Weekly Newsletter   Challenge account   Weekly Newsletter   

My experience with options

About a year ago I came across options. Somewhere on the internet I read an article how to use options to boost my income, get more cash to invest, and use options to buy stocks.

The strategy went as follow:

  1. Sell cash covered puts to raise money to buy a stock you want to hold.
  2. Either use proceedings from selling puts or sell a put option and get exercised or buy-write a covered call to get your stock.
  3. Once you have your stock, continue selling covered calls and puts against the stock to get income.
  4. If a covered call is exercised and your stock is called away, start repeating the process.

I was so thrilled about this idea to get money up front to buy stocks that I had to try it and master this strategy. I looked for a good candidate and picked, in my opinion, a promising company Oncothyreon (ONTY). At that point the stock was trading at $7 per share. As it was raising in value I was selling puts and collecting premiums.

A few months later I collected enough to buy the stock without paying a penny from my own pocket. The stock suddenly dropped in price to $4 a share when investors dumped the stock because of the news about postponing results from phase III drug (Stimuvax) testing. Instead of publishing the results during 3rd quarter of 2012, the results were postponed until the 1st quarter of 2013. The reason was to get longer time period for testing due to longer survival rate of the patients being tested with this new drug.

A question I asked was, if the survival rate was longer than expected, wasn’t this actually a good sign that the drug worked?

Well, long story short, because of the price drop and lack of my experience (instead of selling and rolling the put option) I was assigned at $7 dollars per share.

I wasn’t disappointed or mad about it. I wanted to hold the stock as a long term investment and, most importantly, due to selling puts prior to assignment, my adjusted price I paid for ONTY was $0.25. You read it correctly. I was assigned to a 7 dollar stock paying 25 cents for it.

I immediately started selling covered calls against the stock and puts generating income. Today I hold a stock, which on my brokerage account shows roughly 40% loss, but my adjusted loss is actually a gain. Yes this stock already allowed me to bring almost $1100 dollars into my pocket and I paid $700 to get the stock.

This was a success for me, so I jumped into trading advanced options. I doubled my money in my speculative TD account within 6 months (you can see the spike when I started following and recording my trades here). Well, later on I slowly gave up all my gains and ended up where I started about a year ago (the chart doesn’t show the very beginning). But that is another story.

Nevertheless, I finally learned my lesson and decided what I wanted. I stopped trading options for a while and started learning more about them to get back to trading options. Although I am in favor to dividend investing and I will be buying high quality dividend stocks (with a few exceptions, such as ONTY), I want also continue in practicing the strategy I described above:, sell puts to raise cash to buy the stock and later sell covered calls to generate income. With dividends and covered calls income I hope to boost my revenue and grow my portfolio faster.

I am adding ONTY into my TD account. Currently I hold it only in my ROTH IRA account. On Monday I will write-buy a covered call against ONTY. If the trade executes, I will be buying ONTY for $1.55 a share.

Happy Trading!

3 responses to “My experience with options”

  1. Over the years I’ve learned that just like any other efficiently traded investment, returns are totally commensurate with risk. I used to think I could get rich by buying out of the money calls and then they’d expire. So I’d sell out of the money puts figuring there’s no way a stock could go that low and boom – had to buy them back as well before execution! The only surefire use I have for them now is to hedge my family’s gas prices with UGA and I also hedge company stock option grants I get that take years to vest by selling calls against them years out (LEAPS).

  2. admin says:

    Marvin, I have the same experience. I was the king of the world, for couple of months at least. Well I cannot do much about my losses, but learn from them.
    At least now I know exactly what I want to do and how I want to invest. High quality dividend stocks with covered calls and CSPs. Maybe one day I can go to advanced option trading, but definitely not now. Thanks for stopping by. I appreciate it.

  3. Do not feel bad about your loss. In honesty it is probably better you experienced it early on in your career. I can speak from experience my first dozen or so option trades were absolute winners. I thought I was the man and knew everything there was about investing and options. As I’m sure you know the market has a crude way of humbling us. I got crushed a couple months later. I didn’t even make it back to break even I was at a loss.

    So now I sell puts on high quality dividend stocks. And every now and again if I find a stock that is completely beat up that has good fundamentals and technicals I will write a covered call on it.

Leave a Reply

Your email address will not be published. Required fields are marked *