Options trading update – May 2021

My second month of trading options

In May I received $820 in premiums from trading options. That’s $100 more than what I made in April. Yay. πŸ™‚

An options strategy using the wheel is very effective

Here are some key points from my options trading this month.

  • I sold 10 options – 8 Puts and 2 Calls.
  • I bought 1 option to close my previously sold TD Call at $90 strike.
  • My total trading commission was $14.48.
  • It took around 5 hours total to research and execute all the trades.
  • I kept the expiration dates between 2 to 6 weeks out.
  • I started to perform the wheel strategy. More on this below.
  • 6 options expired in May. All 6 expired worthless. πŸ™‚

Here are the transaction details. The $2700 Amazon Put was my most profitable trade with a $215 premium.

options trading details for May

Proceeds – commissions = $820.03

 

Rolling with the wheel

In the previous month I didn’t really have a plan. I just wanted to sell Puts and make some quick money. That worked out okay. But I can probably do better with an actual strategy.

So this month I started to implement a trading tactic called The Wheel. It contains 3 parts.

  1. You start by selling Put options to generate income. Most of these should expire worthless.
  2. If any options are assigned you sell Call options above the cost basis on the assigned stocks.
  3. If those stocks get called away, you make a profit from buying the stock low and selling high. πŸ™‚

A diagram representing how the wheel operates. This is an options strategy that seeks to generate consistent monthly income.

Since you can make money in 3 different ways this is also known as the triple income strategy.

 

Where I learned about the wheel

I recently came across this thread on the WSB subreddit. The internet is a great place to find investment ideas. This particular reddit post received 3,800 upvotes so it must be a legit strategy, right? πŸ˜‰

Apparently the wheel is an improved buy and hold strategy that will outperform the S&P 500 index. At least that’s what the post claims. This sounds interesting to me as I’m all about making higher investment returns.

I’m at the stage of my investment journey where a little active management can have a meaningful financial impact. Soon I will have $1 million of liquid assets. If I can give my portfolio some TLC and add an extra 1% to my returns, that’s an additional $10,000 of value!

 

Moving forward

Instead of using the wheel on index funds only, I plan to use it on individual stocks as well. Looking ahead at next month (June) I expect to earn another $800 or so in option premiums.

I will continue to sell Puts using strike prices at 2 standard deviations out of the money. That basically means my options will have a 95% probability to expire worthless, which is the ideal situation for me.

Here are some stocks/funds I’m currently looking at for potential option trades. I haven’t decides which ones I’ll go with yet as I’m still weighing my options, haha. πŸ˜€

  • Autodesk (IV = 35)
  • QQQ (IV = 18)
  • ARKK (IV = 37)
  • Mastercard (IV = 22)
  • Visa (IV = 19)

IV stands for Implied Volatility, which describes how volatile the stock is. A high IV means the stock price is expected to fluctuate a lot. This translates into higher premiums for option sellers like myself.

That’s all for now. πŸ™‚ In a future post I’ll explain how I screen my trades and demonstrate with some examples.

 

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Random Useless Fact:

 

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AnotherLoonie
05/31/2021 7:53 pm

Great update! I’ve looked into options trading in the past. It seems like a lot of fun, as long as you don’t get too carried away. I’m not sure anyone would be able to earn 20% reliably without being assigned a bunch of high-IV stocks after a while. I think you’re going about it the right way by using it to juice returns but not swinging for the fences. Looking forward to your next update!

DreamingOfDividends
06/05/2021 10:30 am

It can still work in a downturn as long as 1) you’re trading options on solid companies that aren’t expected to go out of business and 2) you have enough capital to roll the trade to profitability. As an example from my own trades, I started with selling a single $40 put on DISCA (capital at risk is $4k). Now that the share price is closer to $30 and now that I’m aware of the WarnerMedia deal, I don’t expect the share price to increase that much. I’m going to look to roll the trade by expanding to two puts at a lower strike price, either the $35 strike price ($7k at risk) for a net loss or a $37.5/$12.5 put spread ($5k at risk) for a $400 net credit. The purpose of the roll is to get closer to the share price because it’s easier to roll and get better premiums when you’re at the money. Plus, it gets you closer to exiting the trade.

Last edited 10 days ago by DreamingOfDividends
James
James
06/01/2021 5:22 am

Great summary – looking forward to future updates! Have you found a way to do this strategy in a tax-advantaged account like TFSA or RRSP? From what I can determine, selling short puts is disallowed in these accounts, effectively making this strategy impossible (selling covered calls is permitted). And if you are doing this strategy in a margin account, will your gains be taxed as income or capital gains? Thanks.

livesinhicar
livesinhicar
06/01/2021 5:32 am

In the transaction details, can you define T-PRICE and C-PRICE ?

Graham @ Reverse the Crush
06/01/2021 8:50 am

Thanks for sharing your options trading update, Liquid. It’s interesting to see your strategy develop. It’s also cool how even 1% can make such a meaningful impact once your portfolio is larger. I’m working towards being somewhere close to this in 10 to 15 years. Nice that you were able to increase income over last month. Keep it up!

Mr. Dreamer
06/01/2021 9:01 am

Another impressive educational post with great content. Thanks for sharing. I am looking forward to seeing another successful in June.

AllIncomeStream
06/01/2021 6:38 pm

Thanks for the great post. I have started trading options as well and trying to stick to securities either I want to sell or ones I want to hold in any case. Perhaps trading options around support and resistance levels is a good idea because there is a chance of hitting that price again.

Last edited 13 days ago by AllIncomeStream
Dipu
Dipu
06/02/2021 8:52 pm

Thanks for sharing your option trades. I am also slowly learning and thus far only have sold covered calls. I have a question please help me understand, my question is if I sold Nokia covered call expiring in Jan 18 2022 with strike price of $11 does this means if Nokia shares hit anytime above $11 between now and Jan 18 2022 option could get excercised or does this means Nokia shares should hit $11 or above only on specific date which is Jan 18th 2022 in order for option to get excercised. Could you share me your knowledge on this. I would very much appreciate it. Thank you!

Dipu
Dipu
06/03/2021 12:30 am

Thanks so much Liquid. This is very helpful

DreamingOfDividends
06/05/2021 10:09 am

Nice! I haven’t tried the wheel strategy, but I’ve heard about it. Do you take into account the capital at risk when making options trades. While the AMZN trade seemed pretty much guaranteed to expire worthless, there was $270k at risk if you were assigned.

An option trade that I make occasionally with success is selling deep OTM naked calls on VXX (volatility index) when the markets are volatile. I sold a 5/21 $54 VXX call on 5/4 for $1/contract when VXX was trading around $42 (30% buffer). That was about a 39% return annualized. VXX tends towards 0, which is why this strategy works pretty well, and it undergoes reverse splits to keep the price from reaching 0.

Last edited 10 days ago by DreamingOfDividends
Dave
Dave
06/10/2021 8:20 am

I sell some puts myself but aren’t you a little worried about the size of some of these? Looks like you’d have to spend 270k USD if you got put the amazon stock alone. It’s unlikely to occur but if it did you might have to sell a lot and potentially incur taxable gains wouldnt you?

I got a little screwed over when I was doing this before the pandemic and everything took a freefall.