An investor bought ~$100,000 of SPX calls late November through December betting the whole market would go up fast in Q1. It did, and I was able to sell a bunch before February came and wiped out the value of the remaining options (*As I’ve said before, options trading is extremely risky and buying out-of-the-money options even more so). Total profit, ~$2,500,000.
Many of you know I was posting about $100k in SPX calls back in December and then January when the value started taking off. Figured I owed you an update.
Why I bought a crazy amount of SPX calls: Congress passed a bill slashing corporate tax rates in December. The last time corporate taxes were reduced so much was back in 1986. So I looked at how the market reacted at the beginning of 1987 and saw a huge spike in the S&P 500 in the first quarter.
I wanted to bet the market would react in a similar fashion. I looked through various strike prices in Jan-Mar and modeled which ones would have the highest payouts if Jan 2018 was a repeat of Jan 1987. I also ran a few more conservative scenarios and bought options at those inflection points as well. Many of these options were so far out of the money at the time they were selling for under a dollar. With volatility, so low a melt-up wasn’t being priced in at all so I put in every dollar I was comfortable losing.
January turned out to be the best first month of the year for the market in more than two decades. The value of the options skyrocketed, some by as much as 5000%.
I was excited and terrified for the same reasons I bought options and not futures or heavily margined shares in the first place. Going back to 1987, there was eventually a large crash (Black Monday) that wiped out most of the gains for that year. I also knew we were currently going through one of the largest stretches of market history without a substantial pullback. I was pretty sure the market was going to go up and fast, but it was like a game of hot potato to lock in gains before a major correction happened.
With that in mind, I actively sold off chunks of the investment as it went up in January. Since I didn’t know if or when a correction would happen, I wanted to make sure I locked in as much profit as possible.
I was still holding the bag on a bunch of these options when Feb came and wiped them out, taking a large number of paper gains with them. Another green week and I definitely would have been into yacht-money territory with this trade.
Still, I’d managed to sell enough in January to lock in two and a half million dollars from a $100k investment.
I also picked up last year and stocks I plan on holding indefinitely, I’m currently mostly in cash waiting to figure out the next move.