Making a “passive” income out of options sounds great. So far, I am doing fine, can’t complain. When reviewing my recent posts, I have the feeling I only share the success stories. I want to tell the full picture.
The March update of my income is a very kick ass story. At least, for my reference framework. I am in discovery faze, generating bonus income. During in my learning period, I made a 70 EUR loss on an option. No big deal, I consider it the costs of a trading course, way less than a 300 or more EUR seminar! 🙂 I am still learning, I learn every day.
Fact is, I also have options that do not do what I want them to do. Who would have thought that?!? These are trades that do not produce revenue in the timeframe that I had in mind. It is part of the game. Not all can be winners. The questions is: how do you deal with losers?
What is important to know: I write options to generate an income. I will always do what I can to avoid assignment. I am after the premium, nothing else.
The RDSA example
On 23.10.2015 I wrote a 23 put on RDSA. The trade was in line with my principles
- I do not mind owning the stock at that price – so I thought
- At that time, it had a delta of 22. It means I had an approximate 78 pct change of making a profit.
I made the trade and got 0,37 EUR for selling the put. The expiration date was 18 December.
Well, it looks like I was not in the 78 pct range this time. The stock drops and goes below 20 on Dec 14. What to do now?
- just wait out the option expiration date and get assigned the stock at 23.
This was not a possibility for me. I think I own already too much RDS.A stock. So, maybe I should not have written the put then… Well no, there is always a second possibility
- roll the position
I bought back the options for 2,66. This is a loss of 2,29 or 229 EUR. That is almost my full March profit. At the same time, I sold a new put, with strike of 22. I got a premium of 3,05. For this put, I decided to go all the way to June 17 2016. That is a lot of days…
Taking into account the buy back cost, I have a net additional credit of 0,39 or a total of 0,76 (the initial 0,37 plus the 0,39 from the roll)
I also managed to roll to a lower strike. I now have a strike of 22.
- Some people might actually decide to close the trade for a loss way sooner. Some stop the bleeding when they have a paper loss of 2 or 3 times the initial credit.
Where are we today?
At the time writing – Sunday April 10 – RDS.A closed at 21.56 EUR. The option is still in the money and has 68 days left to expiration.
Just before publishing, the stock trades at 22,5. This is nice, It is now out of the money. That being said, the option still trades well above the price I have sold it. Still a loosing trade…
A positive note: This stock had another put that went deep in the money. I rolled it down to 18 and far far out, till Sept 2016. This option, I managed to buy back for a small profit. I now have the capital free to make another – hopefully – more profitable trade.
Is this good or bad?
The good news: I still did not get assigned the stock. Remember, the holder of the option can at anytime give me the stock and I would need to pay the agreed price.
More good news: My break even price is 21,24 (Strike- premium received). As I hope to avoid assignment, this is a optional good news item.
Bad news: The trade is already running for 170 days. By the time of expiration it will be 238 days. That are 238 days the margin for this put is not earning a lot. If I can close the deal for 50pct of max profit, I will have a yield of 1,81 pct in 238… Nothing to brag about compared to the rest of my options
If I believe in the long term potential of the stock. It means I will roll again when the option is in the money around June 10. In the mean time, I will keep an eye open to buy back the option for a profit.