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July 2014 results brought the highest income ever, but net-liq got hammered hard

This month was one of my best months so far. My options trading delivered the highest income in my relatively short options trading history. But I cannot have it yet.

The entire month was going well, all my accounts were growing nicely and my trading account was growing bigger every day. Until two days ago. On Thursday at the end of this month, markets suffered a big sell off. Dow lost more than 300 points that day and SPX lost 35 points.

Let’s take a look at the chart:

SPX monthly

From the chart above you can clearly see how deep and dramatic the move was. Investors are panicking out there. That is typically a good opportunity to be buying stocks (and I may open a new dividend stock position or add to existing using some of my proceeds from options trading).

But when looking at the chart, there are two question coming to my mind. Is this a game changer and we start seeing the end of the bull trend? And the second question is, is this a good time to start buying depressed stocks?

It is too early to answer those question, so I will wait for now and see, how the market develops. I can always jump in when it reverses.

There is another interesting thing to look at. I like to watch the Fear & Greed index on CNN Money website. So lets take a look at a picture of that index:

Fear & Greed
Fear & Greed

I do not remember seeing this index that low. Note that last lower numbers occurred in 2011. Since then the depths were not that low and dramatic.

So this again brings up the question: Is this a game changer?

How these last days of market selloff affected my account?

Terribly.

My net-liq (net liquidation) value dropped badly. I lost almost $3000 within those two days. But it is unrealized loss. I closed a few trades with gains and rolled others to safer strikes. Yet increasing volatility keeps those trades in red numbers although they are safely away from strikes and OTM. Rising implied volatility increases the value of my options causing my net-liq going south hard.

Is this unrealized loss something I should be worried about? I believe not. Options are not stocks and when your stock position goes against you, I think you should close quickly as you may end up sitting on a losing position forever. Options on the other hand have expiration day and as long as your stock stays below or above strike (depends whether you are short puts or calls), it will potentially expire worthless and your net-liq value will go up again.

So far I only have one stock, which is giving me a hard time, and that is Amazon (AMZN) which is currently in the money. I was able to roll it down a bit and further away in time. My expectation is that as soon as the stock takes a break from selling, I should be able to get out break even or with a small profit. I just hope we will not see a huge sell off continuation next week, which would drag AMZN down with it.

The trade above reminds me the importance of trading options small and not overdo it. Also trading it against indexes rather than stocks. There is only one big reason why indexes are better: no earnings.

But small accounts and small traders have one big disadvantage. Trading options against indexes requires a lot of cash. Margin requirements in many cases exceed their account (and in many cases mine too). I still cannot afford trading indexes and have to stick with stocks and be vulnerable to earnings and craziness of the crowd who decides one day heavily buying a stock and heavily sell it the other day.

Like TASR, for example. Jumped up one day, sold off the other:

TASR

From the chart above, you can see I hold a short straddle. I have naked call at 14 strike and naked put at 10 strike. If the stock ends in between these two levels by expiration, both options expire worthless and I will keep a nice profit.

The next stock which almost killed me was Corning (GLW). After the stock reported earnings, it tanked huge.

GLW

Originally, I had 1 put contract at 21 strike. The selloff sent the price thru my strike and I had to act fast. I rolled the 21 strike put contract down and opened a new short call with 22 strike. I collected premium on the vertical roll and I collected premium on the naked call. Now I have a short straddle and again, the goal is that the stock price stays in between those two strikes.

If the stock moves either way attacking any of the straddle’s leg, I will simply roll that leg, let the other expire worthless (or buy it back), and open a new leg in its place.

I had this process in place already with another stock Cliffs Natural Resources (CLF).

CLF

The first arrow indicates where I sold my original naked calls with 17 strike. Then a new board selected by an activist investor Casablanca was elected. Investors took it as a great deal (I don’t, since fundamentals of the company didn’t change and the new board will not be able to change it), and the stock shot up thru the 17 strike.

So I rolled to 18 strike (and collected some cash). The second arrow then indicates when I decided to roll again to 19 strike to run away from the euphoria of retail investors cheering the new board. Then the stock started fading away and I believe, it will continue lower.

When the stock shot up I also opened a short put side at 14 strike creating a straddle of this trade and collected another premium. Now the stock needs to stay in between these two legs. I will be rolling any leg which will be attacked by a price action.

By doing this I collected a whopping $4,602.44 in premiums. Unfortunately I cannot use them or withdraw them, as they are now blocked by those same trades, which are losing value due to increasing volatility (the option is gaining value, I am losing value). All I can do now is wait when the panic ends and the options mature and time decay eats them all away.

Although my net-liq value got hammered hard this month, I didn’t close any trade with a loss and I am optimistic that I will be able to navigate remaining trades successfully towards the end. Then I will be able to call the premium mine.

Here are the month results:

 

January 2014 premiums: $156.10 (1.55%)
February 2014 premiums: $139.26 (1.38%)
March 2014 premiums: $746.62 (7.41%)
April 2014 premiums: $421.63 (4.19%)
May 2014 premiums: $803.32 (7.98%)
June 2014 premiums: $230.21 (2.29%)
July 2014 premiums: $4,602.44 (45.69%)
   
January 2014 dividends: $25.87 (0.26%)
February 2014 dividends: $167.02 (1.66%)
March 2014 dividends: $68.77 (0.68%)
April 2014 dividends: $25.91 (0.26%)
May 2014 dividends: $168.51 (1.67%)
June 2014 dividends: $68.81 (0.68%)
July 2014 dividends: $25.96 (0.26%)
   
Total 2014 income: $8,376.40 (83.16%)
2014 unrealized premiums: $4,759.01 (47.25%)
   
Account Equity: $28,451.04 (00.00%)
Account Net-Liq: $18,525.92 (-23.97%)
December 2013 balance: $10,072.25

You can see my dividend and options income on My Trades & Income page.

What about you? How was your July 2014 and the entire year so far? Post a link to your website or write down your results to encourage other investors!

Have a great August 2014!!
 
 





10 responses to “July 2014 results brought the highest income ever, but net-liq got hammered hard”

  1. I used to dink around with options, so I like to follow your website. It helps me to get my options fix :) The rise in volatility negatively affected me in July as well. I short the VIX, so the rise in volatility is a negative for me, just as it can be for an option writer/seller. I lost a few grand in July, but closed out all positions and am watching from the sidelines right now. I am waiting to see if the market will settle down to decide what to do next.

    • Martin says:

      Hi Ryan, thanks for following my blog. Yes the market will settle. Nothing goes up forever and nothing goes down forever. We are in extreme fear now and that will not last forever too. I lost roughly $3000 on my 21k account but it is only on paper since all my open trades are well out of the money and I was able to open short calls against my short puts and these are well protecting me now. So unless you closed with loses, you should recover as soon as the volatility eases.
      Thanks for stopping by!

  2. It has definitely been brutal I am glad my rental income is holding steady.

  3. DivHut says:

    Can’t complain about my July 2014. Dividends keep rolling in and I’m happy with my portfolio. Here is a link to my results:

    http://divhut.com/2014/08/dividend-income-update-july-2014/

    Thanks for sharing your numbers!

    • Martin says:

      Hi DivHut, I checked your income and it is great. I understand why you are happy. It is nice to add aside a few bucks a month which potentially grow into something big generating cash for which you do not have to work at all. I love this idea too, that’s why I invest in options and dividend stocks.
      Thanks for stopping by.

  4. Wow! Thats some kick-ass return for the month of July. Congrats on a successful month.

    R2R

    • Martin says:

      R2R, agree. At first I wasn’t expecting anything like that at all, but as the market started getting crazy and I had to start rolling my options it started growing fast. I was surprised myself. The only issue with that is that the profit or income is still tied by those trade and if I close everything now, I will actually lose it, so I have to wait for those trades to expire first.

  5. Dividends continue to grow and I put a lot of capital to work over the last week of July. I’m still sitting on a bunch of cash though ready to deploy if the markets head south. You’re doing well with the options trading. I’ve never ventured any further than just selling puts and calls. Much beyond that is confusing to me but I’ve never read much about it so I’m sure it’s easier than I imagine. Keep up the good work! That options income sure is nice.

    • Martin says:

      JC, thanks. Yes it is easier than many people think. I also have never imagine how easy it is. If you keep it slow and small it is also very safe. My trade against Amazon is giving me a hard time, because it is a trade which breaks that rule of slow and small. I traded it as a spread, because I couldn’t afford it as a simple put or call trade and now I am trapped in the spread difficult to manage due to high maintenance requirements. So, when you jump into options more in depth one day, you will find out how easy it is.
      Thanks for stopping by.

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