Options Trading & Analysis

Short Put Spreads and Stop Losses Can Be Huge Winners: AMZN Case Study


Simply investing in an idea that Amazon.com Inc (NASDAQ:AMZN) stock won't face a serious stock decline has so outperformed owning the stock out-right that it's almost inconceivable -- but these are the facts, and they are not disputed. The same can be said for Apple Inc (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB).

 

STORY
Selling out of the money put spreads is an option investment that has a very clear belief system: The underlying stock simply will not go down a large amount. With some care, we can turn that strategy into one with even less risk, and still get the wildly out-sized returns -- and that is what we see with Amazon.

DISCOVERY
Let's look at selling a put spread in Amazon every week, but also putting a further layer of protection by putting in a stop loss. Here is the difference in the profit loss graph, where the red line is a normal short put spread and the blue line is a short put spread with a stop loss added.



We can see a normal short put spread does have a risk control in place -- there is a maximum loss. But, adding in a stop loss makes the maximum loss even tighter. Applying this to Amazon.com Inc (NASDAQ:AMZN) has been a staggering winner.

OPTIONS
Here is how that risk adjusted short put spread has done in Amazon over the last two-years:



That's a 243% return simply because the stock didn't collapse, while the stock price itself was up 127%.

IT WORKS CONSISTENTLY
What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last two-years, now let's look at the last year:



We see a 208% return. And, to add context, here is how this option strategy has done relative to the stock.



The gray line is the stock price, up 54%, while the highlighted line is the option strategy, up 208%. Yes, nearly a quadrupling of the stock return, using a risk protected option strategy. Here is how it has done over the last six-months:



That's a 106% return, versus the stock return of 10%, or more than a 10-fold increase. For completeness, here again is the stock chart versus the option chart:



It's not a magic bullet -- it's just access to objective data.

What Just Happened
This is how people profit from the option market — it's preparation, not luck. This same approach has worked for Apple Inc (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) as well. To see how to do this for any stock or ETF and for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.

Past performance is not an indication of future results.

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.


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About Ophir Gottlieb


Mr. Gottlieb writes financial news for CML and also as a contributor to Yahoo! Finance, CNN Money, MSN Money, and before then for Marketwatch, Business Insider, TheStreet and Real Money. He has become a staple in financial TV, often times seen on the Business News Network and CBC. Mr. Gottlieb's experience includes working as an option market maker on the NYSE ARCA exchange floor (CBOE remotely), as Managing Director of Client Services and Algorithmic Trading for Livevol, Inc, and as the Managing Director and Product Manager of Quantitative Research for GMI (now MSCI). Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model, both purchased by MSCI. FAM has been a celebrated achievement in artificial intelligence and quantitative finance that was introduced to world by the Rotman International Journal upon its completion. Mr Gottlieb's mathematics, measure theory and machine learning background stems from his graduate work at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire and through re-publications in Barron's, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Author's web site: http://bit.ly/2mnZAmV


View Ophir Gottlieb's post archive >

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The Options Insider Radio Network

The Options News Rundown

Your source for the most important news and information from the world of options.

The Options News Rundown

The Options Insider Radio Network

All of our radio programs in one convenient place.

The Options Insider Radio Network

Options Insider Radio

The original options podcast. Features interviews with leading options figures.

Options Insider Radio

The Option Block

This high-octane program features education, analysis, strategies and unusual activity.

The Option Block

Volatility Views

The premier radio program for volatility traders.

Volatility Views

The Long And Short Of Futures Options

Your source for futures options information.

The Long And Short Of Futures Options

The Advisor's Option

Arming advisors with the info necessary to manage risk.

The Advisor's Option

Options Boot Camp

Get into peak options trading shape.

Options Boot Camp

Options Insider Special Events

Compelling panel & special event recordings from the options world.

Options Insider Special Events

OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

OIC's Wide World of Options

Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Trading Tech Talk

Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

Options Playbook Radio

Options Oddities

We track all the unusual options trading activity on Options Oddities.

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This Week in Futures Options

The program designed to help active futures options traders stay on top of this ever-changing marketplace. 

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The Business Show

If you like business, if you like humor, if you like stock symbols, this is the podcast for you.

The Business Show