July options trading review
This month I received $1,068 in premiums from trading options. This is a new record for me!
In today’s post I’ll break down my trades for July. And I’ll explain how I make option trading decisions to maximize income without blowing up my portfolio. 🙂
Here are some key points from this month.
- I sold 8 options, 6 Puts and 2 Calls.
- My largest trade was selling a put option on the S&P 500 (SPY), expiring in a year, worth over $500.
- My total trading commission was $8 for the month.
- 11 options from previous months expired in July. All 11 expired worthless. 🙂
Below is a table detailing my transaction details.
Thanks to reader feedback I have added a few new columns for clearer trading insights!
- Initial underlying price – The market price of the underlying stock/ETF when I made the options trade.
- Price difference % – How much the underlying will have to rise or fall to be in-the-money (ITM).
- Initial days to expiry – How many days remain until the option expires, from the day that I traded it.
- Initial Delta – Delta measures the probability of an option expiring ITM. For example, if a put option has a Delta of -10%, it means there is a 10% chance it will get exercised, and a 90% chance it’ll expire worthless.
Raw data from IB statement here.
Taking a LEAP of faith
A LEAP, or “Long Term Equity Anticipation” is a longer term options strategy where the expiration date is more than one year away. Due to this longer term contract, LEAPs generally offer very attractive premiums.
As mentioned on Twitter I sold a LEAP this month (my first ever) on the SPDR S&P 500 ETF.
I chose this fund because it’s well diversified with a lot of liquidity.
The strike price I chose was $290, which is a 33% discount. The average market correction historically is 33%.
The expiration date is in June 2022. It’s not quite 1 year away, but close enough.
After commission I earned US $517.36 from this one LEAP options trade. 🙂
The Delta for this trade was -7.4%. So there’s basically a 93% chance this will expire worthless.
Other options sold
I sold 2 AMC puts with a $15 strike. This was a calculated gamble on a meme stock. The high implied volatility means the premiums are too good to ignore. But to limit my risk I kept the expiration date short (15 days.) I also chose a strike price that’s deep out-of-the-money so that AMC would have to fall 65% to trigger an assignment. This option had a 98% chance of expiring worthless. It expired just last week, worthless. 🙂
I sold a $40 covered call for Summit Materials (SUM.) This is a construction materials company that makes cement. I originally bought this stock in 2017 because I thought Donald Trump was going to build a wall at the US/Mexico border. Alas, that didn’t happen, lol.
The stock is still up a decent 34% since my purchase. But it’s overvalued now. And its return on capital is a measly 5%. There’s little reason for me to keep this stock. This is why I don’t mind the Delta being a little higher for this trade at 17%.
How I make my options trading decisions
If you want to know how I choose my options and strike prices, take a look at my recent video.
I break down my thought process to earn the most premiums without taking on excessive risk. 🙂
You can watch the video here, or see below.
It’s probably easier to follow my thoughts in a recorded demonstration than to read a blog post about it.
Options trading at a glance
Since I started in April I’ve traded over 30 options that have already expired. Surprisingly none expired ITM.
I like to play it safe and choose trades with conservatively low Delta values. 🙂
So far I have earned $3,564 from option premiums. This is before capital gains tax.
Thanks for joining me on my options trading adventure. I hope to continue trading options in August and keep doing my “Wheel” strategy, as well as sell covered calls on stocks that I no longer want to keep.
Random Useless Fact:
Not everyone can afford healthy food all the time.
that’s good to hear liquid you’re expanding your money making repertoire lol one thing, I’m curious on is that are you trading in non-reg? and how easy is it for the trading platform to let you access your gains? let’s just say if you were trading to buy some McDonald’s, how easy is it to get that money out for some Big Macs lol
I do my options trading inside a non-registered account. This gives me access to more sophisticated trades such as shorting put options that are not allowed in a TFSA/RRSP.
I’m able to access my capital fairly quickly. If I have a McDonald’s option I could close it to lock in the gains any day. I could also wait and let it expire which is what I usually do. Meanwhile I could withdraw cash from my account any time. I currently have $120,000 excess liquidity I could tap into. But ideally I want to keep a buffer of $100,000 at all times. 🙂
Great job. Not bad for 4 months of options trading. Do you find that you spend more time monitoring your options trades?
I spend more time researching my trades, but the same amount of time monitoring them. I have all my open positions tracked in a spreadsheet and look over them once a day for any warning signs. 🙂
The number of trades I have open at any given time doesn’t change too much.
I can’t imagine generating an extra $1,000 a month in additional income just as a side project. I want to have enough money one day to actually do things like this and experiment with my portfolios.
It’s certainly possible dude. 🙂 We are living in a time with an abundance of opportunities.
One piece of advice I learned from Naval was that productivity is exponential just like investment returns. If you are willing to work 10% harder than everyone else, then in the beginning you will get 10% more rewards, but over the long run you will actually get 10 times more rewards. Understanding the power of dedication and persistence was an eye opening moment for me.
These is strong income, congrats. Very interesting your option strategy, it works really well which is inspiring to see. So far I had a strong focus on passive income mainly in form of dividends. But I also like investing and spend time with that topic out of interest, as a hobby. So it could make sense to give option trading a try. Your posts are a good resource as you document clearly your approach.
Keep it up and all the best.
Dividends are probably my favorite form of passive income. 🙂 All the active trading that I’m doing with options right now is simply creating more income that I can put into dividend investing, lol.
Yeah, dividends are the most passive income source. The more we put into Dividend paying businesses, the stronger our compounding machines work for us.
Interesting article illustrating option trading strategy in practice. Good work. Looking at this it seems most of the gains ($517) is from SPY. I have a couple of questions where Im trying to understand how this works.
1) Does this indicate that SPY index options have higher premium compared to the stocks (i.e. just the stocks discussed above). Would selecting other stocks provide scope for higher premium?
2) Is it safer to do index options because you are trying to write/sell insurance on a basket (not single stock) ? But given that diversity of safety the premium on index option should be lower than premium on individual stock theoretically. Just curious to know how it works practically.
The factor that determines option premiums is the implied volatility. IV measures how volatile the stock is expected to be.
IV correlates to a stock’s Beta. By definition the S&P 500 index has a Beta of 1. Tesla has a Beta of 2. So TSLA shares move twice as much as the index. Other stocks like Procter & Gamble has a Beta of 0.42.
I would assume all the stocks that make up the index have a collective Beta of 1. But I’m not sure if SPY has a higher premium than individual stocks.
It could be that the SPY premium just seems high because it’s expiry date is 1 year away, and each unit is worth $440 which is higher than most stocks. 🙂
To answer your second question, yes it is safer to sell options on an index (or a basket of stocks) than any single individual stock. This is because an index can’t drop to $0 while a stock potentially could. Basically diversification is a way to reduce your risk without diminishing your expected rate of return.
Amazing! Appreciate your detailed answer and explanation.
I agree with your point that some stocks can be less volatile than the index. Also I can gather from above that LEAP being longer term (1 year) option so higher implied volatility and higher premium, which makes sense.
Index options seem a relatively safer bet than individual stock.
: From the statement I see brokerage is very nominal (less than $2 most cases).
1) I assume you are using Interactive Brokers. Can you confirm the brokerage fee structure (%age or flat or how they charge)
2) Is this open to Canadians?
3) If you can share the IB website link I can check more info. myself reg. requirements to open account, paper work, funds, etc.
I’m thinking of exploring Options in future. Before that I’m just trying to research and understand the mechanics, costs involved, etc.
Thanks a lot for the insights!
I do use Interactive Brokers. They have the lowest fees for trading options and lowest interest rates for borrowing on margin that I could find. 🙂
As a Canadian you can open up an IB account.
The fee structure I chose is tiered and usually between $0.50 to $1.50 per transaction.
You can find more fees and commission details here: https://www.interactivebrokers.ca/en/index.php?f=45251&p=options6
They used to have a minimum account balance requirement but I heard they got rid of that policy which is good. There are also no inactivity fees that I’m aware of.
Here’s some information on what they require to open an account for you.
Not many people know but IB has a pretty decent referral program as well. The details can be found here: https://www.interactivebrokers.com/en/index.php?f=45764
Let me know if you’re interested in a referral code before you sign up. You’ll get some free IBKR shares when you deposit money.
Thank you for sharing this. I will go through and do further research on this.
Thanks for all the information! Just to let you know LEAP are actually LEAPS the S is for security. You say in your article that the profits are before capital gains taxes. I might be wrong but I was on the impression that we pay revenu taxe on option premium. Last but not least, just want to make sure that you understand that one put on Amazon you could be call for a 270,00$ stock investment. Beware of the risk my friend, and keep up the good job! 🤟🏻
Good point Martin. Thanks for pointing out the S in LEAPS.
I had thought option premiums are capital gains if I have a primary full time job, but I will double check to make sure. The risk is definitely there with expensive stocks like AMZN. Have to be careful or else could lose my lunch. 👍
Last night I did a bit of research on tax treatment for selling option for premium. Unfortunately it could be interpreted different ways by the CRA. Here’s the best article I’ve found https://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm