | 7,500 | “ |
| 5/27/17 | REMOVAL OF OPTION DUE TO EXPIRATION -7.0 LL 100 (Weeklys) 26 MAY 17 25 PUT | – | “ |
| 8/1/17 | tIP SOLD -1 LL 100 19 JAN 18 27 CALL @7.60 BATS | 760 | Closing out all LL positions. |
| 8/1/17 | tIP SOLD -9 LL 100 19 JAN 18 27 CALL @7.60 BATS | 6,840 | “ |
| 8/1/17 | tIP BOT +20 LL 100 17 NOV 17 40 CALL @1.20 PHLX | (2,400) | Opening on more position. |
| 9/12/17 | SOLD +20 LL 100 17 NOV 17 40 CALL @2.85 PHLX | 5,700 | Closed last position for 238% gain |
| TOTAL P/L (before commissions) | 16,767 |
