Mar 192015
 

A couple days ago I made $220 in about 5 minutes from trading options. Today I will explain exactly what I did, why I did it, how others can do the same if they wish to, and the risks involved with this maneuver. Out of all the option trading strategies out there, buy write options are probably the least risky, especially done with underlying large cap, blue chip stocks. They also require minimal knowledge, no money down, and are accessible to the general public. 😀

So first, what the heck is a Buy Write options strategy? Simply put it’s when we buy a stock, and then write (sell) a covered call against the stock we just bought heh. 😉

The reason we might want to implement a buy-write is because we believe the stock will not move a lot in either direction in the near future and we want to generate some extra returns in the mean time!

Through a suggestion from a friend I decided to perform my first buy write strategy earlier this week. I chose to do it using the National Bank of Canada, which is one of the largest financial companies in the country with a strong balance sheet and growing profits. 🙂 Canadian banks are ideal for doing Buy Writes with because they are fairly stable and grow their dividends over time.

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So let’s quickly run through my thinking process. What is the purpose of buying a stock and then writing a call option against it? For me, it’s to make some quick and easy money with minimal risk, but a high chance to beat the market. 😀

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Jun 262014
 

Last month I wrote how to make some easy money by selling a put option for Teck Resources. The option expired several days ago and I made $48. Cool beans! Since my trade was successful I decided to do it again. So after the option expired I sold another put option for TCK.B for the strike price of $23, that will expire in August. The most I could potentially make from this trade is $52.76 🙂 By repeating this simple trade on a regular basis I could make a few hundred dollars every year with minimal risk! Not a lot of money, but better than nothing.

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Just like before, there are only 2 potential outcomes of this event.

Scenario 1- By August 16th TCK.B shares stay above $23/share. So when the contract expires I keep the $52.76 premium with no strings attached
Scenario 2- By August 16th TCK.B shares fall below $23/share. The contract is exercised and I’m forced to purchase 100 shares, but still keep the $52.76 premium.

Ideally I would like scenario 1 to happen, but scenario 2 isn’t a bad outcome for me either. When I originally bought 61 shares of Teck Resources years ago I purchased the stock at roughly $33 per share. I realize now that I overpaid. Teck is one of the few companies that has under performed in my portfolio 🙁 14-06-tckshares

But investors have a tool at our disposal called dollar cost averaging. This means if our investment falls after we buy it, we can simply buy some more to lower our average purchase price. Since the whole point is to buy low and sell high, by lowering the average price that we buy at we don’t have to wait for the stock to increase as much to make a profit.

So even if my option gets exercised I’ll be happy to pay $23 per share which will lower my adjusted cost bases to about $27 instead of the current $33. Selling options is fun 🙂 Since no leverage is used there are no extra costs like interest. Speaking of interest, I recently wrote an article for mint.com showing how faster credit card payments can save consumers a lot of money.

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Random Useless Fact: 

The World Cup can perform miracles

14-06-wheel chair stand world cup

 

May 152014
 

I just sold my first covered call this morning 🙂 The proceed was deposited into my trading account and I am now $68.76 richer, yippee! I should do this more often (^_^)

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What does it mean to sell (or write) a covered call option?

A “call option” is a contract between a buyer and a seller where the buyer has the option (but not the obligation) to purchase stocks from the seller at a set (strike) price, within a certain time period. If the option is “covered,” like in today’s example, then that means the seller already has the underlying stocks. Therefore, selling a covered call simply means giving someone else the option to buy your stocks for an agreed upon price point. Since you are potentially giving away a part of the stock’s future gain the buyer has to pay you money 😀 (called the premium)

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May 072014
 

I recently wrote about wanting to try options trading. There are different kinds of options. The strategy I’m explaining today involves selling an uncovered put option. Earlier this morning I submitted an order to sell one $0.60 put option for Teck Resources.

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Unlike stocks, options have an expiration date so we can’t hold them forever. My TCK options contract ends on June 21st so I’ll post an update next month. But from now until then 1 of 2 results will happen.

Scenario 1- TCK.B shares increase in value so the contract expires. I keep the $48 premium with no strings attached
Scenario 2- TCK.B shares fall below $23/share. The contract is exercised and I’m forced to purchase 100 shares.

The first scenario would be ideal because I basically walk away with free money, yay! The second scenario isn’t bad either. Buying TCK.B at $23 is still 6% cheaper than today’s market price anyway. The P/E ratio would be about 14 x which isn’t a bad deal for a mining giant. I’ll just borrow $2,300 from the bank to buy the 100 shares. The dividend yield is higher than the cost of my margin loan anyway so it will be self sufficient. In other words, there is no outcome where I won’t be happy 🙂 The only possible risk is having to purchase TCK.B at $23 if the market value at the time could be lower, but that’s a gamble I’m willing to take 😉

Last Thursday I explained how a put option is kind of like a short term insurance policy against a stock correction. Below is a more detailed explanation of how it works.

Teck Resources (TCK.B) is trading at $24.5 CAD today. If a shareholder doesn’t want to risk his shares dropping below $23/share he can buy a put option with a strike price of $23, for a certain amount of time, for example until June 21st. This means that from now until the expiration date of June 21st, he has the “option” to sell his stocks for exactly $23/share to someone.

So if TCK.B falls to $10/share sometime before June 21st, he can sell his stocks for $23/share if he wants to get out. Of course if the stock price never falls below $23/share then his insurance policy expires. Technically he can still exercise his options contract even if the stock price goes higher, but there’s no point to sell his stocks for $23/share when he can sell them on the open market for a higher price. So by purchasing a put option he benefits from all the upside if the underlying stock goes up, but limits any potential losses if the stock falls.

It’s like buying short term car insurance. If something bad happens to the car then you can claim your insurance and be covered from any major loss 🙂 But if nothing happens or if your car’s resale value goes up, then the insurance policy will simply expire eventually. The only cost to you is the insurance premium you paid up front.

Whenever there’s a buyer in the market, there has to be a seller. So this is where I come in 🙂 I want to insure 100 shares of someone’s TCK.B at the strike price of $23/share, until June 21st. And the premium they pay for their insurance policy would go to me. This is my first time trading options so there could be some surprises along the way and I’m not sure if I know what I’m doing, but we’ll see how it goes 🙂

Disclaimer: I already own 60 shares of TCK.B

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Random Useless Fact: Light travels faster than sound. That’s why some people appear bright until they speak.