Dipping My Toes Into Options Once Again

Back in October 2021, I started learning about options from various YouTubers.  The main video I learnt from is this video by ProjectFinance.  It is a long video, but it breaks down the principles of options to small bits, and showed how to trade options with different strategies.  

"An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they decide against it.

Each options contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. 

Options are versatile financial products. These contracts involve a buyer and seller, where the buyer pays a premium for the rights granted by the contract. Call options allow the holder to buy the asset at a stated price within a specific timeframe. Put options, on the other hand, allow the holder to sell the asset at a stated price within a specific timeframe. Each call option has a bullish buyer and a bearish seller while put options have a bearish buyer and a bullish seller."

Being a total noob and a beginner at that time, I decided to go with the simplest strategy, and just learnt about selling cash-secured puts.  One month later in November 2021, I decided to start trading options on my own.  I started selling puts on companies whose share prices are below USD 100, as each contract is 100 shares, and I will need to ensure I have the cash on hand if I ever get assigned.  Companies I sold puts on are Bank of America, Citibank, Palantir and META ETF.  This is probably the mistake that I made right from the start, because these companies (besides Palantir) are not the ones that I am comfortable to hold for long period as I do not have huge conviction in them.  These caused me to feel jittery after selling the puts, and that inevitably results in the failed outcome.  By May 2022, my total loss from options is USD 752, with the biggest loss from Citibank.  This is not a big sum, but coupled with the weak mindset I have, I feel that options may not be suitable for me, and hence I stopped dabbling in options then.

Fast-forward a few months to September 2022 (yes, just 4 months later), my itchy fingers returned.  I decided to give myself another try, this time, only selling puts in companies I am very comfortable in holding them for the long term, and the share price should be below USD 200, so that I have sufficient funds in case the puts are assigned.  The first I bought was again Palantir.  I sold 2 put option contracts at USD 7 strike price, expiring only in January 2025.  By January 2024, the share price of Palantir has risen to above USD 16, and thus with more than 80% of the premiums earned, I closed the option, raking in a small profit.  This boosted my confidence and it gave me more confidence to sell a couple more puts.  Currently I am not aiming to rake in huge profits, but instead starting slow to recoup all the losses realized earlier.

I sold another put option contract at USD 125 strike price for Google in January 2024, expiring in February 2024.  I was lucky that January was a good month for Google, and in 2 weeks, I am in the green with more than 75% of the premiums, leading me to close the option early to realize the profits as well.  These helped to boost my confidence level.

In the following days, I have sold more put option contracts for Tesla, Google, Apple, JP Morgan, Palantir and Microsoft (basically all the shares I like and currently own as well), each with different lengths of expiry from April 2024 to Jan 2026.  Although I stated earlier that I am only comfortable in selling puts of companies whose share price is below USD 200 (to ensure I have sufficient liquidity in case I am assigned the shares), Microsoft is the one that I broke the rules for, as I like the company and its performance.  Regardless, my main aim, as mentioned earlier, is to do this slow and steady to ensure that I cover my initial losses, and hope that with time, realized net profits can come.  Though the profits was small, slow accumulation can still eventually reach my goal.  However, as we enter February, the markets may be rattled by the earnings of the big Tech companies and it seems like volatility is back, and if the earning results fail to impress further, correction may be on the cards.  However, I am not too worried as my options turned red, because I have staggered the expiry of the options, ensuring I have adequate cash to buy the shares in case I get assigned, and I am happy to be assigned the shares.  These further proved to myself that I am on the right track as I learnt the following 3 important points:

1)     Choosing the strike price is important as it is the price level I am comfortable to own the shares at, and that kept me worry-free despite all the volatility in the markets.

2)     Only sell put contracts on the companies I like, and have conviction in, such that I will be more than happy to own the shares if assigned.  Do not just sell puts of companies based solely on the premiums generated or because the share price of the shares is low so that I can afford to buy the 100 shares if assigned.

3)     Have sufficient cash ready, so that in the event of assignment, the cash is ready for the purchase of the shares.  To prevent the need to stash too much cash in the account, I personally will staggered the expiry of my options, with only 1 expiry every 2 months minimally for now.  This may seem too slow in generating options income, but being a newbie starter, I think I am more comfortable at this pace for now.  In addition, as the cash (in excess of USD 10K) is earning 4.83% interest in the account, I am fine with holding cash for now.

So that's it.  Hopefully greed doesn't overpower me, and may I remain grounded and disciplined in this options journey moving forward.  Barista FIRE, here I come...!