April options trading update

I didn’t think I would be so busy with options in April.

But I saw some opportunities I just couldn’t pass up, which included a decent gain ($3k) from Netflix. 🙂

It’s officially been 1 entire year since I started trading options. I’ve learned a lot over that time.
And fortunately I got paid to do it rather than it being an expensive lesson, lol.

Overall I’ve made CAD $36,000 in net premiums, which averages out to $3,000 per month.

Assignments and losses

Although I made over $8k in option premiums, I had some put options expire in the money, and had some shares assigned to me. This means I overpaid to buy some stocks, haha. This was a known risk for me when I started selling options. Here are all the options that was assigned in April.

• ContextLogic (WISH)
• Shopify (SHOP)
• Ginkgo Bioworks (DNA)
• Sea Limited (SE)

WISH and SE were surprised assignments because they still had weeks before expiration. The only way I knew about them was because my discount broker emailed me that the short options I was holding had been exercised.

The DNA assignment was expected though. Ginkgo Bioworks is a small cap biotech company that isn’t profitable yet. But I like the ticker, lol. 😀 I try to keep the exposure small for high risk stocks that I don’t have a lot of confidence in such as DNA and WISH.

The Shopify assignment almost didn’t happen. On April 14, expiration day, SHOP was trading around $580. My put option strike price was $580. By the end of the trading day SHOP closed at $579.51 and the option was exercised last minute, lol. SHOP rallied to $600 over the next couple of trading days and I remember feeling pretty smug about it. 😂 But of course, now the stock is at $430 so the option buyer that sold me 100 shares at $580/share is getting the last laugh now.

Full list of April transactions here.

Making high probability bets

In a way, becoming a good investor is about recognizing patterns in the world that other people tend to miss. 😉 And I believe I’ve discovered one with Netflix. I used the website tipranks.com to compare Netflix’s stock movement 1 day after it released its earnings over the last couple of years.

What I found was a noticeable pattern. For whatever reason, NFLX was down almost every time after earnings release. This is not the case for most stocks.

This represents an opportunity to short the stock before earnings are made public. But instead of shorting the stock directly I decided to buy a put option, which will rise in value if the share price falls.

So on April 18 I bought a NFLX put option for $435.

A couple of days later NFLX shares dropped over 30%. 😂

I sold the option for $3,551. Yay!

That’s a $3,116 profit.

In hindsight I actually closed my position too early. If I still had the option today it would be worth over $7,000 because NFLX stock continued to fall!

But any gain is better than a loss. 🙂

As usual I like to post my trades on Twitter so anyone can follow in real time.

Each of the past 4 times when Netflix released earnings the stock fell immediately after.😅

So I've bought an OTM put option on $NFLX with a strike of $270 expiring 1 month from now.

This is a short term strategy where I will sell to close the position later this week. pic.twitter.com/28WrQkNKU4

— Liquid 🚀 Freedom 35 Blog 🕊 (@Liquid_f35) April 18, 2022

New learnings

Prepare for assignments.

In the money options can be exercised any time. So be prepared for it and make sure to have enough capital. If I plan to purchase a stock tomorrow, but an option gets assigned today, I may not have the liquidity anymore to buy new shares tomorrow. So planning is very important.

Buying a stock via option assignments can lower the cost.

IBKR adjusts the average cost based on the option premiums. For example, even though I bought SHOP at $580 per share, I had earned $300 from selling the put option contract. So my adjusted cost base is actually about $577/share.

Options can’t save a portfolio

Generating income from options is great. And a stock market correction can make selling options more profitable than usual due to higher volatility. But my IBKR account balance is still down over $50,000 in April, lol. I have heavily invested in tech stocks and I use leverage so when the market drops it really negatively impacts my NAV. Options help cushion the blow, but ultimately I need markets to stabilize before my net worth can recover. 😅

It ain’t over until you say it’s over.

On paper it appears that I’ve already lost $14,702 with my Shopify position. I purchased the 100 shares for $57,700 and now they’re only worth $43,000. However, I’ve been writing put options on SHOP for many months now. Most of those options expired worthless, and I’ve earned about $3,000 in premiums so far. This means my average cost per share is actually below $550.

And now that I have SHOP shares, I can take advantage of this position to sell covered calls and generate additional premiums. 😀 In fact I’ve already sold a call option expiring on May 20th with a strike price of $700.

I made $1,209 in premiums from selling that single option. If I close the position today I’d make a profit of $1,089 because SHOP shares have fallen so much, lol.

That’s the amazing nature of options. You can make steady income even when the stock market is going down. 🙂

Looking ahead

I plan to buy short strangles on SHOP going forward. This is when I sell an OTM put, as well as an OTM call at the same time, with the same expiration date.

The profit/loss graph looks like this.

The advantage of this strategy is it should allow me to earn premiums from both a put option and a call option at the same time. I expect to generate $2,000 per month just from using the short strangle on Shopify alone. 😀

I can continue to write options with SHOP until eventually my average cost per share drops to $430, which would be the break even point based on today’s share price.

In terms of other high probability tactics, I plan to buy a risk reversal on Medifast (MED) as well as Shopify (SHOP) this week before they release earnings. Hopefully at least one of them works out.

If neither pans out and the stocks drop in price, no big deal. I wouldn’t mind owning these great companies at a discount to their stock price today, which is already heavily discounted compared to a year ago. If my short strangle fails and SHOP drops like NFLX did, then I would pick up another 100 shares, lowering my ACB from $577 to probably around $450. I go into more details about my plan in this video here.

I don’t normally speculate the earnings season. But as an options seller sometimes it’s worth it to time negative Vega, which correlates to a decrease in implied volatility after quarterly financials are released. Of course it doesn’t always work out, but when it does the upside can be huge. 😀

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