August options trading review
This month I received $1,169 in premiums from trading options. This is another new record for me!
In today’s post I’ll break down my trades for August.
Here are some key points from this month.
- I sold 11 options, all Puts.
- I bought a put option as part of a spread. More on this below.
- My total trading commission was $17 for the month.
- All options that expired in August were out of the money. 🙂
Below is a table detailing my transaction details.
- Initial underlying price – The market price of the underlying stock/ETF when I made the options trade.
- Price difference % – How much the underlying will have to rise or fall to be in-the-money (ITM).
- Initial days to expiry – How many days remain until the option expires, from the day that I traded it.
- Initial Delta – Delta measures the probability of an option expiring ITM. For example, if a put option has a Delta of -10%, it means there is a 10% chance it will get exercised, and a 90% chance it’ll expire worthless.
Raw data from IB statement here.
My first options spread
A put spread is an option spread strategy that is created when equal number of put options are bought and sold simultaneously.
Normally when I sell put options I do not have a bottom line. If the stock drops 99% I still have to buy it.
But in order to reduce risk I could buy a put option with a lower strike price than the one I plan to sell. Simultaneously buying and selling put options on the same underlying, with the same expiration date is a put spread. 🙂
The stock I used for my first put option spread is Berkshire Hathaway because it’s a large conglomerate so it should be a pretty safe choice.
I basically sold a $250 Put. And bought a $200 Put. This means I am protected if BRK.B drops below $200 per share when the options expire in September.
I earn less premium with a put spread compared to a simple put option because buying a put costs money. But it’s less risky.
Options trading at a glance
Since I started in April I’ve traded over 30 options that have already expired. Surprisingly none expired ITM.
I like to play it safe and choose trades with conservatively low Delta values. 🙂
So far I have earned $4,733 from option premiums. This is before capital gains tax.
Thanks for joining me on my options trading adventure. I hope to continue trading options in September and keep doing my “Wheel” strategy.
______________________________________
Random Useless Fact:
The Hawaiian pizza was a Canadian invention by Sam Panopoulos.
Hi Liquid,
in your opinion, what is the minimum asset level someone should have in their account before considering implementing an option strategy like the one you’ve highlighted in a few posts now?
Tom
Hey Tom,
I think $100,000 is a good point to consider options trading. Aside from the portfolio size another factor to think about is the investor’s knowledge/experience. So I would start with relatively conservative strategies such as selling puts or covered calls.
Trading costs at some discount brokerage firms can be high. My trades are generally $0.50 to $2.50 at Interactive Brokers so I would suggest either trading options using IB or another brokerage with similarly low fees. 🙂
I am not sure if you have mentioned this before, but I assume the Puts you are selling are all cash-covered? I believe there are certain Cash and/or Margin requirements for selling Puts. Can you confirm if there are any “behind the scenes” requirements for your current strategy?
Also, not sure if you mentioned this strategy requires Level III authorization within your brokerage. It’s not that difficult to obtain, but may require an application or call to your brokerage as it is not the default Options trading level.
Hi c041v,
The put options I sell are naked. If any of them get assigned I have to borrow money on margin to buy them. The basic margin requirement is 15% of the assignment price. For example, if I sell a put with a strike price of $100, my margin borrowing capacity drops by $1,500. I generally keep at least $100,000 of margin liquidity to prepare for a correction any time.
I forgot how I obtained the authorization to trade options. I don’t remember talking to anyone on the phone, so it was probably an application. But when I used to sell options with TD Direct Investing, I did have to call in and take a short quiz on the phone. It wasn’t too difficult. One of the questions they asked was, if you sell a naked call option, what is your potential loss? The answer is unlimited of course.
Great article Liquid. I like this tool for calculating profitability of credit spreads: https://www.optionsprofitcalculator.com/.
Cool, that’s a useful website. I like the chart layout.
The more information we have the better the judgement we can make with our decisions.
Thanks for sharing. 🙂
Hey Liquid awesome spreadsheet! So glad you listened and added the price difference % 🙂
I have couple of questions:
1. How do you calculate the initial delta %?
2. Do you ever calculate how much in debt you’ll be if all Puts get executed then base your number of Put contracts on that?
3. Say you bought Intel at $62.5 on margin and had it for couple of months. With the current premium levels for intel $62.5, would you sell covered calls at lower price to try to lower your ACB and hopefully profit? Or any other ideas?
You were one of the key people that opened my eyes to leverage. My net worth is on the similar path as yours!!
Hi Arshia, thanks for the helpful feedback. I grab the initial delta either from barchart.com, or from my Interactive Brokers trading platform. In the IB interface the deltas are shown in the option chain. 🙂 As you know the delta of an option changes, so I copy down this number as soon as my order is filled to get the most accurate delta figure I can. I keep track of how much stocks I would have to buy if all my put options get assigned. I keep this number around $200K to $300K most of the time. That means if the overall market falls 50%, most likely I would have to maybe purchase $250K worth of stocks, all on margin. I’m not comfortable risking over $300K, so that is primarily what is limiting my monthly option income at this point. 🙂 I don’t know if I would use options to lower my ACB. I haven’t really thought about it yet. If I bought Intel at $62.50 I would most likely just hold it. Most companies I own I treat as a buy and hold forever investment. There are exceptions, for example if I have 500 shares of one stock, I… Read more »
[…] month I experimented with a put spread. Both related contracts have expired worthless as expected. […]