options experiment – where are we

One of the goals this year is to learn about options. The selling of covered calls is already ongoing. What about puts? This one could not wait any longer.

With a put, you promise to the buyer to purchase the stock from him at a predefined price (strike) , up to a certain date (option expiration date). So, In this case, I needed to take into account that I could get stock at the strike price. Hence, I looked for a stock that I would not mind to own. The conclusion was simple and the same as for the covered calls: RDSA looks like it fits all my needs.

The challenge with the put is to find a price level that fits the following needs

  • unlikely to be reached during the time left in the option: I have no idea, nobody knows. So, I used the options data to guesstimate where the stock would end up if all goes as in the past (spoiler: it never goes like in the past). I fixed a price of 24.
  • a price I do not to mind owning the stock:  the yield at that time was around 6,5 pct gross. Not to bad at all, so a price below the price at that time would be fine. The 24 from above fits that criteria.

Here is the trade log:

  • Jul 24:  I sold the 21 aug put with a strike of 24. At that time, the stock traded around 25,3.
  • Jul 25: About 24 hours later, the stock was down to 24,4, but seems to be ready to take off
  • Aug 5: I make about 75pct of my maximum profit and decide to close the position
The story of my first put
The story of my first put

How do I look at the risk that comes with options?

This is hard to say: you take on risk when writing these options. I actually write the options expecting not to be assigned to deliver upon my promise. But it can happen. Therefore, I need to be sure that I am happy with either outcome when writing the option.These are the scenarios I consider:

  • Covered cal

The stock breaches the strike price: Will I be happy to deliver the stock and miss all the future potential and the dividends? As my main focus for now is index investing, I tell myself not to care about this as long as I can make a 4-6 pct profit on the trade in a short period.

How will I feel if the stock tanks and I make a significant paper loss? As DGI is a part of my future investment plan, I should be ok to keep the stock for the long run, under the condition I have bought it at a fair value.

All other case: take the option premium and be happy about it.

  • Naked put

The only case to consider here is that I have to buy the stock at a price way below the the strike price. If you think about it, this is the same as owning a DGI stock and the market tanks.

All other cases: be happy with the premium received. I will not feel sad if the stock started to rise really high, as owning the stock was never my initial plan.

To be honest, it is easy to write these rules down, but in reality it turns out to be harder. If one of the above events become more likely (the options gets in the money), then I start to doubt. But with each trade in make, the doubt is less prominent. The good thing is that these rules are now written down and can act as guidance during my next option discovery.

With options, there is always the possibility to roll the trade. In this case, you close the position and take your loss, to open a similar position with a further out expiration date and/or strike. Until now, I did not yet need to do this, but I practiced already a little on paper. 🙂

Is it worth the stress?

The below table shows all my trades until aug 20. All are done on RDSA

date in action cost reduction credit to open debit to close close date % of max profit
june-9 covered call -15,5 -18 2,5 jul-16 86%
jul-22 covered call -17,5 -27 9,5 jul-23 65%
jul-23 naked put -13,5 -18 4,5 aug-05 75%
aug-03 covered call -11,5 -17 5,5 aug-19 68%

This mean I created an additional 58 cents on my stock. As a result, the average buying price of my RDSA dropped from 26,09 to 25,51. This is a return of 2,22 pct on 3 months. Not too bad.

In the same time, I also went on record for the dividend. The estimated net dividend is 0,24 per share.

Going forward

Is it repeatable? I have been lucky to keep the stock and not having to buy additional stock. I wonder what would happen if the stock drops really below my current cost basis, making it mentally more difficult to write covered calls. At that time, what if I can not write a covered call that brings me my 4-5 pct profit when called away. What will I do? Go for low premium at a far away strike, or do as usual but keep in mind I might need to roll out the trade? I am curious to see what I would do.

Only the future will tell… so for now, the experiment continues.


3 thoughts on “options experiment – where are we

  1. Thanks for sharing your options experience. I have been wanting to get into options for the longest time but quite frankly still do not feel comfortable doing so. You cover the two methods in which I would like to play options, covered calls or selling puts. The way I see it, selling puts gets me a premium at best and at worst a stock that I am interested in owning in case I get exercised. Look forward to following more of your trades and learning.


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