Options had always been on my mind but I had been slow to it because I had the impression that it requires a large portfolio to start.
This year, I made a decision to add one more stream of income to my portfolio. I did extensive research, reading and learning. After gathering the necessary information, I decided to take the plunge in June despite having a small portfolio size.
Disclaimer: This is purely a personal opinion and lessons I had gleaned on my options journey. It does not serve as investment advice to buy or sell any vehicles mentioned. Please consult your financial advisor for investment advice.
For those of you who are new to investing, my thought is that options are not the best way to start this journey. Options are derivative tools that make use of leverage. As with most derivative tools, if used incorrectly, you can blow up your entire portfolio and get yourself into debt.
Feel free to skip this article if you are new to options. I prefer to keep the basics of options in another article. If there are enough likes on this article, I will consider writing the basics of options for those who are keen to learn.
Here's a trade that I had made that I felt so stupid.
I sold a $80 Roblox (NYSE) strike Put on 22 Oct for a $4.08 premium. The contract expires last Friday, 19 Nov. From a yield perspective, that's a sweet 5.01% for a one-month contract.
What I failed to take into account was Roblox was releasing their earnings on 8 Nov. The earnings were better than analysts' expectations and the stock skyrocketed.
At its peak, it hit $134. In retrospect, I was foregoing a 60%+ gain for a 5% return.
Of course, the counter-argument was that the reverse could also be true. The results could have been worse than expected and the stock might drop.
I could only say this in hindsight, the strategy looked the best to me, given the information I had back then.
Another option trade I had done recently was Jumia (NYSE: JMIA).
I wrote a put option at $16 strike that expired on 19 Nov. I collected a premium of $0.94, which yielded about 5.9%. Sounds decent too right?
But before the expiration, the stock came down to around $14. The option was exercised and I got myself 100 shares of Jumia stocks.
From what I managed to find, the stock came down because an analyst at a prominent bank wrote a bearish article. That helped push the price down 10% on that single day.
My position was down 18% (as of 11 Dec's writing) in exchange for about 6% return.
Below are five key lessons I had gleaned over the course of the past 6 months.
1. There is no free lunch in options.
At first glance, getting 5%+ on a monthly basis sounds very attractive. If I were to extrapolate to a year, it's 60% returns!
What makes it interesting is I'm getting the premium upfront!
However, what many do not realize is that I have also put aside the cash to earn the premiums.
Coming back to the above example of Roblox's contract, I had set aside $8,000 to earn that 5%. One friend commented that I was too conservative. Given that I had the experience of losing and owing people money, I prefer to be more kiasu.
On top of that, I don't have a fixed income like most people. Hence, I prefer to be more conservative.
To me, selling puts is like being an insurer. The risk of insuring is no joke. If it's exercised, a huge chunk of my cash is wiped that month.
And this brings me to my next point.
2. Using Put Options to buy stocks.
I count myself lucky because the people I learned from, shared with me a very important lesson in options.
Always buy options of companies that you want to own.
That's why I don't buy options on Gamestop or companies I don't understand.
If Roblox did go south due to weak earnings, I'm willing to hold Roblox for the long term. Actually, I really do want to buy Roblox because I believe in their potential.
(The fact that I'm a gamer gives Roblox some extra affinity points :)
Currently, I have about 62 different US-listed companies. As such, I'm well-diversified and I use options now to buy companies I want to own.
I akin this strategy to being paid to wait for my right price.
If I had used this strategy on companies I don't wish to own, I will feel more stupid and regret my decision to be greedy.
3. Not the best, not the worse.
I find it difficult to measure the success in options.
In the case of Roblox, forgoing the 60% for the 5% upfront felt like a foolish trade.
And in the case of Jumia, I could have gotten a much lower price if I hadn't been greedy for that 6% premium.
Options don't always give you the best results if you want to buy the stock. I'm foregoing the potential upside for the upfront premium (in the case of the Put options).
Neither is it a lousy strategy because you get to enjoy the upfront premium.
I have come to terms that to enjoy the upfront benefits, I must forego the potential short-term rise.
4. Low volatility vs high volatility
When I first started out, I was exploring options for companies with lower volatility. I looked at companies like New York Times (NYSE: NYT), Starbucks (Nasdaq: SBUX) and Nike (NYSE: NKE).
Some trades were too expensive for my current cash holdings. The returns for others felt a little low for the risk I'm undertaking.
Hence, I'm leaning towards the higher volatility stocks for now. Sounds counter-intuitive, given that tech stocks tend to be more volatile.
And because of the high volatility nature, I like the premiums that they are paying me.
Or maybe I'm just greedy 🤑
5. Ongoing learning journey
I am aware that there are more advanced Options strategies. For now, I would take it one step at a time.
I began with Put options and will do Call Options down the road.
It is like building your lego house. The Call and Put options are the individual pieces and I can mix and match them to create my masterpiece.
And hopefully, I don't blow myself up in the process 😅
May the lessons here be of use to you as well if you are starting out on your Options journey as well.
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