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A new portfolio!

One of our PSW Investment Companies,Hemp Boca, sells CBD products and hasa weekly radio showthat I'm often a guest on and I've been giving trade ideas to their listeners and we have now begun to track them in a new virtual portfolio that we started with $50,000 and we're playing this one small and conservative – so it is a great way for people to get started learning to manage a small options portfolio.

We initiated the portfolio on May 21st so just over a month and we're only up 1.1% so far – so these are still good for new trades and we will add to the portfolio over the course of the year with a goal of making 25-30% annual returns.  Initially, there's always a bit of a loss when you add new positions as you are penalized by the bid/ask spreads of the options since your broker always shows you the worst-case balance.

So far, we've deployed just $6,895 of our cash and about 1/3 of our ordinary margin.  As this is our first summary of the positions, I will make some comments on each one as to the logic of the position and we will use these reviews for reference (as you always should with portfolios) to remind ourselves if our premises are holding up and whether or not our investments are on track to our goals at time progresses.

For those of you unfamiliar with options – it's really not very complicated.   

  • A call is a contract you buy (or sell) that gives the the right to purchase a stock at a certain price between now and the expiration date for that contract.  In the case below, we paid $4.20 for the right to buy IMAX stock for $17 between now and Jan 17th, 2020 – the expiration day for that contract.  Our bet then, is that IMAX will be higher than $21.20 (our net cost) on that date.  HOWEVER, we mitigated that cost by selling an equal number (10) of call contracts where someone paid us $1.78 for the right to buy IMAX stock for $21 between now and Jan 17th, 2020.  That lowers our net basis on the spread to $2.42 and now we're netting into IMAX for $19.42 but we've capped our gains at $21.
  • A put is a contract you sell (or buy) that gives the buyer the right to PUT the stock to you at a certain price between now and the expiration date for that contract.  We sold 10 IMAX Jan 17th, 2020 $20 puts for $1.75 so, if we were assigned, our net entry would be $18.25, about 10% below the current price.  If IMAX stays over $20 though, the puts will expire worthless and we keep the $1.75, which lowers our net basis on the $4 spread (above) to 0.67.

That's it, you are now an expert on options (certainly compared to most people!).  Now let's see how we apply that to the Hemp Boca Portfolio:

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  • IMAX (IMAX) – As noted above, our net on the spread is 0.67 ($670) and our premise is that IMAX will do well this year and is undervalued at $20.32 as they are likely to earn more than $1 per share and show a continuing growth trend.  We did not shoot for the moon and IMAX only has 2020 options, no 2021 yet, so we kept a conservative target ($21) that will return $4,000 if IMAX is over it in January fora profit potential of $3,330 (497%) in just 6 months*.*  

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  • Macy's (M) – We like Macy's because they are a venerable retailer who are still dropping $3/share to the bottom line and they have a lot of hidden value in their real estate holdings yet $21.18 means you can buy the whole company for $6.5Bn – their Manhattan store alone is worth about $2Bn.  Macy's made $1.1Bn last year and will probably make 10% less this year as they re-organize but they are far from dead – though priced like they are.  We're a little more aggressive here – especially selling a put that's higher than the current price but that's because we think M is stupidly low at the moment.  It's a $7,500 spread we paid net $0 for and, in fact, now it's a net $198 credit if you "buy" the spread.  So theupside potential at $25 is $7,500 (infinity %)and our worst-case scenario is owning 1,000 shares of M at $23 ($23,000).

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  • Alternative Harvest ETF (MJ) – This is an ETF of cannabis stocks and some of them have been erratic earners but, overall, the industry trend is strong and next year we should see some exciting numbers.  We don't want to put all our eggs in one basked so an ETF that holds over a dozen different stocks in the cannabis industry makes sense.  Our $10,000 spread is half in the money yet it's still trading at net $1,350 so theupside potential at $35 is $8,650 (640%)in 18 months.

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  • Molson Coors (TAP) – Another sin stock also wildly undervalued and we like TAP because they are partnering to begin producting cannabis-infused beer.  That's a potential winner for them and the overall business is valued at $12.1Bn at $56 yet they are dropping $1Bn to the bottom line – so quite the bargain.  Again this $20,000 spread is over $10,000 in the money yet you can still buy it for net $5,550 giving us$14,450 (260%) of upside potential at $60 in 18 months*.*

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So here we have just 4 trades using just $6,895 in cash with the potential to make a profit of $33,930 over the next 18 months if our trades remain on track.  $33,930 is 68% of the $50,000 portfolio so it's a very good first two years' return if it works out but we have room for 8-10 trades so we'll keep looking for opportunities to add things over the coming months and, of course, we will monitor the trades we have to make sure they remain on track towards our goal.