Greetings all, as we enter into the final few weeks 2017 I thought it would be opportune to summarize progress across the board. I will deal with my option writing this week.
Those that have come by here may recall that I decided to embark on a program of writing out of the money put options over year ago. This is principally designed to complement activity in my Project $1M portfolio, which was a concentrated, focused growth portfolio aimed it tripling my investment capital over a ten-year period.
Well, that portfolio is now fully invested, I have been opportunistically looking at ways to buy more of these businesses at substantially lower prices. Of course I realize that these opportunities only come around periodically. As a result it seemed like an interesting idea to write out of the money put options at prices that were more consistent with levels that I would like to buy at.
What I have essentially been doing is writing insurance. In other words I’ve been providing insurance to others that hold the same high-quality stocks that I wish to buy, with the assurance that I will be a buyer of last resort if the prices of the stocks fall substantially.
While some people trade options with a view to making a few bucks, I find that option writing on positions of high-quality that I would ultimately like to buy helps keep me disciplined with respect to contemplating new purchase activity.
See, the thing is that I am already generally quite happy with the positions that I have in Project $1M and to a large extent the amount of each of these positions, however I’m always opportunistically looking to increase exposure in these high-quality businesses where favorable pricing presents itself.
Of course these ‘lower prices’ at which I may be interested to buy may never come along However just like the insurance that you take out on your house or on your car ,even if an insurable event doesn’t materialize, you still have to pay your insurance provider premiums.
One of the happy consequences of a rising market in 2017 is that while some of the prices at which I would have liked to have bought stocks haven’t materialized, I’ve been able to pocket option premiums on virtually all of the positions of which I’ve written options. In fact, providing this insurance has enriched my overall portfolio income to the tune of close to $13,000 in 2017.
You can see the details of these option positions below. One thing to point out, as I alluded to above, I’m only interested in writing options or insurance on stocks that I believe are fundamentally high-quality and which I would be prepared to buy at the price I’ve written the option on.
One of the consequence of the rising markets is that I had earned close to 75 to 80% of my option premium in quite a rapid timeframe. Rather than wanting to keep the option outstanding for 20% to 25% of the remaining option premium income I have brought back many of my options that had crossed a 75% option income threshold and which had more than a year till option expiry.
What’s been interesting about writing options in 2017 has been the rather pronounced lack of volatility which has meant that premium incomes have been earned over very short time frames as underlying stock prices have risen so rapidly, causing options to become out of the money in a very short space of time. To illustrate, an option to buy Facebook stock at $130 within 12 months has appreciated due to the rapid rise of Facebook stock in a very short space of time.
I don’t expect 2018 to bring about quite the same amount of option income, as I don’t believe that stock prices will rise anywhere near the extent of their rise in 2017. Thus, I won’t be closing out my options as quickly. If I can earn close to seven to $8000 in 2018 with my option writing endeavors, I think that will be a good performance.
I have relatively few options still on the books going into year-end. I recently wrote some options on GE stock which are long dated options to purchase at $18 a share. I received close to three dollars a share in option income for writing these options, which effectively put my cost price at $15 in GE stock. If options are put to me at that price, I believe that I would be quite a happy buyer at those levels. This is the one exception to my rule of only writing options on those businesses that I would like to hold for the next 10 years. While I don’t want to hold GE for the next 10 years, I believe that the stock has been beaten down to levels where the reward is more in favor of the purchaser at this time.
Other than GE, I recently wrote an option on Celgene stock which would obligate me to purchase stock at levels close to $85 a share, at which price I believe Celgene would be a very good buy. I also have an option on the books for both Mercadolibre and AliBaba, both for which I would be a very happy buyer at the prices that I’ve written options for.
To conclude, option writing has been a very nice endeavor for us in 2017. It’s an activity that I plan to continue with in 2018 at close to the levels with which I have written options in 2017. I do plan on waiting for a long overdue correction to restart my option writing in 2018. However if 2017 is any sort of guide, I’m not sure when that may occur!
Security Adj gain($)
AAPL Jan 18 2019 125.0 Put 1,993.91
BABA Jan 18 2019 110.0 Put 814.54
BABA Jan 19 2018 75.0 Put 632.45
CELG Jan 19 2018 90.0 Put 735.45
CLB Jun 16 2017 85.0 Put 288.47
FB Jan 19 2018 110.0 Put 757.49
MA Jan 18 2019 105.0 Put 1,797.92
MA Sep 15 2017 80.0 Put 523.46
MELI Jun 16 2017 140.0 Put 623.46
MELI Mar 16 2018 190.0 Put 604.53
MELI Sep 15 2017 175.0 Put 831.50
MNST Jan 19 2018 46.67 Put (5.32)
MNST Jan 19 2018 46.67 Put 476.31
SBUX Jan 20 2017 52.5 Put 365.21
UAA Jan 20 2017 35.0 Put (221.54)
VWO Mar 17 2017 34.0 Put 216.46
V Jan 18 2019 85.0 Put 1,283.93
V Jan 18 2019 80.0 Put 1,403.93
Total: 13,122.16
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