Making the most of Headlines
Making the most of investments involves keeping an eye on things. It is not just set and forget. If you are serious about having enough money later in life to live as you want to, then you must pay attention to your money. If you really want to juice your returns though, then you must spend some extra time to focus attention on the business news.
The market has settled down since the election. People have made a lot of money on expectations of a wildly positive business environment. The Vix’s range has settled down to between 13-15, enough to still allow profitable option trading. I trade my daily ‘tried and trues”. These are options on stocks that consistently allow me to write, and close, puts and calls on them. Most are ones I want to own or already do. But every day there are one or two stocks that rise or fall on something in the news. The reaction to a headline is often a quick rise or fall in the stock price. Frequently it is an over-reaction either way. Over-reactions mean money in my pocket.
Today was a case in point. Lilly (LLY) rose over 4% on news that 1: the Federal government may allow weight loss drugs onto its Medicare/caid platforms and 2: Amgen (AMGN), a LLY competitor dropped over 6% as it had a Phase II trial on its weight loss drug that did not meet Wall Street’s exceptions (more on this later). Based on this news, I wrote a naked call on LLY as soon as the market opened and closed it in less than a half hour later. The market gyrations in LLY over the news meant its stock price ranged from up 2% to 4.5%. That quick first trade was easy money. I re-wrote the same option again after I closed it, selling it at a higher price than I originally did and hope that tomorrow it will bring me a little more cash when I buy it back. Enthusiasm for a particular headline usually fades the next day.
This trade was a “naked call” (i.e. a call on stock I do not own). I avoid and strongly advise beginners against naked calls. They can be costly and are responsible for some of my biggest losses. I did own LLY but was called away ages ago (at a nice profit). When I was called away, I immediately wrote a put contract on LLY at $850 with a premium of about $75 for January of 2025. Given LLY’s current price is $790, it is very likely I will be put LLY, which is why I was willing to write a ‘naked’ call. This call expires on the same day as the put, making this what I call a ‘pair’ trade. I will be put the shares and then use them to fill the call. I may very well close and open either the LLY call or LLY put closer to the expiration in January, as trades, and then repeatedly re-write them. I will let you know if I close the LLY call tomorrow (and if I write it again). The ideal outcome for me is to sell and buy back lots of LLY calls between now and expiration in January and hang onto the put so I can get LLY back in my portfolio.
Amgen (AMGN) was another story. Given its drop, and the fact that the trial did not seem as bad as the financial analysts were making out, I wrote a put immediately. I set the strike price at a level 10% below where the stock had already dropped to. Before the day was out the stock had recovered, and I closed the put for a nice profit. I re-wrote the put on the market close and expect I will make money tomorrow as well.
All up I closed 13 trades today - 6 were puts on stocks I don’t own but would like to (I would not mind being put them). The rest were calls on stocks I own or repeats of trades as I often open and close the same option contract on a given day. Stocks I traded today included: APP, NFLX, ALB, CRWD, LLY, AMD, ZTS, VST, SNOW, QCOM and GEV. Total profit: $23.9