have an example of a crazy return in my portfolio this week, and it’s getting close to the time that I have to make a decision about it. My remaining position in Shopify (SHOP) April Call Options, on which I’ve already taken a profit in excess of my initial investment, was glowing on my spreadsheet as a 1,000% gainer earlier in the week (it’s down a bit from that now, but still).
That’s the kind of thing you could build a hype-filled newsletter ad around… just a few of those a year and soon your $5,000 turns into a million dollars! It’s so easy!
But, of course, most people, including me, don’t want to take those kinds of chances with large sums of money — and we know that such short-term gains come only with extremely high risk of loss. When I bought those SHOP options last Summer, I thought the growth rate was such that the options were underpriced… a rise of 50% in the shares was not a shocking notion for a small cap with strong underlying growth and a lot of attention from the Motley Fool and others, so betting on a rise from the low $40s to $60 over more than six months was worth the risk (the options cost about $1 a share). But there was also much more than a 50/50 chance that those options would be worth zero if SHOP reported just one bad quarter, so the bet has to be small enough to absorb a 100% loss without gnashing of teeth.
And even a month ago, I certainly had no conviction that SHOP would continue rising rapidly after their earnings release — I took profits on some of my options contracts after the last earnings report, because selling a little more than half of my position meant I was guaranteed at least a small profit on the overall investment… conceptually, that takes the remaining options down to having a cost basis of zero, and I can risk zero all day long for the chance of higher returns.
So I can in no way take credit for saying that I knew SHOP would be near $70 by this week… but I left myself open for that possibility, regardless of how crazy SHOP’s valuation now looks, because small and scalable growth companies often get crazy-looking valuations, and the difference between trading ...