One of my favorite stocks in the last year has been General Electric. (NYSE GE)
I bought into GE on April 29th, 2010 when the stock was at $19.49. I bought in against on May 27th when the stock was at $16.66. I finally bought a third time on June 21st at $16.10.
Today GE trades at $21.44. I should be happy, right? So why are my investments still down 15%?
Because I bought call options instead of common stock.
Yesterday I talked about how call options were cooler than Justin Beiber because I gained over 90% in four months. Now here’s why options can straight up suck.
I thought GE was gonna go up last year, so I bought options with a $25 strike price and a January, 2012 expiration. Unfortunately, GE went down a long way before it went up. In fact, when I bought on April 29th, that was basically the peak price for GE in all of 2010. I bought at the absolute worst time.
Luckily I bought in again a few more times and brought my costs down, but GE kept going lower and lower. My total investment in GE options was $2,343.85 and my average contract cost was about $0.69. I don’t know the specifics, but I think at one point I was down over 80%. Imagine how you would feel if your $2,300 investment was worth less than $500. I can tell you from experience, it’s about as much fun as being set up on a blind date with a girl who has “a great personality”.
I got a big break when GE reported earnings a few weeks ago. The stock was trading around $18.50 before earnings, and GE knocked it out of the park! Their earnings were so impressive the stock jumped over $20 in two days. The momentum has continued and the stock is now trading around $21.50. That’s a 16% return in just a few weeks.
My options, which were down somewhere around 60% in early January, climbed frantically like a person trying to get up a tree to avoid an angry rhino and/or mother-in-law. Those darn things got all the way up to $0.65 earlier this week, and have pulled back to about $0.60 as of Thursday.
When an investment like this springs back to life, all I want to do is get my money back. I have a sell order in for $0.70 and I’m praying it hits soon. After trading fees I will end up almost entirely even if it hits.
If I had bought common stock instead of options, I would be up $508.43, or 21.7%. Instead, I am down $337.85, or 14.4%. How’s that for a turd sandwich? (Did I really just say that?)
So while trading options can help you get big gains, it is also a much bigger risk. Your options can even lose value as the stock goes up, which is about as awesome as watching the original Dune. (worst movie ever!)
If you trade options, be prepared for something like this to happen to you. You can’t get the massive gains without incurring some losses along the way. So hope for the best and be prepared for the worst.
Leave a comment below if you trade options and have ever made a bad investment.