1 Week/1%

“1 Week/1%” is not only the name of one of my strategies but it’s the return I look for when making a trade. When investing, Rate of Return is very important. All investors want to know what they might make on the money invested and how long will it take. You might think I’m being greedy or unrealistic but you would be wrong. You talk to any options trader, you will see, “1 Week/1%” is very realistic. Let’s examine “1 Week/1%” and see what it means.

“1 Week/1%” is the return I desire when looking for options I’m interested in. I am talking about the premium only. I want a 1% return on my investment from the premium when I sell an option. I say “premium only” because some times you sell an option and make money with the stock in addition to the premium. When I sell an option, I have no idea what the stock is going to do but I know what premium I’m going to receive. The least I should make is the premium, and I want the premium to be 1% of the money invested. If I also can make money on the stock, great! But I get into the deal for the premium. Let’s look at an example using the graphic below.

GoPro (GPRO)

Stock price $16.19

This is a real example of an Option Chain for GPRO. Today is Monday, Jan 11th and this Option Chain is for the Expiration Date for this coming Friday, Jan 15th. Basically 1 week, 5 trading days. Above the graphic you will see the stock price is $16.19. Whenever I do my “1 Week/1%” strategy I look for a Strike price of 1 and a half to 2 and a half dollars above the stock price. This would be Out-of-the-Money. All the different Strike Prices are listed below where it says “Strikes.” The option  symbol’s are listed below the word “Symbol.” As you can see they are in the same format I use when explaining an option order in my post. Next over to the right you see the “Bid” & “Ask.” Sticking to my rule, when the stock price is $16.19 I’ll look at the $18 Strike Price which is highlighted is yellow. If you go across from the $18 Strike Price you’ll see the Bid-Ask is ranging from $.20 to $.22. The $.22 is the Ask which is actually the price you would have to pay if you were buying an option but I would enter the $.22 as a price to sell an option and as the stock fluctuates the odds are I would get executed. In this case the stock is $16.19. If you bought 1000 shares it would cost $16,190. If I got executed on the sale of the option for $.22 the total premium would be $220. To get the “Rate of Return” you divide the money made by the money invested. 220 divided by 16,190 = 1.3%. This is a real situation. This is fantastic! If you bought the stock and got assigned at $18 you would make $1.81 per share on the stock. Thats $1810 on the stock and $220 premium for a total of $2030 on the entire trade. On a $16,190 investment, thats 11.1%. You go put $20,000 in a CD at your bank and see what you get. It wouldn’t even be 1.3% and that would be annually. If I’m not mistaking, annually means yearly. In this trade above I would get the 1.3% or the 11.1% weekly! If you did this same trade every week for a year, the premium alone would be $220 X 52 = $11,440. And don’t think it can’t be done. Watch “Main Street beats Wall Street” and you will watch me do it. I post my trades as I make them.

Let’s look at another real situation below with Facebook.

Facebook (FB)

Strike Price $97.33

Here the 1 week FB Option Chain. Also from Monday, Jan 11th and these Expiration Dates are for this Friday, Jan 15th. As you can see I have the $99.50 Strike Price highlighted. The stock price is $97.33, and let’s say we sold a Call at $1.25 which would be between the Bid and the Ask. On 1000 shares the stock would cost $97,330 and the premium received would be $1250. I know 1000 shares is a lot of money for a $97 stock but I’m making a point for percentage purpose. Here 1250 divided by 97.330 = 1.2%. This is what I look for with my “1 Week/1%” rule. If you got called out of the stock in this deal the stock gain would be $2.17 per share or $2170 on the stock. With the premium the total would be 1250 + 2170 = $3420

This is the premium I look for with most of my trades. Many premiums are much below or above the 2 examples I just showed you. I do not like a premium very low or very high. Below I have a graphic of the Option Chain for Best Buy (BBY).

Best Buy (BBY)

Stock Price $28.95

As you can see the premiums are much higher percentage wise compared to the 2 above examples. Here the stock price is $28.95 and the $30.50 Strike Price is between $.74 and $.84. Lets say you sold a Call for $.80. On 1000 shares the stock cost $28,950 and the premium would be $800. That’s 2.7%! A little high for what I look for. Many times this means there’s news about to come out on the company and the volatility is forcing the premium up. I avoid these situations.

Let’s look at another with a very low premium.

Coca Cola (KO)

Stock Price $41.51

Here we have Coca Cola with the same time frame of an Option Chain. Here the stock price is $41.51 and the similar Strike Price is only between $.02 and $.07. Let’s say we sold for $.05. On 1000 shares the stock cost $41,510 and the premium would only be $50. Here you would have to ask yourself, is the “Rate of Return” worth the investment? Once you understand how premiums work you will understand why some premiums are high, some low and some that fit into my optimum situation of “1Week/1%” model. This all comes with time and experience. If you have any questions on how premiums work send me an email.

Coachsjc@gmail.com