Splunk 1st Week of June Options Trade
Welcome to my 1st Weekly Options trade publication. From now till 1st June 2024, I intend to record my weekly options trade.
There are a few rules I follow generally for options selling/buying:
Always sell puts only for companies you want to own.
Always sell calls only for stocks you own.
Always be ready to own the underlying for a very long time at the average strike you are assigned.
Always be aware of max loss.
Trade for 1st Week of June
In market speak, I am Short 4x SPLK Puts at $1.45 limit.
What this means is I am short puts on 4 lots (400 shares, 100 shares per lot/contract) of SPLK 0.00%↑ shares.
Being “short a put” means I’ve sold the right to someone to sell me their shares by a certain price by a certain time.
In this case, I’ve sold someone the right to sell me 400 shares of SPLK 0.00%↑ at $97 per share for a total value of $38,800USD.
The cash/credit I am receiving for this trade is $1.45 per share for a total of $580. Or approximately 1.4% of $38,800USD.
The expiry of the option is set for 2nd June. Since 1st of June was a memorial day and markets were closed, I was unable to sell on a Monday and earn an extra day’s worth of “time.”
Rationale
It is crucial to understand my approach to options trading.
#1 - I always position myself to win.
#2 - Never forget rule #1. Never get too greedy. If you’re not being compensated more than 0.5% of capital at risk for a weekly trade, in general, its not worth it. (earning .5% every week for 48 weeks a year is 24% return on capital a year, more or less 24% a year is good with me).
What do I mean? In my current trade, I am comfortable owning 400 shares of SPLK at USD$95.55 ($97 strike less the $1.45 I have been paid to own the share). If the value of the shares drop over this week enough to trigger the sale, I will be effectively owning 400 shares at $95.55 each.
If on the other hand, the share do not fall but remain stable or rise over time, then what happens is that I get to keep all of the USD$580 credit and I get to sell another batch of options for the 2nd week of June.
Win-win either way. The real scenario of risk here is where (1) I am assigned the stock and (2) it falls precipitously below my average buying price of $95.55. In which case I am prepared to hold SPLUNK for a much longer period of time while selling .30 delta otm call options against my position.
What .30 delta means is that I am selling call options that only have a 30% chance of expiring in the money while holding the shares.
let’s pretend i am forced to buy shares of SPLK at $95.55. The next week, share prices start dropping to $70-$80. I am now able to only sell call options at $85 - $90 for example → a priced below my average.
Let’s say I sell a $90 call and someone eventually calls it. I can “buy back” the right to the call, or I can let the stock go. Either way, I have to “eat the loss”, letting go my position with a slight loss (95.55-90+whatever credit I get for the call).
Obviously, this strategy isn’t meant for everyone.
#1 - You must have a ready list of stocks with options liquidity that are rewarding enough for you to take the risk of selling calls and puts. Typically, these companies are large, picture META 0.00%↑ GOOG 0.00%↑ NFLX 0.00%↑ and the likes.
#2 - You must define the price at which you are willing to own the business and be willing to hold it for the long run.
#3 - You must be able to price the option you are willing to sell or determine if its the right time/duration/price to buy.
Why Am I Comfortable Owning $SPLUNK?
Data and analytics will exponentially increase over the next decade.
I think generative AI will drastically alter the course of previous data production expectations.
I think tech enabled product companies w sticky software and analytics will earn the lion’s bulk of profits over time as the need to process, store and analyze the data grows.
SPLUNK has netted some great new logo wins over the past year. I think their business momentum, secular tailwind drivers, and general profitability is in the right direction overall.
Disclaimer: This is not financial advise. You are responsible for you own profits / losses stemming from any ideas in this publication. I will not hold any responsibility over your profits / losses.
See you all next week.