Towards the end of 2009 I wrote My Stock Pick for 2010. I gave it a lot of thought, weighed many different options, and then decided the best place to invest my money in 2010 would be buying stock in Amazon (AMZN).
And I got really lucky—check out what Amazon has done since the start of 2010 (2010 is in red):
As you can see, I nailed it. I am the obvious successor to Warren Buffett. Shower me with praise and offer for me to invest your money.
Of course, as it is with most things in the stock market, I got lucky. My key assumption (that the Kindle would “blow up”) was pretty accurate. You see that thing everywhere now…even my mother-in-law has one.
The stock went up 38% in 2010. It’s only up 3% since then.
How Much Money Did I Make?
This is where it gets a little embarrassing. I didn’t make a cent off of Amazon in 2010 because I never bought the stock. Most of my money is invested in a retirement account that buys cheap index funds, and only a small portion of it is in actual, individual stocks (right now that’s Berkshire Hathaway and Johnson & Johnson).
Besides, at $130 I would only have invested around $300 in the stock at the time. At a 38% return, I would’ve made $114—nothing earth shattering for having been so right.
But I have a little secret: right now I’m making some money off of Amazon, and so far it’s looking way better than 38%…
In February I put on a call spread that basically makes the following bet: If Amazon stays above $175 by April 20, I will make $500 before commissions. Making the bet cost me $285, which means my max profit would be $215, a return of 75% in three months.
Right now it’s looking pretty good (knock on wood), as AMZN stands at $182. Here’s what the stock has done since I entered this trade:
Nothing dramatic, I just paid a little more than I usually do in order to lock in a lower “must finish above X” price ($175) because I felt that the stock wasn’t going to go below that number. Amazon had gone from a high of around $240 at the end of 2010 down to a low of $175 and I felt that it had stabilized around there.
That’s why I picked that strike.
It had little to do with the fundamentals of the company. It had little to do with my long-term prospects of the stock. It had nothing to do with all the amazing investment books I love talking about so much (Malkiel, Lynch, anything with Warren Buffett, etc.).
When I trade options, it’s more of a speculation than anything else. It’s short term and as you can see it can be extremely profitable.
But of course it can be risky as well. If AMZN goes down under around $170 I will lose my entire $285. It’s happened to me several times and it’s something that typically doesn’t happen with stocks.
Anyway, I’ll be writing more and more about options trading so if anyone has questions or wants to learn more about specific parts of it, let me know!
Image by rednuht