Option Trader Series #1 – Investment Hunting

As a first interviewee on the option trader series, I am happy to talk to Investment Hunting. Lets’s go:
Can you introduce yourself?
Hi, I’m Nathan from Investment Hunting. I’m a dividend growth investor who also writes option contracts. I write a handful of option contracts every month. I only write (sell) options. This means I sell covered calls (contracts that use my existing shares as collateral), or cash secured puts (contracts that use cash in my brokerage account as collateral). I’ve made $6,000 dollar the past year selling Options. There have been up and down months throughout the past year. My best positive month I earned $1,790, and my worst month I’ve lost $1,710. The positive came from expired contracts. The negative is caused by me buying my options to close a contract. Overall though, I’m positive $6,000. Considering I spend minutes a day evaluating options, I consider this to be a good amount of positive income.
How did you get an interest in option trading?
I never considered option trading until I started posting articles on Seeking Alpha. Many commenters suggested that I could get a better entry price on stocks if I sold Puts. I began researching from there and the rest is history. Here’s the first Options Post I ever wrote.
What actions did you take to learn on option trading?
First I searched online for bloggers trading options. I couldn’t find many, so I bought a few books. I’ve read the following:
All About Dividend Investing, by Don Schreiber, JR., and Gary Stroik.
This is a good entry level book that covers beginner to intermediate options strategies.
Generate Thousands In Cash On Your Stocks Before Buying Or Selling Them, by Dr. Samir Elias
This book covers most popular options strategies.
Options as a Strategic Investment, By Lawrence G. McMillan
This is a serious book on Options. Honestly I only understood about 15% of this book. Th author covers every strategy and goes into deep detail.
What is your goal/ambition?
My goal is to increase the total return of any stock I own. I’m not looking to get rich with options, but I am interested in increasing my ROI slightly. My primary goal is to retire by living off of monthly dividend income. I see options as a way to capture a premium. The plan is for my option contracts to expire and provide me with premiums that I can use to buy more dividend paying stocks.
How do you describe your style?
Passive is the best description of my options style. I don’t do anything fancy or time consuming. I spend 10 minutes a day, usually on my train ride to work, evaluating the stocks that I own and how they are trending. For stocks that are overvalued I sell covered calls out of the money.
Did this evolve over time?
Yes. When I first started options trading, I sold a lot of cash secured puts. However, over the past year I have put most of my liquid money into stocks, so I don’t have available cash to sell this type of put. The past few months all of my contracts have been covered calls.
How much time do you spend on trading options?
10 – 20 minutes a day
How do you deal with the risk that comes with option trading?
I only sell options on those stocks I am willing to sell or own. For example, I’ve been selling covered calls on Realty Income Corporation the past few months. The stock is about 20% overvalued right now. I’m selling slightly out of the money calls. If the stock goes up above the strike price, I’m fine having it called away. This is because my cost basis is much lower than the stock’s current price. If the stock is called away, I’ll hold earnings and wait for the next price dip to buy the stock again. Then I’ll sell more calls.
What tools/sites/blogs/podcasts do you read on option trading?
I read other bloggers sites, but I don’t use any tools. I read Dennis McCain and Amber Tree Leaves.
What is the size of your option trading account?
Since I don’t sell options on margin, the size of my account is a segment of my overall investment portfolio. This means, only those stocks that are in my portfolio that I own more than 100 shares of are eligible to be used. I haven’t added everything up, but I’d say $100,000 U.S is the amount I have in shares to use as collateral. Here’s a link to my stock portfolio. Any company that I own 100 shares of is eligible to be used for covered call contracts.
Where do you get inspiration for trades?
I look for minor to medium volatility stocks. This is because a very stable stock, AT&T for example is not a stock that will yield me enough income to make the contract worthwhile. An example of a good options stock is Gilead Sciences. This stock price is volatile enough that I can sell covered calls when the stock spikes and have confidence that during my options contract period, the stoke will drop several dollars. When this drop occurs, I will revisit the contract to determine if I should buy it back or let the contract expire.
How do you track your trades and P&L?
I track everything using Google Docs in a spreadsheet that I created.
Where can we follow your results?
Right now, nowhere. I used to write about my options transactions, but stopped last year because my readers were not interested. Here’s a link to the last Options Post I wrote. But this has changed. The past 6-months, I’ve noticed many more dividend investors have embraced options strategies. I’m going to start reporting monthly again soon, stay tuned :-).
What is the worst trade ever you did?
I sold a put on Copa Holdings last year at $85. At the time the stock was trading over $100. The stock fell quickly and on the day of expiration it fell below $85. I almost sold the stock the next day. If I had I would have turned a $600 profit, because that’s what my premium was. But I held in the hopes of a gain. Copa stock continued sliding and today it trades around $55. Ive sold a bunch of covered calls in an attempt to reduce my cost basis, but this stocks seems to be volatile enough to offset any gains. I haven’t given up, but I really want to have a few wins with covered calls, then sell at or near break even.
I just sold another covered call today. The trade details are: CALL COPA HOLDINGS SA $65 EXP 11/18/16. What does this mean? A call at a strike price of $65. I’m betting that this stock will not go above $65 by November 18th of this year. My commission for this contract is $290.28. If the option expires worthless, I’ll keep the commission.
What is the best trade ever you did?
I think Gilead Sciences is the best options stock I’ve traded. I’ve sold a bunch of covered calls over the past year, which has reduced my cost basis by more than $25 a share. Today the stock is undervalued at $83. Even at it current low price, my cost basis is $75.51 a share. This low price was all made possible thanks to covered calls.
Where/how can we follow your progress? 
Investmenthunting.com - Logo
You can follow my dividend stock strategy and transactions at Investment Hunting. In the near future, I will add an options section, but for now, I have blog posts about my stock transactions and my monthly dividend income.
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21 thoughts on “Option Trader Series #1 – Investment Hunting

  1. Ok now that comments are ok (please delete the previous one) I wanted to compliment with you both for the interview, really nice idea ATL, and great work IH, I have already got some ideas from this post… 🙂
    ciao ciao
    Stal

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    1. Hi Stalflare. Good to hear that you have some new ideas based on the post. When you start testing them please pass the information on, so we can try them out too.

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  2. This is great. Thank you both for sharing this interview. Options have always been intimidating to me so it’s great to get some insight into how others have gotten started.

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    1. If you want to get started with options, I suggest easing your way into it. Sell one covered call or cash secured put, just to try it out. Do this only for a stock you’re willing to give up or willing to own. That way, there are no surprises. Best of luck to you.

      Liked by 1 person

    1. Hi Easy Dividend. I’m working on my first monthly options update post, i should have it live by the end of the week. Thanks for your continued support.

      Liked by 1 person

  3. I have started following ATL’s site to begin building my knowledge of options trading as a strategy and had a quick question.

    You mentioned that you have about $100,000 in underlying stock collateral and you earned $6,000 last year trading options on that collateral. As such, is it fair to say you enhanced your total return on that $100,000 by an additional 6%?

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    1. Correct Financial Slacker. I made $6,000 selling options last year using about $100,000 in collateral stocks. So 6% is fair. This added to my dividend income last year of $3,885 totals is just under $10,000. All of that money was reinvested into buying more stocks. $6,000 was a good average of $500 a month in options income. It’s not always that way though. This year for example, I’ve sold fewer options, but the market has shifted frequently. I’ve bought to close many contracts, so my income so far this year is only about $200. It could have been more, but I chose to buy options contracts back and keep my stock. For the remainder of the year, I’ve decided to not re-buy contracts, so I may lose stocks I own to the option buyer but I’ll keep the premium. At that point, I’ll either hold my cash and re-buy the stock on the next price drop or buy a new stock.

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  4. Interesting series and I look forward to more of these!

    I like the strategy in this post, only option trading on stocks you would own must save you a ton of time since you are already very familiar with them – nice returns as well!

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    1. Correct Apathyends. Trading options on those stocks I own or those I want to own reduces the list size dramatically. It also removes some of the speculation. Options trading is not for everyone, but I really enjoy it. It’s also a great way to expedite retirement.

      I follow a lot of bloggers who are fantastic DGI investors but don’t touch options. I cannot figure out why they won’t at least sell covered calls on stocks they already own. Realty Income Corp (O) is a great example of a stock that I think anyone who owns 100 or more shares should be selling covered calls on right now. The stock has gone up 23% YTD and it was already overvalued before this increase. I started selling covered calls in January of this year. If my option contracts are called I don’t care. I get to sell my shares for $65 a share and collect option premiums. It’s actually great if the stocks are called. I’ll hold the money from the transaction and wait for O to return to the $50s and buy more shares. Here’s what I’ve done with O so far this year.

      Sell to Open a $65 call expiring 6/17/2016 for a premium of $148.29
      Buy to Close the same contract for $26.71
      Sell to Open a $65 call expiring 12/16/2016 for a premium of $128.29

      Less buying to close costs, I’ve made $249.87. This amount of dividends collected so far this year total $189.55. Added up I’ve made $439.42 in the first 5 months of 2016 on O stock.

      Now for the best part, all of this happens in a Roth IRA, so I pay no taxes now or ever on these transactions 🙂

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      1. That is a good summary. My RDSA stock is almost at the point where I do not mind selling them. At that time, I plan to write calls against them for extra income. I already do this with my KMI stock. One covered call generates in my case about 1,5 times the net dividend. When I can do that once every quarter, I have a nice boost on my income. When called away, I start to sell puts. I would not do that this aggressively with core holdings unless they are clearly overvalued.

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  5. Really interesting read Nathan & ATL, I appreciate you both taking the time to do this interview.

    Perhaps one day it may be suitable for us (I’m not sure how good it is in Australia), but I will consider it 🙂

    Tristan

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  6. Interesting article. And thanks for the reference. Everything that IH is doing is exactly on target. Anyone reading his articles will get a nice investing education as well as some interesting and thoughtful reading. Do yourself a favor and visit his site often.

    Options are an integral part of my investing strategy and tactics along with dividend distributions. All of this can easily be found on my site. I wish everyone the best in all their trades.

    Respectfully,
    Dennis McCain
    dennismccain.weebly.com

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  7. Great interview. As I commented on IH’s blog I feel like I’m being left out of the options world with more and more dividend bloggers getting into this trading method for generating extra monthly income. Not to sound too childish but I guess I still feel like I need hand holding before I get my feet wet with options. Of course, I would not try any exotic trades. Just covered calls and maybe cash secured puts but that Copa example looks scary.

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    1. After trading options for about a year, I have learned to deal with the risk. My first trades were on stock that I would not mind owning at the the strike price. It might look scary to have to buy at 40 when it trades 38. Then again, the day I wrote my put, people paid 41,5 and the also went down to 38…

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