March 18, 2017
BY: HANS ALBRECHT, CIM®, FCSI®, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
When we confess, we begin to heal. So, I accept responsibility for my sin – I bought Twitter (TWTR) at $33. There. I feel better already.
I bought the ‘dirty bird’ thinking that somehow it would find a way to monetize all those eyeballs. With Facebook and Google making money hand-over-fist, surely the management at TWTR could find a way to convert all those celebrity tweets into robust advertising revenue. After all, it’s the President of the United States’ favourite way to communicate!
Alas, it wasn’t to be. But as my ownership in the hapless fowl plummeted towards a seemingly certain collision with terra firma, I realized something around earnings time: Options skew was particularly compressed, meaning downside puts were trading at fair value versus upside calls. Earnings were to be released in a couple of weeks and the stock was at $23. I wanted to hold the stock, but at the same time protect my downside just in case. So I bought the six-month duration $21 strike put for $2.25. To ‘finance’ this purchase, I sold the $25 strike call in the same month for $2.10. My net cost to purchase this structure, which is called a collar, was $0.15.
Sure enough, Twitter released disappointing earnings and the stock continued on its not-so-merry way downward. In fact, it fell to below $15 by the time my options expired, but I didn’t care. My $21 put had protected my holdings and enabled me to wait out an important event. I had paid $0.15 for the collar so I was protected below $20.85.
If the stock had rallied following the earnings announcement, I would have been forced to sell at $25 since this is the strike at which I sold my call. My effective sale price would have been $24.85 – the $25 strike less the cost of the structure. All in all, not the greatest investment, but I did manage to avoid a lot more pain by using the protective collar.
The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.