Sunday, June 17, 2012

The Greeks made me at least a $1000

I always tell you about long term investing and not to worry about the day-to-day media noise.  So why was I clinging to my Windows Phone this weekend? Well… I had a short term trade and it hinged a bit on the outcome of the Greek elections.

You must be aware of my dabbling in the option markets to generate extra cash. I wrote a whole series of posts on the topic. So what made me so dependent on my, by now loved and trusted Windows Phone? Well, I wanted to sell JNJ first thing on Monday morning for $65.90 U.S. This would likely go through if the more conservative parties in support of the EU bail-out won while the markets would likely crater if the more radical left won the election. Not that this matters in the large scheme of things. I know Johnson and Johnson is a great company and its stock price will sooner or later go back over $65.00 and I would make some money anyway.

It all began some time ago, April 03 when the stock market was in a blissful rally. JNJ was approaching $66 per share and I wanted to make some quick cash by selling a put option. Using my earlier mentioned ‘Option Tracker’ spreadsheet, I calculated that there was no chance for the stock to fall below $65.00 for the foreseeable future and thus I sold 4 put contracts with a strike price of $65 to expire on May 18. Proceeds after commission were $245.00.

That is easy money provided the share price of JNJ wouldn’t fall below $65 prior to May 18. To remind readers: when you buy an option you pay for the right to do something while when you sell an option you take on the obligation to do something. In my case, I took on the obligation to buy 400 shares of JNJ for $65.00 if the share price fell below $65  prior to May 18. Well, that was not likely to happen I thought; hence the ‘easy money’.

Then the European Debt crisis stuck up its ugly head again and we got a correction. The Greeks had an election the results of which did not let them construct a government. New elections had to be held on June 17th and hopefully the pro-Euro forces would win or else… Armageddon, the End of the World,…. Blah, blah, blah.

JNJ dropped in May to $63 and my options were exercised and 400 JNJ shares were assigned to my account for $26,043.00 (including commission). There was no cash in the account, so the money was borrowed. Oh… my G… , I don’t want to increase my debt at this point in time. But… he… JNJ is a good stock, the crisis will pass and JNJ will go back over $65.00 maybe even higher; then I sell.

Next thing that happened was that I received $207.4 in dividends. Then the market in its wisdom started to turn around and JNJ shot back up like a rocket. Friday it closed at $65.90 and I wanted to cash in. Oops, the Greek elections – are they in or are they out? My Windows Phone just reported they’re in.

So on Monday morning, there will be an enormous rally until the moment that somebody feels that the news is not good after all. But then it will be too late for the sucker who bought my JNJ stock. My total profit: $245 put option premium plus $207.40 dividends plus $350.01 sales proceeds minus $90 interest = $712.01 on an investment of zero. That is an infinite ROI.

In the worst case, I might have had to hold on to JNJ which I would have been happy to do because buying it for $65 minus the option premium of 61 cents or $64.39 would have not been bad either. In the meantime, my whole stock portfolio may shoot up Monday morning and that makes me for a few seconds think that the Greeks earned me a thousand dollars plus over the weekend. Zeus be thanked.

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