To The Moon

In a blink of an eye, January is over, and we are deep into February already. I wanted to do a monthly review of how I did with my options, and of course reflect and see how I can do better. This comes a lotlater than I would have liked, but here it is.

As this is the first time I am doing this, I will structure this monthly review in the following way:

1. Last month's performance

2. Reflections and learnings

3. Thoughts for the next month

Performance for Jan 2023

January was a very good month for the stock market. With that, it was really easy to be profitable. A high level summary is given below.

No of positions initiated: 27

No of positions closed or expired: 17

% of trades closed that were profitable: 82%

ROI% for Jan: 4%

The above summary only considers options, and does not include the stocks I am holding. A 4% monthly ROI translates to 48% in a year, which of course sounds very good. However, the fact is, given how bullish Jan was, I could have done much better. But considering this is the first month I am doing it, I am satisfied with how I did, and will strive to do better in the next few months.

Reflections and Learnings

Since this is the first month I am doing this, I have quite a number of observations and learning points.

1. January was very bullish. The S&P500 itself rose by around 6.8% in January. Considering this, 4% return is not very impressive at all.

2. The key options strategy I employed this month was in selling puts. All my sell put positions were profitable. However given the bullishness of January, buying call options would probably have resulted in much higher ROI. Nonetheless, selling puts is indeed a good way to generate income with relative consistency and I will continue to do so.

3. It can be very easy to sell puts beyond your available cash coverage. The brokerage will allow you to sell puts on margin. This can be potentially risky if the put options get exercised. It is very important to maintain prudence and ensure sufficient cash should the options get exercised. The last thing you want is for a margin call.

4. Related to point #3, the whole idea behind selling puts should in fact be that you are looking a certain stock, but the current price and valuation are not favorable. Thus you can sell put to collect some income while waiting for the valuation to improve. As such, we must be prepared to have the cash available to purchase the stocks. It is also crucial that you sell put options only for high quality stocks that you want to own. We should not sell put purely for the sake of collecting premiums.

5. I tried a few other strategies including the repair strategy which I wrote about in my previous post. This is not a quick fix strategy, and I think I was a bit too impatient when it came to realizing the benefits of the repair strategy. It also requires a good understanding of the value of the options, and the components that go into the intrinsic and extrinsic value of the options. As such I would not recommend this strategy to beginners, and I probably would not use it very often.

6. The most important lesson for me I think is that, no matter what strategy you use, and whatever underlying stock you choose, it is absolutely crucial to have a plan - an entry and exit plan for each position. I realised that I when I started in the beginning of Jan, I had the mindset of just "trying things out". As Jan was a bullish month, I was lucky that I was still able to profit from it. However, without a proper plan, I was never sure what to do whenever things move. When prices go up or down, I was never sure if I should keep or close the position. As such, I believe things can go very wrong, very quickly, if you start trading without a proper plan.

7. I think 27 trades this month is too many. I end up spending too much time looking and monitoring the market. A solid system is needed to take as much of the emotion out of the trades.

My thoughts for Feb

1. I believe Feb will not be as bullish as Jan. While the fears of inflation has subsided slightly, and the Feds are slowing down the rate hike with the latest increase of "only" 25 basis points, I don't think we are out of the woods yet. In fact I think the possibility of a recession is still very high for this year.

2. With the markets moving significantly higher in Jan, I believe there will be some correction in Feb as people start taking profits off the table.

3. There will be more earnings call this month. Tech stocks are laying people off left and right. Every day we hear of fresh layoffs. Clearly the companies are expecting this year to be a tough year, and are taking this chance to cut costs. This might help the company's earnings in the short term and mitigate the declining revenues.

4. I will probably be more cautious moving forward. I plan to employ 2 key strategies that I will employ. One is selling puts on high quality stocks to wait for the dip to buy the stocks. Two is to buy call on high quality growth stocks during the dip as well to amplify the benefits from the potential upside. I have never had much luck trying to profit from the market decline, either though shorting or from buying puts, so I will likely stay away from those for now.

5. I will also reduce the number of positions I initiate and have clear entry and exit strategies for each position.

Bonus thoughts

1. It is not easy to write. I wanted to write much more often, but it is often hard to get started, and it is not easy to organise my thoughts in a coherent fashion. This has given me new found respect for all the bloggers out there. However, I believe practice will make progress, and I will try to write and post more often, hopefully at least on a weekly basis, and to rationalise the trades for the week if any.

That's all for now. Do check out my blog at https://spoilt4options.com/ .Happy reading and happy investing!