Another stock that interested me once I started working with my margin account is Southwest Airlines (LUV). When I first looked at it, it had been trading in the 50’s to low 60’s for the past three years. I started thinking about the types of trades I could build assuming that it was going to continue to trade in a narrow range. In the meantime, I had to save up more money to invest.
Well, COVID-19 unsurprisingly dragged Southwest’s stock way down. I hadn’t really been following it, though. Once I thought to look at it, it had slightly recovered from a low near 30 and was in the range of 36 - 38. I thought that it would be an amazing bargain at 30 and continued to watch it fluctuate until I had a decent change of getting it with a PUT contract at a strike of 30.
As it turns out, what I ended up doing was depositing more money into my margin account so that I could sell two PUT contracts at a strike price of 30, with a premium of 0.35 on Monday, April 13, 2020 for the Friday, April 17, 2020 expiration. Each contract cost me $1.00. So, my net credit to my margin account was $68.00 ($0.34 / share).
Yesterday it was official in my account that the contract had expired worthless and I got to book the $68. So, I risked $6000 to make $68 in one week, which is approximately a 1.1% return. While $68 is not a lot of money, I’m pretty thrilled at being able to generate 1.1% is just one week! If I annualize that amount, using a calculation of 50 trading weeks in the year, it works out to be 56.7%! I would be pretty ecstatic with generating that type of return each year.
One of the reasons I had decided to do the one week contract is that Southwest is due to report earnings this coming week. I am betting that the earnings are going to be quite bad and the stock is going to drop in price. I spent some time thinking about what strategy I wanted to use. Initially, I was thinking about waiting until the earnings report came out, hoping that the stock would drop to 30 or below and I would just by it outright. I also considered whether I wanted to sell a PUT contract at a strike price of 30 and hope to get assigned. My concern was over whether the stock would drop sufficiently below 30 that I would regret not having waited to just buy it at the lower price. Finally, I knew that I wanted to add more money to my margin account so that I could purchase 400 shares. My goal was that the stock would recover within the next two to three years and allow me to double my money.
Last night (early this morning) I thought more about different ways that things could play out and whether I really needed to plan to wait two to three years to make money on the stock. Having given thought to how well my trade from last week played out, I realized that I could set up trades that could give me the opportunity to do even better than doubling my money in two to three years. So, I gave more thought to how I could continue to work with options contracts instead of buying the stock outright. I considered how I might deal with being assigned on my PUT contracts and having the stock price be well below my strike price, say $28. I decided that I would be willing to deal with that. I could still choose to sell four CALL contracts at a strike price of $30 and see whether the premium would return me at least 1% per week. I further reasoned that if the CALL contracts wouldn’t generate that return that I could also initiate a credit spread at lower strike prices to make up the difference. One possible outcome of that setup is that all the contracts expire worthless and I would still be making my 1% per week. Another possible outcome is that the stock would rally and I would get assigned and have all my shares sold. I would still generate my desired return on the money I risked and I could just start the whole process over again. Naturally, the stock could also continue to drop. Assuming that I had set the credit spread up at, say a one dollar per share difference, I could still deal with that small loss.
So, this morning once I got up I took a look at the options chain for next week. As it turns out, the last price for a PUT contract at $30 was $1.15 for the Friday, April 24 expiration. I have decided that not only does that premium give me a lot of protection to the downside, it also gives me a really nice return if the contracts expire worthless. If I get assigned, my net cost is $28.85 per share. I’m not terribly concerned that the stock will drop much below that price. If I don’t get assigned and the contracts expire worthless, they would generate approximately a 3.8% return in one week.
I transferred enough money from my checking account so that I would have $12,000 to work with. I placed a SELL TO OPEN on four PUT contracts of LUV at a strike price of $30 with a premium of $1.15. The latest contract sizing looks in my favor at 16X1. I would imagine that I could have even set my price at $1.30. I’m choosing to give myself the better odds of getting a quick execution on Monday morning.
I had even considered doing a credit spread, selling PUT contracts at 26 and buying them at 25 with the aim of getting a net credit in the range of eight to ten cents. But, I have decided I’m starting to get ahead of myself if I do that. I think I need to take it slowly and not outsmart myself.
I’m going to wait until the week of April 27 to decide what my next move is going to be.
I give thanks to the Universe for the abundance it provides me. I surrender and am open and ready to receive.
Bhavatu sabba mangalam - May all beings be happy