To The Moon

Introduction on options:

Hi everyone.

I believe that by now, a lot of people would have heard about options. To some, it's something that they will avoid with an extremely long stick, while to others it's an opportunity.

To me, we can treat our investing journey With stocks as walking/running to a destination. A retirement home on the beach perhaps?

options is like giving us a car.

Options can let u reach ur destination faster, however it can also let u get a crash landing on u (pity it's not by an opposite gender).

The crash would be a lot worse than if u arejust walking along.

However, that's looking at it on the surface.

Proper options usage is like learning to drive a car. U need time to go for theory tests, practical test, test drives until u finally get to the road and go on the expressway. The “gurus” makes it sound simple, it’s something in between actually.

When u know how to drive the car properly, u actually get protection if another car crashes u. Imagine that u are on the road, and a car comes at u. Are u better protected inside a car or standing outside naked. Proper usage of options does protect u from downside, at least will take away some of the impact.

In general, u can treat options as buying or selling insurance contract

Buy position: u buy an insurance that will pay u if something happens within a time frame.

Buy Calls: the insurance will pay u if the stock u choose hits X price within the lifetime of the contract. (Upside move)

Buy puts: the insurance will pay u if the stock u choose hits X price within the lifetime of the contract. (Downside move)

Sell positions: u sell insurance to the buyers. In a sense, u can consider urself as illegal bookie for 4D or lottery.

Sell calls: if the call buyer managed to hit the agreed price (X) within the lifetime of the contract, u will give him the agreed payout.

Sell puts: if the put buyer managed to hit the agreed price (X) within the lifetime of the contract, u will give him the agreed payout.

Let’s go into wat I have done wrong and where I had achieved results.

Worst trades: I started options Ard 12 years back. I attended an options course that cost me USD of $8000. Advanced options course of USD$4000. Some inside circle of USD$3000.

Did I learn anything?

I learnt that I can learn from books and online for free and achieve the same results. 🤦‍♂️

The guru advised to buy options. Make great returns! 100-200% returns! U can become a Millionaire in 1-2 years time!

Following the advise, I bought options and made prediction on the directional moves.

Guess wat, I bankrupted my account. The reason being, it is already very difficult to predict the direction of the stock. Let alone getting both the direction correct and the time correct.

Best trades:

After my account is bankrupted, I went to understand more about options. I realised that I was doing it wrong. If options is a zero sum game, where did my money went? My money went to the options sellers.

Realising that, I refunded my account and restarted with selling of options. Selling options made me profitable if I dun count commissions…

the commissions was sky high then.

Each transaction easily cost USD$15 and up.

Selling options gives lesser returns but the returns are high in probability.

My options premiums was only granting me around $50-100 then per contract, I am paying close to 20% of my profits to the broker. (Partly cos I have no money to go for the bigger contracts then, as I already emptied my account previously)

I realised that Only the broker will be making money from me.

Hence, I closed my account again. Failed yet again. But I realised that it’s workable.

12 years has since passed. I went into value investing specifically into dividend stocks and had decent returns. My friend asked me to consider looking into options again. He told me that options commissions had now fallen greatly, thanks to the advent of discount brokers like tiger.

I restarted my options account, this time focusing on options selling. Specifically, cash secured put options and covered calls. With the extremely cheap commissions now, suddenly

Let’s break this down a bit.

Imagine right now, u want to buy a share, say 100 shares of Alibaba. U will set a buy order at a certain price, say $100. And wait for the order to be filled.

I believe this is how we buy shares nowadays.

Cash secured puts is like this.

I do the same as u, when u are buying a share. I prepare $100 x100 shares in my account.

I find a put contract and sell it at strike price $100 at a fixed time frame, say 1 month.

When I sell a contract, cos i took on the risk as insurance broker, I will get some money for my efforts. In this case, treat it as $2x 100 shares for the contract.

Scenerio A:

After 1 month, darn it. Alibaba went to the moon. Cannot buy at $100. Ur buy order for the Alibaba stock cannot get filled. U continue to wait some more.

Whereas, my options contract would have expired. And I get paid $2x100 for my effort. $200 more in my pocket.

Scenerio B:

After 1 month, Alibaba drop to $98.

Ur share buy order will get filled at $100x 100 shares , as its a pending order.

My options put contract will also get assigned, I will need to buy Alibaba at $100 x 100 shares also. But I get to keep extra $200 in my pocket.

Covered calls is like this:

After Alibaba go to the moon, $280. U want to sell at $300

For share owners, u will ready ur 100 shares of Alibaba, go to ur sell order, create pending order at $300 to sell.

After that wait for the stock to sell at $300.

For option seller. I will ready my 100 shares of Alibaba. Go find a call contract for $300 for 1 month contract, again collect the premiums, let’s assume $4 premium x 100 shares again.

After that, we both shake legs and wait.

Scenario A:

1 month later,

Alibaba fell off from the moon…

Share holders can’t sell the share at preferred price. Shake head and wait for Alibaba to go to the moon again

Options sellers, also shake head. Sadly collect $400 keep inside pocket. And go find another call options to sell. Collecting another $400 reluctantly.

Scenerio B:

1 month later, Alibaba went to the moon.

Now at $350 per share

Share holders selling order triggered At $300. Happily collect $300 x 100.

Options sellers, sadly see their Alibaba shares also get sold at $300 x 100, but find that their pocket still have $400 of premiums collected previously.

Above is a layman description of the process. I tried to simplify to make it easier to understand.

This approach is frankly profitable. But there’s a downside to it. What if, when u are selling put options and the stocks plunged. What will happen? Cos u will be stuck with a stock that had greatly fallen in value. And covered call can barely cover the loss.

That is when u can initiate rolling of contracts. In a sense, extending the insurance cover by a fixed time, while getting paid cos of the time extension.

selling cash secured puts and covered calls is very suitable for beginners.

I would recommend starting with this, as it effectively replaces ur buy order for shares through selling puts and replaces ur sell order for shares through selling covered calls.

It’s the same process, but u get paid for waiting for ur order to be filled at no additional risks.

My returns from selling options is around 3-5% per month so far. It’s not a lot, but it isn’t shabby also.

Hope that my sharing has helped a bit in ur investing journey.