Recently I noted in a post that I opened up a new Interactive Brokers account in order to trade options more economically. I also shared how to move funds from your broker to IB and get started. Over the last couple of years, I have been dipping my toes and trying to understand how options trading works and trying to figure out what kind of strategy to use. Now that I have a better understanding of some of the basics, I decided to dedicate a separate to track my option trades.
Options trading can be a tricky strategy. There are multiple ways to play the field and make (also lose heavily) money. Some can be simple such as buying and selling calls and puts, some slightly more involved but still easy to understand – such as writing covered calls & puts; while some involve more complicated trades such as the bull call spread, bear put spread, butterfly spread, long straddle, long strangle etc.
Given all my assets are in tax sheltered accounts, I am limited in the type of option trading strategies I can use. For some weird reason, the Canadian government has decided that trading calls and puts straight up is OK and writing covered calls is also OK, but writing puts is not. This limits my option trading strategies, but nevertheless, I have decided to play by the rules and stick to the allowed types.
Covered Calls
For the most part, I will be using buying stocks and writing covered calls on them to boost my returns. If you are already familiar with covered calls, you can skip the following two sections as I just re-iterate some basics.As a primer, here is what covered call option strategy looks like: I buy shares in multiples of 100 and write a contract agreeing to sell those shares at a particular price (strike price) by a certain date, thus collecting a premium for that contract. If the shares rise above that strike price on or during that period (depending on whether it is American vs. European style options) they can get ‘call’ed away – meaning that I have to sell them at that price, since I am obligated to do so — based on the contract agreement. If the shares stay below that strike price, the contract simply expires worthless and I can repeat this process again after the expiry date thus collecting more premiums in the future.
To give a real world example: Recently I wrote an option contract on Canadian Utilities Ltd (CU.TO). I bought 100 shares on Jan 17 at $36.90 and wrote a $37 option contract to expire in 31 days (Expiry date of Feb 17). For writing that contract, I collected $45 in premium. Being a dividend investor, I also made sure that I picked a date that was past the ex-dividend date, which was Feb 02 — which meant that even if the shares were called away, I would still get to collect the dividends (that’s another $35.75 for the quarter). During the month, the stock price fluctuated — sometimes above the $37 strike price and sometimes below. But come expiry date, the stock price was below the strike price (Feb 17 closing price was $36.68), which means that I get to keep the 100 shares that I own and also pocket the $45 premium I had collected last month. Now, I can repeat this process all over again if I choose to.
Writing covered calls can also be a good way to take some short term profits off the table. If I am overall bullish on the company/sector and want to own the stock for the long haul, but see that the market is getting ahead of itself; instead of selling the stock, I would simply write a covered call instead. I have repeated this process for some stocks in the gold mining sector over the past few months. Being a volatile sector helps, especially when there are macro events and gold prices jump.
New Tracker Page
I will be starting a new page that tracks my option trades and income. So far, I have had intermittent trades over the course of last few years, which are summarized below.
Going forward, I will updating the spreadsheet on a regular basis whenever I make trades and both open and closed trades will be posted for live tracking.
What are your thoughts on options trading? Do you use it regularly to boost your income? Be sure to share your thoughts below.
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