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.
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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.
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