Getting familiar with options is one of my 2015 goals. I read and heard so many things about it. I just had to know how it works. Here is part 2 of the story.
After doing a lot of reading and thinking, early June I pulled the trigger and sold my first option. The options expired the third Friday of July. Here is what happened.
I first bought 100 RDS.A stocks at about 26,09. I wrote a covered call at 27, expiry on July 17. During then option lifetime, the stock flirted with the 27 strike price. It did not go over it, so I was not called away. Due to the Greek and Chinese troubles, the priced moved down again.
Two days before expiry, the Greek parliament approved the EU plans. When I read the news early in the morning , I started to question my position
- I expected a big price move up
- Would I be happy to be called away? NO! The dividend record date is less than a month away, and I wanted to figure out how all of this works in practice.
- How could I react? The option was only trading at 0,01. Not that much money to take my profit off the table and to keep the stock so I can see in detail the dividend cycle.
So, I decided to move ahead an placed an order to do a closing buy trade. I got filled soon after market opeing. After expenses of this trade, I kept 87pct of the trade max profit. (sounds enormous, but it is actually only 15,5 EUR)
Since then, I have been reading on the subject, and closing soon is actually a good practice: try not to be to greedy and take some decent profit and avoid some risk. Very often, it is combined with placing another trade so you can redeploy your assets and get some more credit (premium) paid. I did party one, not part two
As the stock did not jump up that high, It is a move I should not have done at all. With hindsight, I think I might actually do this again in the future, but for another reason: secure the profit, lower the risk and start the cycle again. As I write covered calls, I will try to figure out if it is a good thing to do or not. I plan to keep stats on the costs to close a position vs the extra time value I get compared to selling again after the expiration date. Sounds like a plan, now lets execute it.
I am still a rookie in options and still have a lot to learn. But it is a domain that has my interest. I will be exploring this further. As I want to combine it with DGI, I could have some unwanted side effects or even too low returns.
The other domain that I would like to explore is selling puts. Not sure when I get into that adventure
To be continued…
7 thoughts on “Review of my first option trade”
This is very interesting. And it’s very brave of you to take on this level of investing! We tend to think that we are not able to time the market, and so stick to index funds for the most part. But certainly there could be big gains to be had for those willing to take on some additional risk.
It is very interesting indeed. For now, I only do this with 1 stock. I try to find out if I can add value to the dividends of that stock. It is a learning experiment for me.
My main portfolio remains an index portfolio. I need approx 1 year of build up to have it to the point where I want it to be, relative to my safe products. At that time, I will decide if I stick to indexing or If I move to something else.
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I love what you are doing. Keeping the bulk of your money in an index takes the pressure off your “experiment” trades. That keeps me from panicking and making bad decisions.
The goal is to discover the options world. I want to do this in a no harm, no pressure way. With the amounts that I trade now, and by having an exit strategy, I planto limit any damage if a trade goes wrong.
To me you are in totally uncharted territory and I will leave you there for the moment, although I wanted to ask you why using options when you can have CFDs that do pretty much the same thing but behave a little different in terms of entering and exiting from a position…
The territory is still new to me… I am just seeing what is possible and what not.
Why options and not CFDs. The goal of the options is to write covered calls. It brings in a premium and at the same time I choose a strike price that hopefully allows me to keep the stock.
CFDs do not allow this. And as an instrument, they are too leveraged to me.
Options have – according to me – the advantage of flexibility and defined risk trades.