It’s time to review my options results as part of my Dividend Growth Journey. As a regular visitor of my blog you know that I try to boost my income and portfolio value by trading options. I have been very busy at work and articles to be written piling up. A little late but here comes my options review February 2021.
My main strategy of trading options is to sell puts options on companies I have on my radar but may be above the price I am willing to pay. Selling put options allows me to set the price I’m willing to pay. As a result, I get paid while waiting for the share price to drop!
Additionally, I sell covered calls on stock for which I hold the shares in my portfolio to boost my income. Not only do I collect dividends but also option premiums. The underlying thought is that if the share price increases above the strike price I am not too concerned of selling the shares.
Last but not least, I use options for a more speculative approach. I sell puts on stock which have a high implied volatility at far out of the money strike prices or I buy 100 shares of a stock and directly sell a covered call option.
Rules for Options trading
I have put down a very simple set of rules for my options trading which should help me generate additional income while not taking on too much risk. These rules are:
- Only expose up to 100% of net portfolio value
- Only sell puts of stocks I am actually willing to buy
- Only sell covered calls, not naked
There is another important aspect but I would not consider it a rule. Each option trade has to be treated as an individual transaction even though you have the possibility to roll forward an option. However, it is crucial not to chase an option position and not to try to compensate for losses on the same stock, maybe it has run out of reach and there are better alternatives.
I failed to meet my rules in 2020 and took on excessive risk just before the market drop in February and March. I suffered substantial losses and identified that I definitely needed to ensure a better risk management.
Assigned Options
If the option holder decides to exercise the option I’d sold, I am obliged to sell (call option) or buy (put option) at the option’s strike price.
No option assignment took place in February 2021.
Expired Options
If a contract expires it is worthless for the seller and I do not have any further obligation to purchase the shares at the strike price. For covered calls, my shares can no longer be called away, and, for put options, the margin set aside for collateral gets released. I secure the income in full.
In February, the following options expired:
-1 WBA 12FEB21 40.0 P @ $161.21
-1 EBIX 19FEB21 35.0 P @ $255.76
-1 DBX 19FEB21 21.0 P @ $115.02
-1 DBX 19FEB21 21.0 P @ $114.61
-5 TTCF 19FEB21 20.0 P @ $771.30
This secured me $1,417.90 in options premium income.
EBIX announced some issues around there accounting after the close when the stock drop from $55 to $36. Luckily the option had expired just before.
Sold Options
Selling options allows you to set a price (strike price) at which you are willing to buy (put option) or sell (call option) up to a set future date, the expiration date of the option. As a seller you collect a premium from the buyer in exchange for the option to be able to exercise when favorable for the buyer. In this section I only include sold options to open a position.
In February, in total I opened 8 new positions with a total of 12 contracts, eleven of which are puts and one a call option.
02-Feb-2021 -1 GME 19MAR21 25.0 P @ $467.90
02-Feb-2021 -1 EBIX 18JUN21 30.0 P @ $239.66
02-Feb-2021 -1 SKT 18JUN21 17.0 C @ $159.21
02-Feb-2021 -1 SKT 18JUN21 10.0 P @ $131.21
17-Feb-2021 -2 DBX 16APR21 21.0 P @ $263.12
17-Feb-2021 -4 TTCF 16APR21 20.0 P @ $619.56
22-Feb-2021 -1 EBIX 18JUN21 20.0 P @ $309.77
23-Feb-2021 -1 PLTR 16APR21 27.0 P @ $438.20
With these sold options I generated a cash flow of $2,628.63.
Bought Options
Buying options gives you the right to buy (call option) or sell (put option) at a defined price (strike price) up to a set future date, the expiration date of the option. The expectation is that the share price moves in the right direction and you profit without actually holding the shares. If the stock price does not go over (call) or fall under (put) the strike price, the option expires worthless and the loss would be the total of the premium paid for the option. In this section I only include bought options to open a position.
I did not buy any options to open in February.
Rolled Options
Rolling forward options means buying back an option and selling another option with a later expiration date on the same underlying. You can do this to avoid options assignment for in-the-money options or to collect more options income for out-of-the-money options.
I did not roll forward any options in February.
Closed Options
When an out of the money option goes further out of the money, you can close the option early and secure most of the options income. In the case of covered calls, you must close the calls if you want to sell the underlying shares before expiration.
13-Nov-2020: -1 BYNM 19MAR21 95.0 P @ $590.20
23-Feb-2020: +1 BYNM 19MAR21 95.0 P @ -$60.78
I closed this option roughly one month before expiration giving me a profit of $529.42 or 90% of the obtained premium.
10-Dec-2020: -1 MAIN 19MAR21 30.0 P @ $159.71
23-Feb-2020: +1 MAIN 19MAR21 30.0 P @ -$16.08
I closed this option roughly one month before expiration giving me a profit of $143.63 or 67% of the obtained premium.
04-Jan-2021: -1 MRK 19FEB21 75.0 P @ $82.91
17-Feb-2021: +1 MRK 19FEB21 75.0 P @ -$27.09
I closed this option two days before expiration giving me a profit of $55.82 or 90% of the obtained premium. I had bought MRK during the month and did not want to increase my position. As the stock price was close to the strike price I decided to close the option early.
05-Jan-2021: -1 KO 19FEB21 50.0 P @ $93.91
11-Feb-2021: +1 KO 19FEB21 50.0 P @ -$39.78
I closed this option roughly one week before expiration giving me a profit of $54.13 or 58% of the obtained premium.
05-Jan-2021: -1 MSTR 21JAN22 250.0 P @ $6,449.62
09-Feb-2021: +1 MSTR 21JAN22 250.0 P @ -$1.295.23
This may be THE option trade of the year for me. I sold the option with an expiration date in Jan 2022 giving it a little bit of time as an indirect play on Bitcoin. When the stock shot up from $400 to $1,200 in just one month I had to make a call: price movement vs volatility pricing in the option. Which would have more impact on the future options price? I decided for the first one and closed the option for $1,295.23 securing a profit of $5,154.39 or 80% of the obtained premium in just one month. In hindsight, I really got lucky as the stock dropped back to below $600 and up went the options price with it.
06-Jan-2021: -1 O 19MAR21 55.0 P @ $123.06
23-Feb-2021: +1 O 19MAR21 55.0 P @ -$15.23
I closed this option roughly one month before expiration for giving me a profit of $107.83 or 88% of the obtained premium.
20-Jan-2021: -5 BNGO 19MAR21 8.0 P @ $1,366.84
23-Feb-2021: +5 BNGO 19MAR21 8.0 P @ -$424.42
I closed these five options roughly one month before expiration giving me a profit of $942.42 or 69% of the obtained premium.
02-Feb-2021: -1 GME 19MAR21 25.0 P @ $467.90
08-Feb-2021: 1 GME 19MAR21 25.0 P @ -$346.08
This was a speculative move but the stock did not move up as I expected so I closed the trade early. I paid $346.08 giving me a profit of $121.82 or 26% of the obtained premium.
02-Feb-2021: -1 SKT 18JUN21 10.0 P @ $131.21
23-Feb-2021: 1 SKT 18JUN21 10.0 P @ -$35.08
The stock had moved up quite significantly and I decided to close the put side of my trade. I paid $35.08 giving me a profit of $96.13 or 73% of the obtained premium. The call side at $17 remains open.
In total, in this section of Closed Options I secured $7,205.59 of income and had a negative cash flow of $2,259.77 for the premiums to buy back the options. My weighted average secured income level is 76% of the received premium.
Cash flow and secured income from options trading
When trading options there is a difference between the cash flow and secured income. The cash flow shows you the net effect of opening positions which means selling or buying options. When you sell an option you immediately receive the premium for said option – a positive cash flow.
When you buy an option you pay immediately the premium – a negative cash flow. Additionally, when you close positions before expiration you buy back sold options and sell bought options. Again, these are all transaction that generate cash flow, either positive or negative. Only when an option expires, you are called or assigned or you close an option before expiration you actually secure income or loss.
In the table below for my Options Review February 2021 you see the impact on cash flow and secured income. You can see that I had a net positive cash flow of $386.86! This result derives from options income of $2,628.63 for sold options and outflows of $2,259.77 for closing options to lock in profits or avoid assignment.
At the same time I had a secured income of $1,417.90 for options that expired worthless for the buyer.
In the below chart you can see the evolution of my cash flow related to options.
At the same time, I secured income with a total of $8,623.49 of which $1,417.90 are linked to expired options and a whopping $7,205.59 from closing options early.
The next chart shows the profit and loss evolution. The bars represent the monthly results and the black line the accumulated result. The outcome is quite different from the previous chart and the reason is having still open positions for which I collected premiums and as such not locked in any profit or loss.
February was so far my best profit generating month. However, accumulated I still carry a loss of $8,251 due to the significant losses in February and March 2020. I hope I will run into positive net results by mid-year, latest after the summer.
Risk Exposure
You can see that the exposure value during February has a clear downward trend with $120k naked exposure remaining at the end of the month, only secured by my stock holding and cash. Cash secured or covered calls have no impact.
The portfolio value multiple has dropped to a factor of 0.68 of my overall net portfolio value (red line). Obviously, the portfolio value increase is also helping to lower this relative exposure value. It is a great result and I plan to keep this metric below the factor of one.
That’s it for my Options Review February 2021 and I hope to continue this positive trend. I will see what I will do with the two sold call options on DFS which are deep in the money. They will have the biggest impact in April latest.
Disclaimer: I am not a professional investment or financial advisor. The information presented on this site represents my personal dividend growth journey and it is for informational purposes only. Opinions expressed are my own and should NOT be relied on or taken as investing advice. I have no knowledge about your personal situation and before you make any investment decision you should exercise due diligence and must do your own research. Always consider seeking advice from a professional financial and tax advisor.