My First Options Trade

[workathome]

Made my first options trade, a covered call.

Sold 2 GE 08/17/2013 Calls and received $60. This is enough to cover some ERE's monthly grocery budget! So that's kinda cool.

Worst case scenario: GE trades above $24 and I sell for a total realized profit of $120.

Best case: I keep the $60 and my GE stock.

I realize I might get called out of future GE gains, but then I'd probably try selling puts. It's really just a learning experience, but if done carefully it seems like I could easily earn enough money to cover some basic living expenses.

[44deagle]

Been doing this for years and it has been working very well to generate extra income. Missed out on some big capital gains a few times though but that's the risk you take.

[chicago81]

Nice job. I love using options to boost yield.

But it is important to remember... the worst case isn't having the stock called away... the worst case is a significant decline in the price of the GE shares you are holding.

[workathome]

44deagle - Is it possible to tell if you've made more off your covered calls than you've missed out of on capital gains?

Chicago81 - I don't consider that a worst case here, because I know I wont sell GE for the next 30 days, and that would be a risk independent of the options trade.

[secretwealth]

Is there a beginner's guide to selling covered calls out there? It's a complex topic with a lot of potential profitability, for those who understand it.

[chicago81]

@secretwealth - My broker (OptionsHouse) did a Webinar about covered calls.

Here is the link:

http://www.youtube.com/watch?v=b_0PkRofgco

[secretwealth]

Awesome, many thanks! Looks fun.

[44deagle]

@chicago81 that's true, but if you are long the stock you have more downside risk anyways without the covered call.

@workathome I keep track of everything and I've definitely made more off premiums collected than missed out on capital gains.

I'm more of a fan of doing bull put spreads on sector etf's or individual stocks than writing covered calls. I only write puts on shares I would love to own at particular strike price. Been sort of a bad year for that though because volatility has been so low for most of year. When there is panic in market though you can write puts for crazy premiums at far out strikes.

[workathome]

GE is trading at $24.84! So I was on the wrong side of that bargain.

[George the original one]

GE is trading at $24.84! So I was on the wrong side of that bargain.

Perfect example of why I don't do options. Unlike regular trades where both sides can actually be winners, there is only one side of an option trade that wins.

[workathome]

Fortunately it was limited risk.

I also had a learning experience (which should have been obvious!) - it may be wise to wait until after earnings are announced to make a trade! Also keep in mind factors like the "Bernake Put"...

Per 44deagle, selling Puts sounds like a more attractive long-term strategy. Instead of risking parting with companies you love, sell puts on companies you'd love to own. Or only sell calls on companies you actually want to dump instead of trying to generate a little extra income on companies you want to hold.

Sold calls:

GE @ 24
ABBV @ 45
EEM @ 40.50
PFE @ 29

Sold puts:

BP @ 42
GDX @ 24.50
ZTS @ 30
EEM @ 38

All trades are limited to 30 days.

Generated this month: $856.44 (after commissions and fees)
Missed out gains: ($160)
Actual losses: $0
----------------
Total: $696.44

By making my screw-ups more public, maybe the learning experience will be more deeply ingrained.

[workathome]

Also, if you're reading this and see I'm making a mistake or being stupid - I'd really appreciate you letting me know.

[44deagle]

Just sold a put on POT. September 36 for .74 Wouldn't mind the shares at $35.26 anyways, would be 4% yield in a solid company. Otherwise the $74 in premium just about takes care of property taxes for a month.

[jacob]

Also, if you're reading this and see I'm making a mistake or being stupid - I'd really appreciate you letting me know.

You might want to consider the tax implications of your trades. For example, qualified dividend paying stocks with calls written on them might no longer be qualified depending on holding period. (All covered in publication 590, I believe.)

[workathome]

These positions are in a taxable account. It looks like that is only relevant in an IRA. I haven't played with calls in an IRA, though depending on tax implications that could be quite interesting!

I went overboard this month on options with selling puts. If there's a major market pullback in the next 10 days it will eat up more of my cash position than I'd like. Fortunately, most of my positions look to be very profitable. I wrote up a few more ground rules for the future (limit executed value of sold puts to 5% of net worth, only sell puts on dividend-paying stocks I'd hold long-term) so it hopefully doesn't bite me in the ass. Strategy should get better as time goes on.

Fortunately an ERE mentality somewhat naturally limits risk, as one is no longer looking for high risk trades but smaller income-generating strategies.

Looking more at selling puts vs. covered calls now, though testing out using a couple covered calls to purposely exit positions. Of course, it could backfire on a market pullback before the expiration day. Otherwise it's a really neat way to generate an extra 2+% on a sale.

In theory, selling $10,000 worth of puts with monthly turnover could generate an extra ~$2,500/year (until/unless you get put in your positions) and then you could fall back to earning $200-300 in dividends/year until you feel comfortable selling the positions (or attempt covered calls). Of course, that's a very basic theory with a lot of problems to be worked out - like not actually wanting to be locked into the strategy and selling puts in the middle of a dramatically declining market.

[McTrex]

Hi WAH,

I've been using a similar strategy for a while. Pay attention to VIX, as when volatility is low, option premiums are also low, making the returns smaller and the risk larger when volatility goes up. Maybe it's better to wait for either markets to be high or low, or volatility to be relatively high. Writing put options around march 2009 for example would have ensured high premiums and (with hindsight of course) low risk.

[workathome]

Thank you! I will pay attention.

[workathome]

I apologize for not updating this, but I wanted to let you know that last year was successful overall.

Total profit 6,215.66 - or 11.7% return on the capital used. I also only traded for half the year.

Simply sitting in SPY would have resulted in much better returns though, while at the same time I was lucky selling Puts in what turned out to be a bull market. So I'm not convinced the income generation was worth the risk I was taking on over a full market cycle. I don't plan on continuing this year.

[JohnnyH]

I've had mostly success selling covered calls.. Seems like 90% of the time it goes great, generating very nice additional income then BAM! some big random event wipes away months of profits.

I was selling weeklies on PP core holdings only in weeks where no big news, reports or Fed releases... I'm hoping to start selling covered calls again once I finally rebalance back into the PP.

[altoid]

@WAH,
I like your examples of selling covered call of GE@24. Does your GE stocks have to be in the same brokage where options are being traded ?

I just recently opened account with option house, but most of my dividend paying stocks are with schwab.

thanks.