iQIYI Call Options: A 300% Return
I look at options trading and investing as an odds game. Stock XYZ is in an uptrend, option activity is wildly bullish, so I buy a call as I think the odds favor more upside. And when the odds of a further advance drop, I sell. There’s much more to it than that, but that’s the gist of it.
And two weeks ago, following a meteoric rise in iQIYI (IQ), a position in which we had a quick profit of over 300%, I felt the odds were no longer in favor of more upside, so we sold iQIYI call options. Here was my trade alert:
Sell Existing Position: Sell your iQIYI (IQ) December 25 Calls for $15 or more.
“IQ’s meteoric rise has pushed our position to a profit of approximately 300% in just two weeks. And while it’s possible that the stock is going to continue to shoot higher, I know that at some point this run on recent Chinese IPOs is going to end abruptly. When this will happen no one knows. And because I won’t be able to time the top, I am going to sell today for a big profit.
“To execute this trade, you need to:
“Sell to Close your IQ December 25 Calls.”
How to Hedge a Portfolio with Options
We were filled on this iQIYI call options sale at $17.60, which was a profit of $1,330 per call purchased.
Here at Cabot Options Trader our tactical trades are on fire. From February 1 through April 1 we’ve registered 7 winning trades in a row with an average profit per trade of 35%. We’d like to share our success with you by giving you a chance to test-drive our trading advisory at our lowest rate.
Here at Cabot Options Trader our tactical trades are on fire.
From February 1 through April 1 we’ve registered 7 winning trades in a row with an average profit per trade of 35%.
We’d like to share our success with you by giving you a chance to test-drive our trading advisory at our lowest rate.For more details, click here.
And when I feel that the odds of a market advance are no longer favorable, I also can short the market, or hedge my portfolio via a put purchase on the S&P 500 (SPY) or Nasdaq (QQQ). And buying puts on the QQQ is exactly what I recommended to my Cabot Options Trader subscribers recently (to learn which puts I recommended, click here).
Here is a great article I found on the CBOE website for calculating how to hedge a portfolio. Please note that the article is using the SPX. When we trade the S&P 500 at Cabot Options Trader, we trade the SPY, which is worth 1/10 of the SPX. For example, today the SPX is trading at 2,750, while the SPY is trading at 275.
Calculating Index Contracts to Hedge a Portfolio
“Stock prices tend to move in tandem with the overall stock market as measured by the S&P 500 ETF Trust (SPY). The 500 stocks that comprise the S&P 500 Index represent almost 85% of the stock market value in the United States. Therefore, the index is an excellent reflection of the overall stock market. If an investor owns a portfolio of stocks and is concerned about a near-term downward move in the overall market, purchasing the appropriate SPX put options could be a desirable alternative to hedging each stock individually.
“Determining the number of contracts to use to hedge a portfolio is a fairly simple process using the following formula:
“Each SPX option represents $100 times the strike price. For instance, if an SPX put with a strike price of 1250 is utilized, it would represent $125,000 of market value (1250 x $100). So, an investor with a stock portfolio valued at $500,000 would purchase 4 SPX 1250 puts ($500,000 / $125,000) to hedge the portfolio.
“For example, consider an investor who has a diversified stock portfolio valued at $500,000 and is concerned about a market correction of 10% over the next 30 days. With the S&P 500 Index quoted at 1250, a correction of 10% would result in the S&P 500 trading at 1125.00. The investor could choose to purchase four 30-day SPX 1250 puts quoted at 25.00 ($2500 per contract) that would have a total cost of $10,000 or 2% of the value of the portfolio.
“The previous table shows the dollar and percent results of this strategy based on the S&P 500 index at a few levels upon option expiration. Because at-the-money SPX option contracts are used for hedging, the maximum potential loss is equal to the 2% cost of hedging. 2% of performance is sacrificed on the upside if an unanticipated market rally occurs. A payout comparison between a hedged and un-hedged portfolio appears in the payout diagram below.”
Here is another example from the CBOE website that may be a bit easier to understand:
“An investor has a portfolio of mixed stocks worth $2 million that closely matches the composition of index XYZ. With the current level of index XYZ at 100, this investor wants to buy XYZ puts to protect the portfolio from a market decline of 4% over the next 60 days.
“The investor might determine the number of puts to purchase by dividing the amount to be hedged (the $2,000,000 portfolio) by the current aggregate value of index XYZ (100 x 100 multiplier = 10,000). $2,000,000 / 10,000 = 200, so the investor purchases 200 XYZ puts.
“To establish the protective put position with the downside protection needed the investor chooses an XYZ put strike price 4% below the current XYZ level of 100, or the 60-day XYZ 96 put. The XYZ 96 puts are purchased for a quoted price of $0.75, or $75 per option. 200 puts are therefore bought for a total of $75 x 200 contracts = $15,000.
“XYZ Index at 100
Buy 200 XYZ 96 Puts at $0.75.”
While I don’t think the market is headed for a major decline, I did recently buy puts to hedge Cabot Options Trader portfolios as the price was right, and I felt the odds of further upside for the market were limited.
To find out more about options and how you can profit, consider taking a subscription to Cabot Options Trader. Just recently, we closed a position in IQ Calls for a 309% gain, QQQ Puts for 36% gain and MSFT Calls for 41% gain.
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader, Cabot Options Trader Pro, and Cabot Profit Booster. He uses calls, puts and covered calls and more to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.Learn More