First of all, wishing all a happy and prosperous lunar new year of the rabbit ahead!
Last week i wrote how I decided to start optiosn trading this year to try and generate additional income. Over the last few weeks, I have been learning as much as I can about options trading which I tried to summarize in my last post. In that post, I also put up a 2×2 matrix to summarize my understanding of the most basic ways one can trade options. That 2×2 matrix summarizes my understanding based on type of options, and action you can take.
However, after thinking it through some more, I felt that presenting it this manner does not allow me to easily decide what to do and what kind of trades I should make. So, I put together another 2×2 matrix, but this time presenting it based on market sentiment (bullish and bearish) and objective (returns and income). I feel this could be more useful as it can be used as a guide to decide what to do, based on how you think the market is going and what you want to achieve. This matrix is shown below.
So, if I am bullish about the market, I can buy long term calls to profit from the expected increasing share price, and even more as the options act as leverage to maximize returns with much lower cash outlay compared to buying the stocks. Alternatively, I can sell short term puts and collect premiums for cash flow while being prepared to purchase the underlying stocks should the price go below the strike price. While this will require capital, it need not be a bad outcome if it means we can collect quality stocks at reasonable prices. Similarly, if I am bearish, I can buy long term puts to profit from the increasing option price when stock prices go down, or sell short term covered calls to collect the premium.
Now in the last 3 weeks, I have started making some trades. There is no better way to learn something that to get your hands dirty and putting real money on the line. I have been lucky that the market has been very bullish in this month of January, so it has been quite easy to make some profits. Nonetheless, valuable lessons can be learned, and hopefully, it will allow me to avoid certain mistakes when the market turns.
1. Selling/Writing Cash Covered Puts
The first group of trades I made was selling puts with the intention of collecting premiums for additional income. I also own most of these stocks and do not mind owning more. All in all, I made over $1600 from these trades, with the bulk coming from Tesla, where I actually sold weekly contracts every week. The other stocks did not give me significant premiums from the weekly contracts, so I looked at 2-3 week contracts to increase the premium while also minimizing the effort to monitor it. I probably could have made more from weekly contracts, but I am happy with the premiums so far. As the market was bullish, the selling of puts proved to be quite profitable.
2. Selling Covered Calls
The next group of trades I attempted was to sell covered calls. I already owned 100 shares of Shopify (SHOP) and Teladoc (TDOC), which are actually deeply in the red at the moment, after last year’s blood bath of Tech stocks. So, I was toying with the idea of making some income out of these stocks. I also didn’t really expect them to recover very quickly. However, as the market was bullish, both stocks went up in price. As I still wanted to hold on to these stocks, I decided to quickly close the positions before expiry, even taking a small loss in TDOC. I managed to eke out a small profit for SHOP. However, I realized that when I initiated these positions, I didn’t really have a sense of which direction the market was moving. The premium was never high to begin with, and taking positions opposite of the market direction was a mistake. Luckily, the mistake didn’t cost me too much.
There are of course many other types of strategies one can use. But these are the most basic ones that I started with. I have dabbled in some of the other types of trades which I will write in subsequent posts.
In the meantime, you can follow my blog https://spoilt4options.wordpress.com/ and let me know what you think or if you think I messed up somewhere. Always willing to learn.
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