This week was just like last week. My stocks were up, but because I did covered writes against them, I didn’t reap all of the benefits.
For example, my favorite holding, TLT – iShares 20+ Year Treasury Bond ETF, had a good week. In fact on Friday it was up 1.77%, to a new all time high.
Great.
As I watched the rise this week, I concluded on Thursday, with TLT trading at around $136.50, that there was no way TLT would go up more than a dollar on Friday, so I sold the $137.50 calls, expiring the next day (January 30), for 19 cents. Of course, as the chart shows, I was wrong, with TLT closing on Friday at $138.28.
Obviously calls with a strike price of $137.50, with the underlying stock price at $138.28, are worth 78 cents plus the time premium. Oops.
Not wanting to have my shares called, I bought back the options to close out my position early Friday afternoon for 51 cents.
Total loss on the options: 51 cents – 19 cents = 32 cents plus commissions.
Of course the underlying stock by the end of the day was worth $1.78 more than when I covered, and I still have the stock, so I’m still up $1.78 – 32 cents, or $1.46. I didn’t lose, but by doing the covered write I gave up a possible $1.78 profit in exchange for a $1.46 profit.
In hindsight, I should have employed one of two strategies:
- do nothing
- buy calls
Doing nothing would have increased my profit, since I would have kept the increase in the stock price, with no loss on the options.
Buying calls (instead of selling them), would have yielded a significant profit. I could have bought them on Thursday for 19 cents, and sold them on Friday for 51 cents, the exact opposite of what I did, for a profit of 168% before commissions.
In fact, as I look back on the week, but best transaction was a straight buy then sell of options.
On January 27 I bought 20 contracts of the XLE March $70 puts for 85 cents each, for a next cost including commission of $1,734.99. I planned to hold them for a few weeks, but on January 29 they were trading at $1.65, so I sold them, for net proceeds after commission of $3,264.93. That’s a profit of $1,529.94, or 88% in two days.
So what have I learned from this experience?
I’m a slow learner, so at this point, not much.
I had an interesting discussion with a friend of mine this week, who has day-traded for his own account for a number of years now. When he first started day trading he employed many complicated strategies. He did straddles, and bull spreads, and he legged into positions, and he did a bunch of other stuff with options that I never fully grasped. (He’s much smarter than I am). So after years at it, what’s he doing now?
He buys and sells options.
That’s it.
He follows three highly traded U.S. stocks.
He wakes up early in the morning, does his morning workout, then before the market opens he asks himself two questions:
- what direction do I expect the market to move today?
- what direction do I expect my three stocks to move today?
If the market looks to move higher, and Stock #1 looks to move higher, he buys short term call options on Stock #1, with a price “around the money”. If the answers are “down” and “down”, he buys puts. If he’s not sure, he does nothing.
That’s it.
Once he has his position he monitors it. If it starts to move against him, he closes it out for a small loss. Otherwise he lets it run until he has a decent profit, and he sells. In all cases he closes out his positions by the end of the day.
Interesting.
The problem with options is that they are a rapidly depreciating asset. The time value erodes very quickly.
The advantage of options is that they are highly leveraged. A 50 cent move in a stock could be a $1 move in an option, and if the stock costs $50 and the option only cost $5, the leverage is huge.
So my friend has concluded that the way to make money in options is to take advantage of the leverage (by buying short term near the money options with an appropriate delta) but then closing out the position by the end of the day to prevent the loss of significant time value premium.
Makes sense.
So with this experience, will I change my ways and stop doing covered writes, and instead just buy options?
If it makes sense, yes I will, as I did with XLE this week.
However, I’m not a day trader, and I don’t have time to monitor the market each day, so until I quit my day job it’s unlikely I will adopt that strategy. I will, however, exercise more caution with my current strategy. If my stocks are on a good run, I may be less inclined to simply give up the upside for minimal return.
That being said, as I review my performance for the month of January, I observe the following: in my U.S. dollar trading account I hold
two investments:
On the month I’m up 7% on each of them. Not bad. My portfolio, on the month, is up 8.7%. The extra 1.7% was contributed by options trading. Some weeks the options hurt my performance, but overall it has helped, to the tune of an extra 1.7%.
I’m fine with that. It helps minimize my risk, and I can sleep at night, and so I shall.
Thanks for reading. See you next week.
More Money Left on the Table: Time to Stop
by JDH on January 30, 2015
This week was just like last week. My stocks were up, but because I did covered writes against them, I didn’t reap all of the benefits.
For example, my favorite holding, TLT – iShares 20+ Year Treasury Bond ETF, had a good week. In fact on Friday it was up 1.77%, to a new all time high.
Great.
As I watched the rise this week, I concluded on Thursday, with TLT trading at around $136.50, that there was no way TLT would go up more than a dollar on Friday, so I sold the $137.50 calls, expiring the next day (January 30), for 19 cents. Of course, as the chart shows, I was wrong, with TLT closing on Friday at $138.28.
Obviously calls with a strike price of $137.50, with the underlying stock price at $138.28, are worth 78 cents plus the time premium. Oops.
Not wanting to have my shares called, I bought back the options to close out my position early Friday afternoon for 51 cents.
Total loss on the options: 51 cents – 19 cents = 32 cents plus commissions.
Of course the underlying stock by the end of the day was worth $1.78 more than when I covered, and I still have the stock, so I’m still up $1.78 – 32 cents, or $1.46. I didn’t lose, but by doing the covered write I gave up a possible $1.78 profit in exchange for a $1.46 profit.
In hindsight, I should have employed one of two strategies:
Doing nothing would have increased my profit, since I would have kept the increase in the stock price, with no loss on the options.
Buying calls (instead of selling them), would have yielded a significant profit. I could have bought them on Thursday for 19 cents, and sold them on Friday for 51 cents, the exact opposite of what I did, for a profit of 168% before commissions.
In fact, as I look back on the week, but best transaction was a straight buy then sell of options.
On January 27 I bought 20 contracts of the XLE March $70 puts for 85 cents each, for a next cost including commission of $1,734.99. I planned to hold them for a few weeks, but on January 29 they were trading at $1.65, so I sold them, for net proceeds after commission of $3,264.93. That’s a profit of $1,529.94, or 88% in two days.
So what have I learned from this experience?
I’m a slow learner, so at this point, not much.
I had an interesting discussion with a friend of mine this week, who has day-traded for his own account for a number of years now. When he first started day trading he employed many complicated strategies. He did straddles, and bull spreads, and he legged into positions, and he did a bunch of other stuff with options that I never fully grasped. (He’s much smarter than I am). So after years at it, what’s he doing now?
He buys and sells options.
That’s it.
He follows three highly traded U.S. stocks.
He wakes up early in the morning, does his morning workout, then before the market opens he asks himself two questions:
If the market looks to move higher, and Stock #1 looks to move higher, he buys short term call options on Stock #1, with a price “around the money”. If the answers are “down” and “down”, he buys puts. If he’s not sure, he does nothing.
That’s it.
Once he has his position he monitors it. If it starts to move against him, he closes it out for a small loss. Otherwise he lets it run until he has a decent profit, and he sells. In all cases he closes out his positions by the end of the day.
Interesting.
The problem with options is that they are a rapidly depreciating asset. The time value erodes very quickly.
The advantage of options is that they are highly leveraged. A 50 cent move in a stock could be a $1 move in an option, and if the stock costs $50 and the option only cost $5, the leverage is huge.
So my friend has concluded that the way to make money in options is to take advantage of the leverage (by buying short term near the money options with an appropriate delta) but then closing out the position by the end of the day to prevent the loss of significant time value premium.
Makes sense.
So with this experience, will I change my ways and stop doing covered writes, and instead just buy options?
If it makes sense, yes I will, as I did with XLE this week.
However, I’m not a day trader, and I don’t have time to monitor the market each day, so until I quit my day job it’s unlikely I will adopt that strategy. I will, however, exercise more caution with my current strategy. If my stocks are on a good run, I may be less inclined to simply give up the upside for minimal return.
That being said, as I review my performance for the month of January, I observe the following: in my U.S. dollar trading account I hold
two investments:
On the month I’m up 7% on each of them. Not bad. My portfolio, on the month, is up 8.7%. The extra 1.7% was contributed by options trading. Some weeks the options hurt my performance, but overall it has helped, to the tune of an extra 1.7%.
I’m fine with that. It helps minimize my risk, and I can sleep at night, and so I shall.
Thanks for reading. See you next week.