Trade Highlight #5

This Trade Highlight we are not discussing a quick success story. I did end up making a small profit, but I had to go through hell first. I didn’t stick to my strategy and acted on impulse. I almost paid an enormously high price for it.

Last week we discussed my AbbVie puts, yes plural! If you haven’t seen that post yet you can find it here.

Introduction

I Tweeted About Initiating The Beyond Meat Short Call On The 7th Of June.

As you can see above, I initiated my first option on the 7th of June. Quickly after this Tweet I decided to put another iron in the fire. Here are the options I’m talking about:
-C BYND 19 JUL 2019 $145 $7,10 BOUGHT BACK: $12,80
-C 15 JAN 2021 $180 $19
-C BYND 21 JUN 2019 $160 $3,90 BOUGHT BACK: $13,04
-C BYND 15 JAN 2021 $200 $27,30 BOUGHT BACK: $17,00

All information about this trade can be found at numbers 80, 81, 83 and 93 via my options page.

Basicly what happened is that I sold two short calls on impulse (speculating the stock price would go down), when my first call went negative because the stock went up even further I decided it was a good idea to sell a second call.

As you can see above, I had to quickly roll out the second call because it got very close to the expiration date while being ‘in the money’. This means that it was very likely that the trader on the opposite side of the trade would have excercised the contract. I would’ve had to deliver 100 BYND shares at $160 while at the 17th of June the actual price of BYND was between $180-200.

I managed to gain €115 on the rolled out option when I bought back the JAN 2021 $200 call on the 24th of June. Luckily the share price came down a bit. I closed my JUL $145 call on the 8th of July. I decided not to wait to long and to simply roll the option out to January 2021, with a strike of $180.

Background information

Beyond Meat debuted on Wall Street on the 19th of May. Ever since the share price kept skyrocketing. For a company that makes a loss and only has sales of around $80 million a year, a market capitalization of $10 billion is pure madness.

On the 6th of June Beyond Meat reported their quarterly results, while the company at that point had already risen from $25 to $100, there was more to come. On the 7th of June the stock jumped around 38% to close at $138. This is where I decided enough was enough. At work we had been discussion the stock and how insane the current valuation was. In the train back home I decided to initiate a position.

This decision was completely out of line with any options trade I’ve done since November 2018, I guess I saw some quick Dollars coming in. Oh boy was I wrong.

The stock continued to go up to a whopping $200, leaving my positions around $6000 in the red. And even worse was that I had to seriously consider my choices in order not to get taken out by a margin call. It means that my broker has a limit up to where I can use margin, if I get under that limit they could decide to sell something from my portfolio to get me positive again.

The rising stock price meant both calls needed more money in my account to make my broker feel secure. On top of that the percentage that they calculated for Beyond Meat options went up as well. I was fortunate enough to have enough cash to just barely make it, but some coworkers of mine have been less fortunate.

In the long term I’m still convinced I’m right, however, because of the little amount of shares out on the market the price is very easy to influence. This means that the price can keep going up, although the fundamentals could never support the current valuation. I will refer to a famous quote: “the market can stay irrational longer than you can stay solvent”.

Long story short

I learned an utterly valuable lesson here. I saw quick profits, acted on impulse and almost got tremendously punished. Right now one of the two positions is closed at a profit, the other one is still open. However I profited €115, this might’ve cost me one or two years of my life because of high stress levels.

For months I’ve managed to make quite a bit of money by following a strategy. Selling options on blue chip companies and have atleast a 10% margin of safety. Worst case scenario, I have to spend money on stocks I wouldn’t mind owning. I threw this profitable strategy overboard and acted too quickly.

The most notable leftover from this trade is a beautiful post it on my computer monitor with the words ‘Beyond Meat… Stay The Course’. Never again…

For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

2 Comments

  1. Oh man this is so interesting. I’ve been thinking about this trade you made and I’ve got some thoughts I want to share. Because I think I disagree with you here.

    You didn’t make a mistake by making this trade. Your rationale was solid. There was good reason to think BYND would go down. The mistake was that the size of the position (and with that the potential losses) was too big compared to your portfolio.

    Let’s say you would have a portfolio of €600k. All of a sudden, a €6k loss wouldn’t be that big of a deal right? It would be a little sad, sure, but it’s only 1%. Now compare that €6k loss to a €45k portfolio. That’s a pretty bad loss.

    I’ll show you what I mean by giving an example to illustrate this.

    Let’s say you get to play a game (as often as you like). You roll a 6-sided dice. If it lands on the 6 you gain €10 for every €1 you put in. If it lands on one of the other five numbers you lose €1. In the long run this game is profitable for you. Because even though you only have a 16.6% chance of winning with every throw of the dice, the times you win make up for all the losses. All you have to do is make sure to not run out of money. If you bet 1% of your money at a time, you’re pretty safe, because the chance of 100 losses in a row is very small. But bet 10% of your money at a time, and all of a sudden you stand a really good chance of going broke, even though the expected value of the game is positive.

    Now, I’m not sure if the BYND trade had a positive expected value or not. Maybe. Like you, my strategy is to also only sell puts on blue chip stocks, with some margin of safety. But I did want to share all of the above.

    Anyway, thanks for the trade highlight! I really like them, as they help me learn and get better.

    SD

    • DutchIndependence

      Hi SD, thank you for your extensive reply. I really love when you tell me your thoughts as we can both learn a lot from such a discussion. I do agree with you that the size was way to huge, my impulsive decisions led me to double down on a position within the first hour of this trade. This is obviously crazy in hindsight.

      I do think in the long run I’m right and this is why I have rolled out both options and one of them still remains in my portfolio. However it was plainly stupid to firstly double down and secondly to initiate such a position in a hot stock with very little free float. A lot of shareholders are not even allowed to sell until October. This means the price can stay artificially high for a few more months.

      Nice example with the dice, this is the game we both play and you explained it brilliantly, thanks!

      Have a great week SD!

      DI

Next ArticleGUEST POST: Why I Am Investing My 401(k) in Small Caps