Shortly after publishing my post about the closed contract for the FUBO contracts, our limit order to repurchase a put option contract (strike: $75; expiration: 19OCT2021) on insurance provider Lemonade (LMND) was filled. After selling the contract for $274.30 on January 15th our standing limit order purchased to close the short position for $115.69; we netted $158.61, or 2.1% of the $7,500 required as collateral, over the ten days the position was held.
More than two percent return is incredibly attractive considering the prevailing risk free rate. On a twelve-month basis the return on our LMND trade is roughly 77%. Why compare the LMND trade to the risk-free rate? LMND is highly volatile, new to public markets, and new to a market with well-established competitors.
LMND is highly recommended by my favorite stock-picking newsletter and, more importantly, this option contract’s strike price had a significant margin for error. When I entered the order to sell the contract on 15JAN2021, shares of LMND traded for $159.20 – more than twice our strike price. To spell out the proposition of the trade: LMND shares could be cut in half over the following two months and we still wouldn’t have shares distributed to us. Were shares distributed, our cost basis would have been $72.25. To classify this trade risk-free would be foolish but it is fair to deem option execution unlikely.
LMND has had a wild ride since joining the public markets this past summer; see the below chart. Shares of LMND briefly reached $95 in July following a strong initial month but did not cross $100 until mid-December – briefly falling as low as $44.11. After starting January near $130, LMND share soared to $188.30 before tumbling in January’s second week. Our put option contract was closed when LMND shares briefly flirted with $170 before closing at $151. We’ll likely sell another put contract for LMND in the near future if presented with such favorable terms.
Source: QuesTrade; Accessed: 25JAN2021