PayPal - Importance Of Risk-Defined Option Trading

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Options trading can provide a meaningful addition to one’s portfolio when used in a disciplined manner. When used as a component of an overall portfolio approach, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital can be achieved. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. An options-based portfolio can provide durability and resiliency to drive portfolio results with substantially less risk via a holistic beta-controlled manner. When engaging in options trading, specific rules must be followed, and one of the most important rules is to structure every option trade in a risk-defined (put spreads, call spreads, iron condors, etc.) manner.

PayPal (PYPL) was a recent example where the stock witnessed a massive meltdown from an ill-advised acquisition target (Pinterest) coupled with quarterly earnings that were deemed dismal. These two events culminated into a 35% slide from a 52-week high of $310 down to ~$200 post-earnings. Hence the importance of risk-defining all options trades to limit any downward stock movement beyond your protection strike. Risk-defined options trading prevents any losses beyond a specific strike price, avoids the assignment of shares, does not require a significant amount of capital, and does not potentially result in unrealized losses while soaking up capital with any share assignments.

Risk-Defined Options Trading

Risk-defined option trades are straightforward. Below is a theoretical example deploying a put spread on a stock that currently trades at $100 per share.

In the above put spread scenario, premium income was $60 per contract ($1.00 – $0.40) and the maximum risk was $440 ($95 – $90 = $500 – $60 of net premium income). If the shares remain above $95 by the expiration date, then the option expires worthless, and the seller of the put spread locks in a realized gain of $60 or a return on investment of 13.6% ($60/$440). This is the essence of risk-defined options trading, where a minimal amount of capital is leveraged and return on investment is maximized.

No matter where the stock moves, losses are capped at $440 per contract even if the underlying stock falls to zero. This is the case due to the protection put leg that was purchased at the $90 strike. Therefore, in the worst-case scenario, if the stock were to fall to zero, you would be assigned shares at $95 and then sell the shares for $90 for a max loss of $5 per share less the $0.60 in premium, thus max loss of $440 per contract.

PayPal Case Study

PayPal (PYPL) experienced a dramatic fall from $296 on September 8th to ~$200 on November 10th after a two-step debacle of a mishandled acquisition target and a big earnings miss. This 32% downslide happened over the course of 8 weeks. A put spread of $245/$240 was sold on PayPal, and a near max loss was suffered. However, the $40 additional dollars per share in unrealized losses were avoided with the $240 protection strike. In a cash-covered put situation, shares would’ve been assigned at $245, and a subsequent ~20% loss would’ve been incurred. Cash-covered puts can not only be dangerous in situations like this but can also tie up substantial amounts of capital with unrealized losses. Therefore, a risk-defined put spread was essential in order to protect downside risk and avoid any capital-intensive assignment of shares.

Figure 1 – The importance of risk-defined options trades such as put spreads, call spreads, and iron condors which is the foundation of options trading – Служба торговых уведомлений и Инструмент проверки опционов

10 правил гибкой стратегии опционов

Дисциплинированный подход к гибкому портфелю, основанному на опционах, необходим для навигации по очагам волатильности и предотвращения рыночного спада. Если опционы используются для достижения результатов портфеля, необходимо принять множество защитных мер. При продаже опционов и управлении портфелем, основанным на опционах, необходимы следующие рекомендации (рис. 3):

Заключение

An options-based portfolio can provide durability and resiliency to drive portfolio results with substantially less risk via a holistic beta-controlled manner. When engaging in options trading, specific rules must be followed, and one of the most important rules is to structure every option trade in a risk-defined (put spreads, call spreads, iron condors, etc.) manner. Therefore, a beta-controlled, options-based strategy is key, and the market meltdown in September reinforces why appropriate risk management is essential. An options-based approach provides a margin of safety while circumventing drastic market moves while containing portfolio volatility.

PayPal (PYPL) was a recent example where the stock witnessed a massive meltdown from an ill-advised acquisition target coupled with poor quarterly earnings. These two events culminated into a 35% slide from a 52-week high of $310 down to ~$200 post-earnings. Hence the importance of risk-defining all options trades to limit any downward stock movement beyond your protection strike. Risk-defined options trading prevents any losses beyond a specific strike price, avoids the assignment of shares, does not require a significant amount of capital, and does not potentially result in unrealized losses while tying up large sums of capital with share assignments.

Ной Кедровски
Автор INO.com

Раскрытие информации: Stock Options Dad LLC — это зарегистрированная инвестиционно-консультационная фирма (RIA), специализирующаяся на услугах и обучении на основе опционов. Ни с одной из компаний, упомянутых в этой статье, деловых отношений нет. В данной статье отражено мнение РИА. Эта статья не является рекомендацией покупать или продавать какие-либо упомянутые акции или ETF. Автор призывает всех инвесторов провести собственное исследование и комплексную проверку, прежде чем инвестировать или предпринимать какие-либо действия в торговле опционами. Пожалуйста, не стесняйтесь комментировать и оставлять отзывы; автор ценит все ответы. Автор является основателем и управляющим членом Stock Options Dad LLC – зарегистрированной инвестиционной консалтинговой фирмы (RIA). www.stockoptionsdad.com определение риска, использование минимального объема капитала и максимизация прибыли от инвестиций. Чтобы получить более увлекательный краткий контент, посвященный опционам, посетите сайт Stock Options Dad LLC. YouTube канал. Пожалуйста, направляйте все запросы на [электронная почта защищена]. Автор владеет акциями AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY и USO.

Source: https://www.ino.com/blog/2021/11/paypal-importance-of-risk-defined-option-trading/

Отметка времени: 13 ноября 2021