Arcángel de Jesús Montoya
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Arcángel de Jesús Montoya in Money Trafficking,

The Trade That Earned Me 60% In Less Than A Week

This article is not about investment recommendations. I want to show you the trade I talked about on Monday and that played out really well:

(Source: TD Waterhouse)

Essentially, as the stock traded at $0.20, I suggested that the readers sold $0.50 puts, which, at that point, were deep in-the-money. I was practically betting that the stock would not go lower, and the traders would pocket a portion of the premium they had received from the sale of these puts. Why was I thinking like that? Recall that SunEdison's (SUNE) shares opened about 50% lower after the weekend:

(Source: Google Finance)

There were talks about bankruptcy that day, and I thought this was a bit overblown. Also, as I checked the options table, I figured that the premium was too fat to pass by. Essentially, investors were risking losing $0.20 per contract (in fact, it is $20) to make $0.30 (in fact, it is $30). It may not seem very attractive from a risk-return standpoint but two thoughts revolved in my mind:

(1) Even if SunEdison filed bankruptcy, its shares would likely go all the way down to zero immediately. This means that the maximum loss was smaller than $0.20;

(2) The options' duration was too short to reflect the length of the bankruptcy period. Hence, there would simply be not enough time for the stock to go all the way down to zero over the life of the options in question. 

So, the decision I made was done despite the theoretical probability of the options being in-the-money (look at the put option's Delta):

(Source: Author's calculations)

Truth be told, I did not expect the stock to retreat so high (closed at $0.36 on Friday but peaked at $0.46 on Thursday). The options expired in-the-money, of course, but the final premium decreased by 60% at expiration:

(Source: TD Waterhouse)

Call me lucky or no but this trade was really a no-brainer. They say that there are only big two emotions on the market: fear and greed. I would say the first one is oftentimes irrational to large a extent. This particular trade idea was definitely not designed for many investors, but it was impossible to miss. Sometimes it is good to go contrarian - especially in options when you get paid to carry risks.