Life May Not Give Second Chances, but Equity Options Can

The rally that started on March 24 caught almost everybody by surprise. The economy was shutdown, unemployment was surging and sure to get much, much worse. Stocks had just plunged from all-time highs to bear market territory in the shortest time period in history. Taking all those factors into account made almost everyone ultra-bearish. When stocks started rising again, in the midst of nothing but bad news, few people believed they would continue higher. Only seasoned stock market veterans realized that when everything looks the worst ... stocks are selling for incredible prices. From that Monday, March 23, intraday low through Wednesday, the S&P 500 fund gained almost 43%. The Russell 1000 Value Index fund rose just shy of 41%. The much maligned Russell 200 Value Index fund surged by 44.87%, surprisingly beating out large-cap stocks. Most shares are so much higher now than even a month or two ago that traders, who missed getting in cheaply, don't know what to do. Chasing shares which already moved up can be risky. Sitting in cash earning close to nothing while stocks continue higher is painful, too. Here are two examples of how to play stocks I recommended recently, but which have already posted big gains. I loved Vera Bradley at $4.88 on May 25. It fluctuated as high as $6.74 intraday on Thursday, before closing at $6.36. At that price it was up 30.3% from its recommended entry point. The graphic below showed my feeling about VRA from my Real Money Pro article last month. You can't buy VRA under $5 anymore. You could, however, still sell Nov. 20, 2020 expiration date puts at either $5 or $7.50 strike prices. Even with the shares north of $6, I was able to write (sell) those $5 puts for $0.85 per share now. The $7.50 puts did not trade on Thursday, but the mid-point of the bid-ask spread implied you could have sold them for about $2.40 per share. Worst-case, forced purchase prices on those put sales dropped to either $4.15 or $5.10 per share respectively. Sellers of the $5 strike will either keep $850 per 1,000-share commitment, if VRA remains north of $5 through expiration day, or own the stock even cheaper than the original price of my write-up. Sellers of the more aggressive $7.50 puts could pocket as much as $2,400 per 10 contracts sold or end up owning 1,000 VRA for $5.10 per share net. That would be a savings of $1.26 per share or $1,260 vs. simply buying at VRA's Thursday closing quote. Real Money Pro subscribers who got in near $5 a couple of weeks ago can now sell November $7.50 covered calls for $1 or Nov. 20, $10 strike price calls for $0.55. If called away the net exercise prices would be either $8.50 or $10.55. Those both would represent hefty gains from the trade inception price, achieved over a less than six month holding period. Count on Michaels Arts and crafts retailer Michaels turned out great for those who purchased in the low $2s when I wrote it up. On Thursday, MIK reported earnings and showed incredible volatility. It first traded lower, touching $4.16, briefly before rallying as high as $5.26. At 4 p.m., MIK closed at $4.95, more than double my recommended price. The graphic below was published with my article when MIK was still $2.17. Selling MIK's Jan. 15, 2021 expiration date $2.50 put today, with the stock in the $4 -$5 range netted a cool 50 cents a share. That took the worst-case break-even price all the way down to $2. Early in the day, with MIK at $4.20, I sold some of the more aggressive $5 strike price puts for $1.90, dropping the if exercised price to $3.10. At 4 p.m., with MIK at $4.95, you could still pocket $1.70 for a $3.30 break-even. I included Michaels Jan. 15, 2021 call prices in the graphic above, at strikes of $10 and $12.50, to show the diversity of opinions about the stock's future course. Put buyers are betting on a large decline, but those call buyers can't win unless MIK goes up to at least $10.65 or $12.91 respectively. I don't have room to detail the math on the buy/write combinations for MIK and VRA, but you can do that for yourselves if you understand the technique. Selling puts, all by themselves, is a fine way to potentially own stocks at prices that are no longer available. It's like being able to board the train after it has already left the station. How cool is that?

Life May Not Give Second Chances, but Equity Options Can

Here's a fine way to potentially own stocks at prices that are no longer available.

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