Up and up we go.
We're hitting new record highs this morning but there's an awful lot of protective hedges being sold as traders are starting to cover their bets. With U.S. equities rising for seven months running, the market underbelly shows institutional managers are bidding up protective options, while signs of restraint are emerging in the speculative world of retail investing.
Rather than add more hedges, we simply cashed out positions but yesterday we added two positions to our Money Talk Portfolio that can make $53,500 by Jan 2023 and we can keep doing that with our cash every week and make another $2,782,000 in a prolonged rally – so we certainly don't have any fear of missing out.
In our Live Member Chat Room yesterday, we were discussing Rio Tinto (RIO) who are $15 off their highs after paying out a $5.61 special dividend on August 12th and $75 per share is a $121Bn market cap for a complany that made $10Bn last year and made $12Bn in the first half of this year – so it sure seems cheap to me!
When a stock is volatile like this, you take advantage of it by selling puts, which are promises to buy the stock at a set price on a later date. At the moment, the 2023 $62.22 puts are $7.15, which means you get PAID $7.15 in exchange for your promise to buy RIO for $62.22 between now and January, 2023. You can be assigned the stock at any time so make sure you REALLY want to own it but, no matter what, you get to keep the $7.15/share.
That means, even if assigned at $62.22, the net cost of the stock would be $55.07 per share, which is $20 (26%) below the current price. We can also establish an ownership position buy buying 2023 $72.22 calls for $10 and selling 2023 $82.22 calls for $5.50 for net $4.50. That means we can do this:
- Sell 5 RIO 2023 $62.22 puts for $7.15 ($3,575)
- Buy 7 RIO 2023 $72.22 calls for $10 ($7,000)
- Sell 7 RIO 2023 $82.22 calls for $5.50 ($3,850)
That spread works out to a net credit of $425 so we no longer have as much of a discount if assigned and we'd end up owming 500 shares of RIO at $62.22, less and 0.85/share credit for net $61.37, which iss still $13.70 (18.2%) below the current price. So that's our worst case and our best case is RIO goes up and we collect $7,000 for the spread and keep the $425 for a $7,425 (1,747%) gain on our cash outlay. Aren't options fun?
We already have a more aggressive play in our Long-Term Portfolio but if RIO goes any lower, I'll be adding it to more of our portfolios – as this is a really nice way to generate some income. As our risk is owning 500 shares of RIO for $30,685, in a $100,000 portfolio with $200,000 in buying power, we could have 7 trades like this and our upside potential would be $51,975 – a very nice return for 16 months.
In reality, as a trade like this matures, we downgrade our presumed risk and we're able to go on and open up another trade, so we can end up with 14 trades instead of 7 in a good market. That's why we don't fear missing out in a market that never goes down – we can always string together a group of trades that will give us very nice returns without too much downside risk.
Meanwhile, we're waiting for 2024 options to come out so we can sell more premium, which gives us better hedges. Apple (AAPL) has Sept 2023s out so we're almost there. With AAPL at $151.83, you can sell the Sept 2023 $105 puts for $7, which puts you into the stock at net $95, more than 33% below the current price.
Now THAT one we can put in our LTP, as we'd LOVE to own AAPL for a 33% discount. It will probably never happen but then we'll keep the money so, in our $2M portfolio, we can buy $200,000 worth of AAPL and that would be 2,000 shares at $98 which means we can sell 20 puts but we can start with 10 and see how they go – still pocketing a nice $7,000 for promising to buy AAPL for 33% below the current price.
Aren't options fun?
