An update on my options strategy

I launched into an options strategy with full vigor last year. I want to provide an update on how things are going, and how I’m looking to evolve this.

Rising markets provided motivation to consider an options strategy last year. I felt market prices were elevated (who knew that they would continue to inexorably since then!). I figured that writing some out of the money put options, which would obligate me to purchase high quality at prices that made sense, wasn’t a bad strategy in the interim while prices were excessive. If prices didn’t fall to the levels that I wanted, I would just pick up the option income.

If stock prices remain at current elevated levels, I will continue to write additional options, while staying on the sidelines as far as buying more stock outright.

While my initial strategy was to write out of the money put options and hold them to expiry, I observed something with the options that I wrote through 2016.

The rapid rise of the stock market meant that many of the options that I wrote could be bought back, rather cheaply, with more than 50% of time left to expiry. I reasoned that it wasn’t worth hanging onto the option in many cases, to make less than 25% of the option premium, when greater than 50% of the option life was still remaining.

As such, I evolved my option strategy to be a little more practical. I made a determination that if a particular stock had a rapid rise in price such that I could buy back the option for 20-30% of the premium I received, when the option still had a substantial time to run till expiry, then it made sense to do that.

With that said, here is how the options that I wrote in 2016 are tracking. Note below that all of these options were put options that I sold.

BP Jul 15 2016 27.0 Put – $ 138.00   (Option expired unexercised)

GE Sep 16 2016 28.0 Put  $116 (Option expired unexercised)

SBUX Jan 20 2017 52.5 Put $376 (Option expired unexercised)

UA Jan 20 2017 35.0 Put $255  ($455) (Bought back before expiry at higher price)

VWO Mar 17 2017 34.0 Put $255 (Bought back @ $17)

MA Sep 15 2017 80.0 Put $661 (Bought back @ $116)

CELG Jan 19 2018 90.0 Put -$1055 (Bought back @$305)

BABA Jan 19 2018 75.0 Put -$915 (Bought back @$261)

FB Jan 19 2018 110.0 Put -$1106 (Current market value $700)

CLB Jun 16 2017 85.0 Put$390 (Bought back @$80)

MELI Jun 16 2017 140.0 Put $920 (Bought back @$275)

AAPL Jan 18 2019 125.0 Put $2616 (Current value of $41)

MNST Jan 18 46.50 Put $1458

V $85 Put $1714  (Current value of $10)

V Jan 18 2019 80.0 Put $1,894    (Current value of $550)

MA Jan 18 2019 105.0 Put $2368  (Current value of $500)

Thus far, I have realized approximately $3,400 in option premiums, with another $10,300 in premiums still on the books.

These unrealized premiums are awaiting either collection or for the stock to be put to me.

I feel really good about the prospects for the FB and Celgene puts to also simply expire unexercised given the exercise prices that I wrote these options at. I will opportunistically look to repurchase put options early where the premium/time to expiry trade off makes sense.

That is, where the option can be repurchased at a relatively low premium, yet where there is significant time to expiry.

I believe that I can likely retain at least $5k-$7k in put premiums over the course of 2017, without much additional effort. If I can get this figure closer to $10k, this would have made this activity really worth while notice that I’m still carrying out my put option activity over stocks that I’d happily accept being put, at prices that make sense to me.

My most recent transactions are in Visa, MasterCard, Mercadolibre and Apple. Visa and Mastercard are businesses that I could see myself holding onto indefinitely, while Mercadolibre is in the process of building a fairly meaningful moat in the e-commerce market in Latin America.

Apple is an interesting one, because while I haven’t historically been much of a fan, Buffett’s fairly large recent purchase inspired me to look at this business a little more carefully. While I’m still not a great admirer of a hardware business, Apple’s strong free cash flows, and solid returns on invested capital made me comfortable enough to at least start considering writing put options on Apple stock.

The business has also demonstrated rabid user loyalty and ecosystem lock in, which makes it difficult to leave.

Likely 2017 activity

I expect to continue writing out of the money put options on businesses that I would be happy to hold at the right price, for an extending period of time.

Again, like the businesses that I have already written put options on, these will continue to be cash rich businesses with strong returns on invested capital that offer the prospects for low to mid teens.

Returns at the right price. I don’t see why I couldn’t eventually shoot for a steady $10k in options premiums on an annual basis.

At the very least, I should be accumulating more of businesses that I already like at prices that make sense. I may become a little more aggressive with the range of exercise prices that I seek.

I won’t be as fixated on looking at large and  material discount to current prices, and will likely exercise a little more latitude in writing options that are a little closer to the money. I will continue to stick with longer dated options that provide more bang for the buck with respect to the amount of option premium received.

 

 

 

 

 

Comments

  1. Thanks for the update. I use the same strategy. I generally close all of my options once they cross 50%, but some I close in the 2-% – 30% return range. Some traders comment on my site that they hold until expiration and capture the entire premium, I do this sometimes too. But, I like closing and opening a new contract more frequently. Best of luck with this strategy.

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