My second month of trading options
In May I received $820 in premiums from trading options. That’s $100 more than what I made in April. Yay. 🙂
Here are some key points from my options trading this month.
- I sold 10 options – 8 Puts and 2 Calls.
- I bought 1 option to close my previously sold TD Call at $90 strike.
- My total trading commission was $14.48.
- It took around 5 hours total to research and execute all the trades.
- I kept the expiration dates between 2 to 6 weeks out.
- I started to perform the wheel strategy. More on this below.
- 6 options expired in May. All 6 expired worthless. 🙂
Here are the transaction details. The $2700 Amazon Put was my most profitable trade with a $215 premium.
Proceeds – commissions = $820.03
Rolling with the wheel
In the previous month I didn’t really have a plan. I just wanted to sell Puts and make some quick money. That worked out okay. But I can probably do better with an actual strategy.
So this month I started to implement a trading tactic called The Wheel. It contains 3 parts.
- You start by selling Put options to generate income. Most of these should expire worthless.
- If any options are assigned you sell Call options above the cost basis on the assigned stocks.
- If those stocks get called away, you make a profit from buying the stock low and selling high. 🙂
Since you can make money in 3 different ways this is also known as the triple income strategy.
Where I learned about the wheel
I recently came across this thread on the WSB subreddit. The internet is a great place to find investment ideas. This particular reddit post received 3,800 upvotes so it must be a legit strategy, right? 😉
Apparently the wheel is an improved buy and hold strategy that will outperform the S&P 500 index. At least that’s what the post claims. This sounds interesting to me as I’m all about making higher investment returns.
I’m at the stage of my investment journey where a little active management can have a meaningful financial impact. Soon I will have $1 million of liquid assets. If I can give my portfolio some TLC and add an extra 1% to my returns, that’s an additional $10,000 of value!
Moving forward
Instead of using the wheel on index funds only, I plan to use it on individual stocks as well. Looking ahead at next month (June) I expect to earn another $800 or so in option premiums.
I will continue to sell Puts using strike prices at 2 standard deviations out of the money. That basically means my options will have a 95% probability to expire worthless, which is the ideal situation for me.
Here are some stocks/funds I’m currently looking at for potential option trades. I haven’t decides which ones I’ll go with yet as I’m still weighing my options, haha. 😀
- Autodesk (IV = 35)
- QQQ (IV = 18)
- ARKK (IV = 37)
- Mastercard (IV = 22)
- Visa (IV = 19)
IV stands for Implied Volatility, which describes how volatile the stock is. A high IV means the stock price is expected to fluctuate a lot. This translates into higher premiums for option sellers like myself.
That’s all for now. 🙂 In a future post I’ll explain how I screen my trades and demonstrate with some examples.
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Random Useless Fact:
Great update! I’ve looked into options trading in the past. It seems like a lot of fun, as long as you don’t get too carried away. I’m not sure anyone would be able to earn 20% reliably without being assigned a bunch of high-IV stocks after a while. I think you’re going about it the right way by using it to juice returns but not swinging for the fences. Looking forward to your next update!
Thanks man. Resisting the urge to swing for the fences is the hardest part for me lol. 🙂 It’s hard to say how well this strategy will work in a downturn. Even if I set the strike 30% below current market prices an unexpected shock like last year in March could easily assign all my positions. If that happened today I would require $150,000 to fulfill my obligations. I do have the purchasing power, but it’s all margin haha.
It can still work in a downturn as long as 1) you’re trading options on solid companies that aren’t expected to go out of business and 2) you have enough capital to roll the trade to profitability. As an example from my own trades, I started with selling a single $40 put on DISCA (capital at risk is $4k). Now that the share price is closer to $30 and now that I’m aware of the WarnerMedia deal, I don’t expect the share price to increase that much. I’m going to look to roll the trade by expanding to two puts at a lower strike price, either the $35 strike price ($7k at risk) for a net loss or a $37.5/$12.5 put spread ($5k at risk) for a $400 net credit. The purpose of the roll is to get closer to the share price because it’s easier to roll and get better premiums when you’re at the money. Plus, it gets you closer to exiting the trade.
Great summary – looking forward to future updates! Have you found a way to do this strategy in a tax-advantaged account like TFSA or RRSP? From what I can determine, selling short puts is disallowed in these accounts, effectively making this strategy impossible (selling covered calls is permitted). And if you are doing this strategy in a margin account, will your gains be taxed as income or capital gains? Thanks.
That’s correct. You can buy calls, puts and sell covered calls in a registered account, but not sell puts. Options profit/losses are considered capital gains tax for me since it’s not may primary source of income. 🙂
In the transaction details, can you define T-PRICE and C-PRICE ?
T. PRICE is the transaction price. This is the actual money I receive when selling a put option. It’s used to calculate my proceeds and profit.
C. PRICE is the closing price of the instrument at the end of the trading day. This is used to calculate mark to market gains or losses, which determine my margin requirements.
The transaction price is what I focus on more. 🙂
Thanks for sharing your options trading update, Liquid. It’s interesting to see your strategy develop. It’s also cool how even 1% can make such a meaningful impact once your portfolio is larger. I’m working towards being somewhere close to this in 10 to 15 years. Nice that you were able to increase income over last month. Keep it up!
Thanks Graham. Like anything else I was baffled by options at first. But I try to learn it over time and now feel like I have an idea of how it works. 🙂 I’m still keeping my exposure low and aiming for a low return for the time being. One of my call options (CNQ) is about to get in the money, lol. Oh well.
Another impressive educational post with great content. Thanks for sharing. I am looking forward to seeing another successful in June.
I’m hopeful about June. 🙂 As long as we don’t get a surprise correction it should be fine. We shall see.
Thanks for the great post. I have started trading options as well and trying to stick to securities either I want to sell or ones I want to hold in any case. Perhaps trading options around support and resistance levels is a good idea because there is a chance of hitting that price again.
That’s similar to my strategy as well. It’s a combination of understanding the fundamental value behind a company, and using technical indicators to help decide on the option’s strike price. 🙂
Thanks for sharing your option trades. I am also slowly learning and thus far only have sold covered calls. I have a question please help me understand, my question is if I sold Nokia covered call expiring in Jan 18 2022 with strike price of $11 does this means if Nokia shares hit anytime above $11 between now and Jan 18 2022 option could get excercised or does this means Nokia shares should hit $11 or above only on specific date which is Jan 18th 2022 in order for option to get excercised. Could you share me your knowledge on this. I would very much appreciate it. Thank you!
Hey Dipu. Covered calls are a good way to become familiar with options because the risk is limited.
If you have a Nokia call option expiring next year in January, it can theoretically be called away any time. It depends on the option holder who bought the call. Since the price of the option changes all the time most options that get exercised are 21 or fewer days away from expiring. So if Nokia goes up to $15 tomorrow, there’s a chance your $11 option will be exercised right away. But since there is still a long time to Jan 18, 2022 the option holder may hold for the time being.
Thanks so much Liquid. This is very helpful
Nice! I haven’t tried the wheel strategy, but I’ve heard about it. Do you take into account the capital at risk when making options trades. While the AMZN trade seemed pretty much guaranteed to expire worthless, there was $270k at risk if you were assigned.
An option trade that I make occasionally with success is selling deep OTM naked calls on VXX (volatility index) when the markets are volatile. I sold a 5/21 $54 VXX call on 5/4 for $1/contract when VXX was trading around $42 (30% buffer). That was about a 39% return annualized. VXX tends towards 0, which is why this strategy works pretty well, and it undergoes reverse splits to keep the price from reaching 0.
It sounds like you have a lot of experience with options. I haven’t looked at VXX before but I’m curious to do some research on it now. Thanks for sharing the tip. 🙂 I keep in mind the capital at risk in case everything is assigned, and try to keep it within my margin requirement.
I sell some puts myself but aren’t you a little worried about the size of some of these? Looks like you’d have to spend 270k USD if you got put the amazon stock alone. It’s unlikely to occur but if it did you might have to sell a lot and potentially incur taxable gains wouldnt you?
I got a little screwed over when I was doing this before the pandemic and everything took a freefall.
That’s a good point. I was hoping I could borrow on margin to cover the assignment. But if stocks continue to fall more and more then I’ll be forced to sell and take losses. Paying capital gains would be the least of my worries, lol. Maybe next time I’ll try a spread strategy to limit my losses for larger positions like with Amazon. 🙂 Thanks for the cautionary tale.
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