The Buy-and-Hold Approach to Buying Options
If you were paying attention to the markets in January this year, you probably heard a lot about GameStop (NYSE: GME).
It rose thousands of percent in less than 12 months. After that, it spectacularly crashed, only to chop up and down over the past few months.
The situation brought about hearings in Congress, retail investors crying for revolution and at least one company losing millions of dollars trying to cover its bets.
This GameStop fiasco was truly a unique scenario, one that may not be repeated for decades. And then, that’s only if you are lucky enough to spot it.
We’ve talked before about how GameStop was an extreme circumstance that created a massive surge in price. It’s rare.
But one trader was able to spot the opportunity.
Although it’s not the strategy I use in any of my trading services, his story is still worth taking a look at.
Because it’s a textbook way to incorporate options into a long-term investing approach. And it shows us how profitable mispricings in the market can be.
Here’s how he did it…
How Roaring Kitty Made His Millions
By now, you may have heard of him.
He goes by “Roaring Kitty” in his YouTube videos and posts on Reddit often.
His real name is Keith Gill.
But it’s the trade he placed on GameStop that made him extremely popular … and for good reason.
In February 2020, he put in a $10,000 order to buy 500 contracts of the April 16, 2021 $12 call options for $0.20 per share.
He purchased what is known as a LEAPS (long-term equity anticipation securities) contract — one that is set to expire a year or longer from the current date.
The options contract allowed Keith to leverage $10,000 of his capital to control $203,000 worth of the stock.
It was a major speculation.
During the pandemic year, the struggling retailer would have to surge more than 100% while a massive number of short sellers bet against the stock just for Gill to hit breakeven.
Remember, there are 100 shares per contract. So, 500 contracts cover 50,000 shares. Shares closed at $4.06 on February 18, the day he added the options. That’s how we know he was in control of over $200,000 worth of GME stock.
In the end, it was a multimillion-dollar payday for the YouTuber.
Those $0.20 call options traded for more than $300 at one point, making them worth more than $15 million.
Along the way, you can see he had the chance for a massive payout in January, when the bubble reached a peak. And he had the chance again on the rebound in March. But he says he didn’t budge.
Instead, he held his call options, plus some more shares of the stock, the entire time, riding every up and down all the way to the April 16 expiration date.
When it came due, he had the right, but not the obligation, to buy 100 shares of the company for every contract he purchased.
Most traders would be happy to close out the trade and walk away with their $7 million-plus payday.
On April 16, he held his options in order to automatically exercise his right to buy 50,000 more shares of the stock at $12 per share.
The stock is currently trading at $153 per share.
Why I Stick With the Quick Hit Strategy
Keith wasn’t looking for a quick-hit gain on GameStop. He was all-in on the value the stock presented and put money on the line to prove it.
The market was mispricing GME, and he took the bet that it would eventually realize its mistake.
He got lucky and hit the lottery with this one trade. That’s not something you can expect every time you buy an option.
In my research services, I’m also tracking mispriced stocks in the market. But I look at ones that occur over and over again. Consistency is the difference between playing the lottery and growing your portfolio.
I want consistent returns. And I’ve found a way that doesn’t involve chasing long-shot companies.
It’s a strategy that made nearly four times the market’s gains over the past four years without needing to spark a retail-investor revolution.
I’m talking about my Ultimate Trading Strategy…
It’s a proven approach that helps uncover large double- and triple-digit gains to offset any losses we come across. Our average trade takes 40 days.
To learn more about my Ultimate Trading Strategy and stick to quick-hit trades, click here.
Chad Shoop, CMT
Editor, Quick Hit Profits
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.