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:
- Sell cash covered puts to raise money to buy a stock you want to hold.
- Either use proceedings from selling puts or sell a put option and get exercised or buy-write a covered call to get your stock.
- Once you have your stock, continue selling covered calls and puts against the stock to get income.
- 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!
We all want to hear your opinion on the article above: 3 Comments |
Recent Comments