March options trading update
So in February when I made 300% more options income than usual I wrote it was due to a temporary spike in market volatility and won’t happen again going forward. Well, I was wrong. 😅
I continued to capitalize on the high implied volatility in the options market in March, and earned $8,077, breaking my previous record.
This makes a total of $28,104 in options income since I started in April of last year.
I usually trade monthly options, or contracts with expiration dates 30 to 60 days away.
But I’ve noticed some really high premiums on weekly options for a lot of companies.
So I’ve started to sell weekly Puts on $SHOP, $ETSY, and $NFLX.
This approach keeps the duration short which minimizes risk to some degree.
If options are about to expire in the money I just roll them forward to the following week. Occasionally I may decide to take ownership of the underlying, or the contract expires out of the money because the underlying’s price increased.
The only downside to trading weekly options is it does take more time to manage these trades.
The cost is also higher of course. I spent $73 on trading commissions in March, the most I’ve ever paid, lol.
- I sold 47 Puts which is a record.
- I rolled 11 options forward.
- No assignments in March, although there were some pretty close calls.
- I have now made $2,000 from $BLK via option premiums, without ever owning the stock, lol.
Purple = Short strangle
I started to track my daily Theta to see how much time value I can capture over time. During the course of March, it appears I was able to earn 40% of the total Theta value. Theta refers to the time decay of an option. An option loses value as time moves closer to its maturity if all else stays equal. As someone who sells options short, I rely on Theta to make a profit. Ideally I want to sell the option high, and let the option expire worthless which is what happens over 95% of the time.
My March Theta averaged $651 per day. It’s important to know this number because the higher it is, the more money I should theoretically earn. 🙂
Let’s see how April turns out. The Theta value is found in my IB Trader Workstation program on the top right.
Looking ahead to April trading
I’m pretty sure we’re not going to see another record high in next month’s update. $8K of monthly income on a $330K portfolio is simply not sustainable. Otherwise, why aren’t there more people just trading options at home instead of working a 9 to 5 job? Lol.
I’m concerned I may be taking on too much risk that is not obvious to me yet. But I do expect my options income to drop to $2,000 to $3,000 per month going forward.
In any case the 2 year and 10 year US treasury yields inverted, which is a sign that a recession is coming to the United States over the next 6 to 18 months.
I think there will be another pullback in the financial markets before that happens. So I am keeping an eye on my margin requirements, account liquidity, and being careful not to get caught swimming naked, as the saying goes, haha.
Random Useless Fact:
People often overestimate how smart they are.
Hi Liquid, I read your blog regularly and inspired by your options trading, I for the first time sold cash secured OTM put and it expired worthless. The XIRR looks good in options.
Learnigs: Me being a beginner did cash secured put and for me a lot of money is getting tied. For now options selling is not for me until I have some extra cash pile.
Thanks for providing updates it made me come out of shell to try different income strategy. Cash secured put definitely gives some bargains and one I foresee doing for income. Thanks again.
Congrats on popping your options cherry, Subbu. CSP is a great way to start selling options. 🙂 It’s always useful to learn new skills and different methods to earn money. It doesn’t mean you will always use them. But the more tools you have at your disposal the more opportunities you will recognize over time.
I understand many option traders get burned because they start doing well and think they’re a master of the market, only to blow up soon after. So it’s very smart of you to take stock of things and evaluate the risk your taking. I wonder if instead of scaling back, if there were some good risk mitigation strategies out there you could be taking, which would limit your downside should the market take a dive. With $8k in premiums you could easily pay $1-2k towards some downside protection. Not sure what that would be exactly.
Thanks for the idea AL. Risk management appears to be one of those things that you can’t fully learn in school because it requires real world experience, lol.
I like the suggestion you brought up. 🙂 Since I’m mostly selling put options, maybe I could protect my downside by purchasing put options. This would essentially turn my naked put trade into a put spread. There are other ways to delta hedge, but I don’t know which method is the most effective. 😅
Looking at your list of trades there, I’m mostly concerned about a sustained downturn of even a few months. If a bear market started while that portfolio was outstanding, your option liquidity might dry up, and your ability to roll forward be restricted.
You’d then be left with the assignment of every single one of your outstanding.
I personally would just do a worst case scenario analysis for your outstanding trades at any given time. What would you do if liquidity dried up and the market dived at the same time.
Thanks for the concern Devin. That could certainly be a problem if liquidity dries up. I don’t know about a worst case scenario but at this time I can withstand a 20% decline to my IB portfolio without adding new funds.
If all of my outstanding options get assigned right now I would have to pay about $250,000 to buy all of the shares. I can borrow about $170,000 of extra margin debt to pay for most of that, while I will need to transfer $80,000 of cash from my HELOC to my IB account to cover the rest. It would be an unfortunate situation, but I can hold that position and wait until the market recovers. 🙂 IB has a useful stress test tool which is where I got these rough estimates from.
You know more than me about this, and it’s hard to tell your current outstanding portfolio just from your trading summary, so I’ll assume you’re correct.
Best of luck! May the odds be ever in your favor 🙂
Thanks. I got that reference, lol.
You are doing so well with your options. I am really interested in starting to sell puts but I’m a bit afraid of the whole process.. I just don’t know enough. How did you learn about options? Are there specific videos or books that you read? I looked into taking a course on spreads, but it was very expensive.
Also, I’m with TD and only have level 2 for trading options, apparently I have to pass a skill testing question to get to level 4 where the platform will let me sell puts. Are all brokerages like that?
I had to do a test over the phone with TD as well, lol. But I didn’t need to do one with Interactive Brokers. I would recommend IB because they only charge about $1 per option contract. $1.50 for Canadian ones. I started by reading tutorials online. Here’s one to start for example: https://www.investopedia.com/articles/optioninvestor/10/sell-puts-benefit-any-market.asp I also watched YouTube videos like this one. https://www.youtube.com/watch?v=ScPLX2ysE0c&ab_channel=projectfinance The first section of that video goes over put spreads, which I think is a safer way to start for beginners. It’s like riding a bike with training wheels. You’ll get to learn how to sell a put option, but won’t risk losing a lot of money. But it’s like having a baby. You really can’t know what to expect until you experience it, lol. The best way to learn is to dive in and try it out. Start with selling far out of the money puts so it’s very unlikely to get assigned. And then gradually adjust in future trades based on your risk tolerance. I made a video showing how I sold a put option on BlackRock. https://youtu.be/xI0MnkO0k68 The 14 minute mark is the step by step trade. Good luck. Let me know either in… Read more »