I Set Aside $1000 to Learn Options Trading

Part 2: Bullish $FB Call

This is Part 2 of a larger series.

This italicized text is copypasta and will be at the top of each of my posts for my self-learning options adventure where I outline how each option result review will be formatted.

Each trade review will have the following sections, always in this order:

  1. Overview of the Option(s) — full option name, security name, strategy, outlook, option type(s), expiration date(s),
  2. Due Diligence- the research I did in the underlying which led to the trade that I made
  3. Opening the Option(s) — when I opened the position, credit received/price paid
  4. Developments / Changes During Holding
  5. Closing the Option(s) — when I closed the position, credit received/price paid
  6. Review — did I win or lose? What was learned and what I could have done better. ***THE MOST IMPORTANT SECTION!*** (Best for last, ya know)

Also, a note on the arithmetic signs used throughout, I use the traditional options style, that is, a ‘+’ stands for any of the following: a buy of an option (ex. +1) and credit received from selling an option (ex. +$500), where as a ‘—’ stands for the opposite in those cases: a sell of an option (ex. -1) and cash spent to purchase the option (ex. -$500). Market values of any held options are always positive (or $0).

1. Overview of the Option(s)

a. Option(s) technical name: BUY +1 FB 29 MAR 18 175 CALL

b. Security Ticker and Name: $FB, FACEBOOK INC COM CL A

c. Strategy: Long Call

d. Outlook: Bullish

e. Buy/Sell: Buy

f. Options: Call

g. Amount: +1

2. Due Diligence

So, some of you may be thinking I am crazy. And in hindsight, it sure looks I am, with seemingly endless data/privacy scandal information piling on about Facebook daily, and likewise Facebook’s share prices in a near free fall.

Before getting into the speculative part, I was interested in one of the famous FANG stocks already, and at least with P/E and target prices, FB was the ‘cheapest’ out of all of them. I mean NFLX’s P/E of 210? You’ve gotta be kidding me — FB’s is 25.

So let me explain my secondary thinking. At the initial news of the Facebook scandal, it already sounded to me like it was much more of an external problem, mainly by Cambridge Analytica. I remember other Facebook drama hitting before such as when they were experimenting with user’s timelines, and much more recently when there were concerns about losing advertising money as Facebook plans to make changes to a user’s news feed. Each time, Facebook sprang back and kept climbing. I assumed at these initial Cambridge Analytica publications, FB would take a speculative hit, as it always had with previous drama and spring back just as quickly.

Woops.

Image for post
Image for post

As we know now, the data scandal has blossomed into something much greater than investor ‘drama’; the bad news keeps piling up and worst so far, coming in just today (March 26th), is the initiation full blow investigation of Facebook’s security practices by the Federal Trade Commission (FTC).

Sigh. Okay, let’s just get to the next sections.

3. Opening of the Option(s)

a. Opening Date: March 20th 2018

b. Market Value: $136.00

4. Developments / Changes During Holding

Apart from quite a large bump on March 21st (see below in the Review section for more info on that), this call’s value was a slow, painful, and unidirectional ride downwards — this was mainly due to buying an option that expired much too soon. I won’t be doing that anytime again in the near future.

Facing expiry with just a few days to go, I pulled the trigger on selling.

5. Closing of the Option(s)

a. Closing Date: March 26th 2018

b. Market Value: $16.00

6. Review

LOSS: -$120 NET: $880

Running Score: Chris 0, Market 1

Well, ladies and gents, with this one we’re gonna have to throw in a big fat LOSS.

So on March 21th, Facebook made a tiny spring looking towards the direction of $175 (it was managing just over $171) . During this near-midday mark, my call option was selling at a price of $2.78— yes, you read that right, I could have made a cool $142 dollars on this option over my initial $136, or a gain of over 110%! However (and please, drum roll for my magnificent failure):

I got scared and didn’t sell because Robinhood was showing the breakeven share price of $176.36 and the shares at that moment were only selling at $168. I thought the +$142 I was seeing on my phone was just for the day, and I was net only +$8 from my original $136 paid.

Here’s the screenshot a few hours before that peak:

Image for post
Image for post

So, please make a note if you haven’t traded options yet on Robinhood, Robinhood always lists the “break even price” as the price you need to make back on your options purchase at the expiration date, not the real-time break even price!

…and pay attention to the ‘total return’ field! That’s the one that shows your real time (current) return!

What I learned later was that this situation was a textbook example of where delta was outplaying the already large theta (theta would end up sealing my fate anyway.) That quick increase in Facebook’s share price really boosted the call back into the realm of a possible valuable call.

Another point, perhaps more importantly, is that I simply purchased the call ‘on sale’, for only $1.36, when FB was selling even lower from the day before. Indeed, a call so high as $175 on a $168 dollar basis was overly bullish, and quite stupid of me.

I didn’t realize of my idiocy (that I actually COULD have sold for a nice profit) until Friday, where I was still holding on as the rest of the market tumbled in response to the possibility of a ‘trade war’ with China — this meant for FB an even larger tumble as more and more media, inquiries, and investigations were revealed against the company.

I made a decision: I said I would give FB one more day on Monday a chance to earn a bit of value back, then I would jump ship (because Friday is a Good Friday, a national holiday, the market is closed and in this case this weekly would have expired on Thursday at the closing bell). Theta was anyway growing to massive levels and I was worried I wouldn’t be able to salvage any money at all.

I see now why most traders don’t hold long calls close to their expiration date — as soon as the trade goes against you, it goes against you quickly in a compounding fashion.

So, now it’s Monday, and I’m glad I sold near the open. This is what happened to FB subsequently throughout the day today (not a totally complete chart for the day, I’m writing this while the market is still open):

Image for post
Image for post
Yikes. JUST’D.

As of the time of that screen shot, $175 calls were selling even lower at just $0.04. Yeah. I think I should be happy I even got $16 back ($0.16 price).

  1. Understand the brokerage (in this case Robinhood) before opening a position. I could have had a nice win if I hadn’t been a scared idiot. Luckily for you all, you’ve seen my mistake and won’t make the same, right?
  2. Better consideration of the decaying value of a call with respect to time — was it really realistic to think that Facebook would spring back up to 175 levels in just 9 days? Probably not.
  3. Less of a speculative trade, and more of a probability of payout option next time, or at least a much more conservative, at the money (ATM) call, like I will discuss once I’ve sold my ACN (Accenture) call, but that doesn’t expire until April 20th.
  4. The good news out of this giant fail? I know what holding an option is like on Robinhood!

Although I might know what you’re thinking, I’m not going to try to chase FB by buying puts. With my luck, it will just start climbing again through some unforeseen Zuckerberg PR magic.

I’m going to take a week or so to set up my first real trade on Tastyworks — likely an iron condor or butterfly spread. But first, of course, will be my post on the results from my $150 ACN 4/20 call — that one is ATM right now. Stay tuned, and stay hopefully (at least for me :) )

-Chris

Any grammar errors, math errors, conceptual errors? Let me know!

Written by

https://chrisfrew.in 👨‍💻Full Stack Software Engineer 🏠Austria/USA 🍺Homebrewer ⛷🏃‍Outdoorsman

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store