options experiment – where are we – part II

After a first few covered calls and a put trade, I thought it was time to boost my game a little bit. Due to expiration of an insurance contract, the money needed another destination. Having the need for speed, rather than doing the logical (add to my indexes), I decided to use the money to fund an options trading account.

Why do this?

Part of my learning process is to find out how far I can scale the trading with options. I am not a professional trader, I have a regular job and a family with 2 kids. But I like to find out how far I can go with things. The money that came available created the opportunity to do a little more. I decide to reserve about half of it as play money.

The good thing is that my internal risk manager warned me: options are dangerous, you have had success the past 4 trades, one day it will be different. In trading options, I now go with the following rule

Do not use the margin account for leverage. Make sure each written put is fully cash secured! Calls are always covered!

By doing this, I will be able to sleep at night, something that is worth a lot to me. In worst case, if I can not manage my trades well and I get assigned, there will be not forced sales as the results of a margin call. Will I limit my return? Yes, I will. Do I mind? No, I don’t!

The trades

For writing puts, I have some rules in place for selecting the stock: Take a DGI and select a price that represents a fair value. For this experiment, I decided to go with the following 2 stock: Coca Cola (KO) and AXA (CS). For both stocks, I fixed the strike price.

After these 2 trades, I looked at my RDSA stock again, and saw it was time for action again. According to me, the stock reached its bottom, so, I went for the second put on RDSA. By doing so, I kinda broke my basic rule. The cash for this put was not readily available in my brokers account, but I knew I could get it there within 5 days.

Some self reflection is needed in order to understand why I did this trade? I came to the conclusion that I probably was feeling to confident in my skills, in my possibilities to read the market. It is good that I went through this. I can now recognise this and hopefully stop me later on.

The August correction

The puts were written on Aug 17 and Aug 20. Not that much later, the market corrected about 12pct. Bad news for option writers. On the other hand, it is a good experience early on in my options learning.

Let’s be clear, having volatility like that is not nice for a portfolio. Seeing this happening when you are short some puts adds some drama. As the correction was ongoing, I was either at work or at home taking care of the kids. This is not an ideal situation to be in. I was not following the actions in real time, so when I checked upon the prices of the stock, I was not happy. Basically, my puts were all in the money.

Acting at that time seemed to difficult. There were, for me beginner that I am, no solutions available to get out of the trades without a loss. I also felt bad to have to pay more than the price of the stock if the markets continue like this. This was a weird feeling… I had fixed a price that I would not mind to pay… I guess this is the human nature. Maybe comparable to going to a flee market, negotiate a price you are willing to pay and then find out your friends got the same item even cheaper… This is a feeling I still need to deal with.

As the correction continued, I spoke on Wednesday to a colleague about my deep-in-the-money puts. It is good that he reminded me to the basic assumption I made when making the trade: The strike price is a price that seems fair to me to own the stock. It is a fair value to pay for the stock.

How it evolves

At the time of writing the last day of August, the markets calmed down and recovered somewhat. In the mean time, I have been reading a lot on managing positions by rolling. Having some puts to actually roll makes reading all these the posts and watching all these videos so much more valuable. By the 3rd week of September, I will have to see what and how I can roll some positions to give the trades more time. I have actually 2 options in the money and one out of the money.

Due to the increase volatility, the prices of the options has increased as well. Being a seller, wanting to buy back, this is a bad thing. Lets see how the rolling would work out

Covered calls

Having the puts that causes enough excitement for now, I did not continue to write covered calls against my RDSA stock I own. I want first to get the experience on rolling the puts before jumping into writing covered calls that I might need to roll. Why would that be? The stock trades well below my target sell price and thus options with a strike of my wish sell for almost nothing. Not worth the hassle. So, I need to sell at strikes I do not want to sell, so, when the markets rise again, I need to start managing the trades. Lets first see how it goes with the puts.

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4 thoughts on “options experiment – where are we – part II

  1. AmberTree,

    As you get further along in your options trading experience you will come to salivate over corrective moves that leads to explosive volatility.

    These are the best times to sell option premium. Where fear is the highest, premiums are the richest. You get to go further out of the money and collect more premium. The best of both worlds.

    Increased volatility means that your probability of profit goes up as well.

    If I have not already recommended it and you have not found it on your own, I highly recommend you check out TastyTrade.com

    Cheers!

    Like

  2. Hi ambertreeleaves,

    What software do you use in order to trade options in Belgium?

    Do you try to play the long game in order to go around the speculation tax, or do you just accept it as a sunken cost?

    Like

    1. Hey Bruce, I have accounts with multiple brokers. They all have their pros and cons.
      The speculation tax does not apply when the underlying is a ETF, so, that is where I trade. And according to the help sections from brokers, there is not yet speculation tax on options due to a wording issue. That being said, the government is working on a retroactive fix…!

      Like

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