Welcome back! It’s been seven months away from Nisha Trades, and to say that I’m excited to be back is most definitely an understatement. During my final semester of senior year, I dedicated the time I would normally spend blogging towards an online “International Business” class. I truly enjoyed learning about the intricacies of global business and would highly recommend it to other high school students who (like me) are similarly interested in finance and the business world. Today, I’m back for a new post: cost basis reduction and Facebook!
Most early (and few seasoned) traders indulge in the comfortable “buy and hold” strategy -- the typical route of picking a stock, assuming a bullish position, buying it, and waiting until it goes up. While this strategy has idyllic promise, it means either waiting endlessly for a profit or suffering when the stock suddenly dips...a situation quite a few traders found themselves in after Facebook’s epic drop earlier this week. Cost-basis reduction allows you buy and hold onto a stock, but effectively reduce the amount of impact that downwards movement would have on your portfolio by selling premium against it every month .
A revolutionary social media platform started by Mark Zuckerberg, Facebook has certainly received its fair share of attention in recent years. Facebook came under intense scrutiny for its role in the United States 2016 election, Russian meddling, and privacy concerns in the U.S. and Europe. Consequently, Zuckerberg found himself accountable before the U.S. Congress, left to explain for his company’s impact on world affairs. On Thursday (7/26/18), Facebook was dealt yet another troubling blow. Following its latest earnings, Facebook’s stock price dropped nearly 20% -- one the biggest one-day-drops in United States history. Traders near and far, with long positions on Facebook were left distraught. It would be horrible to have bought and held Facebook for eternity only to have it drop massively. Thanks to cost-basis reduction, my portfolio didn’t have a long face over Facebook.
Facebook’s stock was under intense pressure in spring, causing for option prices to be (as expected) very high in such conditions. At this time, I was selling premium on puts and was ultimately assigned. This was one of the few occasions where I wanted to be assigned stock and keep it for a few years; it fit my portfolio and long-term outlook. In turn, I owned 100 shares of Facebook stock at $177.50.
But, of course, I wasn’t just holding onto my Facebook stock. Instead, I sold monthly premium in a variety of ways: strangles around earnings and call or put verticals (in either direction) on a monthly or weekly basis.
Overall, today my account shows a $1,400+ profit. Although the stock is at $174.89 today (as I write this post), after this massive pullback, I can still afford to absorb further downturn for another $14 or 8%. Had I not been doing cost-basis reduction (and essentially chipping away at the amount I originally paid for the stock), I would have incurred a loss of about $261.
Currently due to the fear in the market, IV is high and so is premium. Looking ahead in September, a 25 delta call (couldn’t find the 30 delta call) is priced around $2.60 which is about 1.5% of Facebook’s current price. So, in the meantime, I plan to continue my campaign of cost-basis reduction so that hopefully one day I can own this stock free and clear! :-)
To learn more about cost-basis reduction, you can read an earlier post entirely dedicated to this very concept here.
Thank you for reading! Find more NishaTrades on Twitter @nishatrades.
Ninteen year-old trader, future connoisseur of options.
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