The put needs a call

The start of 2016 has been interesting. The concept of volatility should be clear to all now. The markets went down and then up in an hurry.

During this volatile weeks, I was able to reach my monthly goal on options with my play portfolio for January. The reasons is more luck than skill. How to repeat this? That is the real question.

What happend with the options?

  • My put options

One part of my option strategy is writing put options on stock I do not mind to own. I try to take high probability trades, that pay an acceptable premium. I also take the habit to manage my winners and take the risk of the table.

At the stbadstartart, the stock went fast and hard in the wrong direction. As a result, the price of the option went really up, making it difficult for me to buy back. I rather would need to roll the puts to the next month. Doing so would mean that I can not record a profit in February. I needed more alternatives to act in situations like this.

Having initiated these 3 puts at almost the same time is also the reason that they are all in-the-money or almost in-the-money at the same time. When it drops like it did, all drops…

Having reached my personal maximal limit of value-at-risk (as measured by the worst case amount if all put get exercised) at the start of the drop, also ment I had no flexibility left to react to the new conditions to write more puts at already lower levels.

  • My covered calls

More by accident than insight, I had quite some covered calls on at the start of January. Due to the price drop, the opposite happend with the calls: the price dropped really hard and I was able to take all trades of with 50-60 pct of max profit. This generated a good profit for January.

My stock are all quoting below their cost basis. They are at such a level that writing out calls is not an option, as I want to respect my covered call rule: one write at a price I do not mind to sell.

I  now ran out of covered calls, so February will need to look at the puts for profit.

Strategy adjustment

Going forward, I will adapt my strategy as follows

  • go easy when writing puts. It is better to write one each week, rather than being impatient and sell 3 puts on a day. The reason: in case of a sudden drop, I keep room in my personal allowed value-at-risk to write additional options. Remember, the put  needs the stock to go up or not drop a lot.
  • Put on covered calls as soon as possible. This way, I have in my portfolio options that benefit from a steep drop as well. It is a nice diversification from the puts. I just need to keep in mind that I need to be ok with the strike price. especially for RDS.A stock, this seems to be emotionally difficult.

By applying these 2 additional rules, I think I might be able to reach my 2016 goal of 1000 EUR out of my play money. For this year, it is composed out of the dividend, option premium and capital gains. Going further, It would be option premium only. Let’s wait and see.

What next?

getting betterIn the mean time, the markets recovered in an incredible way, and are sliding back down. On of my play stocks got back into covered call writing territory, so I did what I needed to do: write a call. I also bought one more tracker and wrote a covered call on it.

As a result, my option portfolio is now again getting in balance with my target allocation: some covered calls and some puts.

Lets see what happens going forward. It is for sure an interesting time to learn about options.

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4 thoughts on “The put needs a call

  1. Hello,

    I dont sell puts, to Shares I dont want to own in a Downtrend like it is at the moment.
    I try to sell calls on stocks in a downtrend from the overall market. In the market situation what we have right now, I only sell cash secured Puts to Stocks I want to own 🙂

    Thank you for your good content every post. I like your Blog!

    Like

    1. thx for dropping by and for the comments.
      I also only sell puts on stock/trackers I want to own. In this case, I sold puts at the start of the big drop… You only know afterwards what would have been better. Hence the adjustment to my strategy… DO not buy all in one day/week

      Like

  2. Yes, i think you are right. better one contract short put at the beginning, und if you have money left sell a second short put. If both Puts expires in the money, you have the cost average effekt. 🙂

    Like

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