Date Published: 2017-03-21
CORRECTION: This article previously referenced stock HP Inc (NYSE:HPQ) -- that was an error. The results presented here are for Helmerich & Payne, Inc. (NYSE:HP).
LEDE
Helmerich & Payne, Inc. (NYSE:HP) Options are Outperforming Netflix Inc (NASDAQ:NFLX) and Apple (NASDAQ:AAPL) stock.
Preface
While the tech stocks like Netflix Inc (NASDAQ:NFLX) and Apple (NASDAQ:AAPL) have been getting all the headlines, it turns out that the little remembered, 'boring,' basic materials company Helmerich & Payne, Inc. (NYSE:HP) has seen its stock price return sit at, literally, less than a 1% change, but that makes using options a tremendous winner -- as in, more than 50% in 6-months, tremendous.
Helmerich & Payne, Inc. (NYSE:HP)
When trading options we need to answer a few questions like -- what to trade, when to trade and when to close the trade. Here's how knowing the answer to those questions has meant more than 80% returns over the last two-years, and 50% in the last six-months for HP.
What to trade: Let's examine selling out of the money puts in HP.
When to trade: Let's examine the impact of earnings.
It might have felt like a trivial difference -- but it isn't trivial at all. Selling an out of the money put in HP Inc over the last two-years has returned just 6.4% and carried substantial downside risk. But, by simply doing this:
We see a 6.4% return leap to 36.4%, or a 9x increase with less risk. But we're not done. We still need to address the downside risk of a naked short put and figure out when to close the trade.
Reduce Risk
A short put actually has tremendous downside -- so we need to make a risk adjustment to this strategy. While a short put can see a several hundred percent loss in any given trade, we can put a stop loss on each trade to limit that black swan risk.
This move has totally changed the risk:return profile our the option strategy from the red line to the blue line:
And here are the results of using a safety valve in our short put compared to the unprotected one:
We have taken a 6.4% return, limited risk, and turned it into a 36.4% return by avoiding earnings. Then we limited risk further with a stop loss, and turned that return into 83.7%, in a stock that has essentially gone nowhere in two-years.
Here is a chart of the stock return versus the double risk protected option strategy:
We have now fully answered the what to trade, when to trade it, and when to close it specifics of our option trades. The final question we need to answer is if this is just luck.
Is This Really Analysis, or Just Luck
Skepticism is natural -- trading isn't a game and that means we have to prove to ourselves that this isn't luck or happen stance.
What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let's look at the last year:
A 32.5% return, when we chop the risk down, has turned into a 85.9% return over the last year. Recall, Netflix Inc (NASDAQ:NFLX) and Apple (NASDAQ:AAPL)stocks are up 44% and 34%, respectively, while the 'boring' Helmerich & Payne, Inc. (NYSE:HP) stock, due to its stock dynamics, has returned 85.9% with risk protected options. We are seeing outperformance.
It's not a magic bullet -- it's just easy access to objective data.
Finally, we look at this short put over the last six-months, these are the results:
Yet again, when we have access to objective data, our what to trade, when to trade, and when to close rules have worked.
What Just Happened
This is how people profit from the option market - it's preparation, not luck. We had a hunch -- we were methodical in our plan, and it worked.
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.