interview #10 -FerdiS – DGI with options

This is interview nr 10 of people that trade options. Thanks for reading along. Today, FerdiS does the talking. He lives in California and is originally from South Africa. He mainly invests in dividend growing stocks and uses options to add extra return. He also contributes on seeking alpha.

How did you get an interest in option trading?

Before I found DivGro and subscribed to the philosophy of dividend growth investing, I was an avid trader. I looked at technicals and ignored fundamentals. I studied stock charts and trends, trying to determine the best entry points and looking at patterns that would suggest future price action. In those days, the leverage possible with options seemed very appealing. I started learning about options and subscribed to a couple of options trading advisory services. I had spectacular wins, occasionally, but not enough to sufficiently offset the losses along the way. When accounting for commissions, I don’t believe I did much better than I’m doing now with DivGro. The returns just did not warrant the effort and time commitment.

With DivGro now well-established, I decided to revisit options trading, but this time I’m staying on the sell-side of things! I’d rather collect (than pay) options premiums and I’d rather have time decay work for me (than against me).

What actions did you take to learn on option trading?

I read several books on options trading, and also attended a one-day course. The other way I’ve learned is to subscribe to options trading advisory services. I still do that, but now I’m focussed exclusively on services that advocate option selling. I have some interest in eventually learning about option credit spreads, but, for now, I’ll just focus on selling call and put options.

What is your goal/ambition?

I started DivGro four years ago with the goal to achieve a 12% yield on cost (YoC) after 10 years, a somewhat aggressive goal. Presently, my portfolio has a YoC of 4.3%. Because I’m adding new capital and reinvesting dividends, it is unlikely that I’ll get to 12% after 10 years with dividends alone. That is one of the reasons I decided to add options trading to DivGro and to leverage the stocks I already own to boost dividend income. My goal in 2017 is to earn $8,400 in options income. That’s a hefty goal but I’m going to try my best to achieve it!

How do you describe your style? Did this evolve over time?

As far as stocks are concerned, I’ve transitioned from being a trader to being a dividend growth investor. As far as options trading is concerned, I’ve undergone a similar transition. I no longer buy options. Rather, I sell call options on stocks I own to boost dividend income, or I sell put options to buy stocks at a preferred price.

How much time do you spend on trading options?

I trade infrequently, perhaps two or three times a month. On each occasion, I’ll spend about two to three hours considering different opportunities, strike prices and expiration dates, before pulling the trigger.

How do you deal with the risk that comes with option trading?

I don’t buy options. Selling covered calls is a low risk strategy if you choose a strike price at or above your cost basis. I don’t care if a stock rallies beyond my strike price and I miss out on the upside. Going into the trade, I know what the possible outcomes are and I’m happy to give up my shares if necessary. Selling puts is more risky, so I only sell puts on stocks I want to own at strike prices below fair value. Because of the increased risk, I only sell puts on a few stocks at a time. Although I trade in a margin account, I prefer not to rely on margin too much to cover puts. Having said that, I don’t (yet) have a hard and fast rule to only sell cash-secured puts.

What tools/sites/blogs/podcasts do you read on option trading?

I visit http://www.cboe.com/data/avgdailyvolarchive.aspx monthly to check out the average daily options volume for the prior month. Recently, several dividend growth bloggers have started trading options, so I’m always interested to see what they’re up to.

What is the size of your option trading account?

Currently, I trade options in an account that represents about 25% of my DivGro portfolio, which is public here: http://divgro.blogspot.com/p/portfolio.html. I’m planning to expand that to about 50% of my portfolio by the end of January 2017.

Where do you get inspiration for trades?

I get ideas for selling puts from a couple of options trading advisory subscriptions, though I limit those to stocks I would want to own. Additionally, I do fair value estimates of the stocks I own on a monthly basis. Any stocks trading at or near fair value are candidates for put selling. As for covered calls, I see any of the stocks I own as fair game for selling covered calls.

How do you track your trades and P&L? Where can we follow your results?

I write a monthly options update article on my blog at divgro.blogspot.com. It is comprehensive and includes sections covering all options trades, any assignments or expirations, and a running tally of trades to track secured options income. See http://divgro.blogspot.com/2016/12/options-update-december-2016.html.

What is the worst trade ever you did?

I only have good records since I started blogging about DivGro, so I’ll share my worst trade as a dividend growth investor. I bought Seadrill Ltd (SDRL) on two occasions, making the rookie mistake of chasing yield. Then SDRL suspended its dividend and the stock tanked. My net loss was 85%!

What is the best trade ever you did?

General Dynamics Corporation (GD) is the fifth stock I bought for DivGro. The stock became my first home run stock (100% in total returns) in 2014 and it is well on the way to delivering 200% in total returns. Currently, the stock’s annualized return is 45%!

Where/how can we follow your progress?

I blog at divgro.blogspot.com. Also, I regularly write articles for Seeking Alpha under the profile FerdiS (http://seekingalpha.com/author/ferdis/articles#regular_articles). 

Advertisements

7 thoughts on “interview #10 -FerdiS – DGI with options

  1. Very nice interview!

    Hey, FerdiS, I am reading your posts from time to time. I like your site.
    But dont you think you could be a little more aggressive with such a huge portfolio value?
    I am trading like you, puts on stocks i want to own at the strike price and covered calls on stock I own. 8400 Dollar in options income for whole 2017 seems very low to me for a portfolio value of 385k.

    you wrote that you have got a margin account. you could use your margin to make so much more profit. not all of it! but I think a little more aggressive could be nice.
    I mean: my portfolio value is something about 60k, in 2016 I earned above 14.000 euros through trading options. its the same strategy, only with a little more margin.

    i dont want you to do this, i just want you to think about it 🙂

    thanks for this amazing interview 🙂
    best regards
    Chri

    Like

  2. Great interview! And you had the exact same epiphany as I did a while ago: If you can’t beat the casino, find a way to be the casino. In other words, forget about buying options. It’s more profitable selling them. 🙂

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s