Wednesday, April 1, 2020

Options Update: March 2020

Welcome to my monthly options update!

Here, I shall write monthly options update articles to keep track of options trades in my portfolio. Each options update serves as a status report on the open options and the obligations I have. A running tally of all my options trades and income to date are found on the Options page.

What a month we had in March 2020! The COVID bear market came fast and furious. As a result, I got assigned put options I did not consider likely to get into the money, and sold puts and bought calls in stocks that have fallen significantly and should rebound.

Assigned Options

Both options expiring this month got assigned. Last month, I had considered assignment of these two put options unlikely, but opined that a continued selloff in the market could push this option into the money. And that is exactly what happened! What a spectacular selloff we had in March.

Trade #48: Sold 1 BIDU put option strike 105 exp 3/20/20 for $899.37 net premium on 9/20/19. On expiration, the stock traded at 88.66, giving me the assignment, handing me a loss of $1634, for a net secured income of -$734.63. The stock has recovered some since. This is a long term hold.

Trade #49: Sold 1 SCHW put option strike 35 exp 3/20/20 for $248.90 net premium on 10/3/19.  On expiration, the stock traded at 30.75, giving me the assignment, handing me a loss of $425, for a net secured income of -$176.10. The stock has recovered some since. This is probably a long term hold.



Expired Options

No options expired worthless this month, despite my protests (see above).

Closed Options

When an out of the money option goes further out of the money, one may close the option early and secure most of the options income.

Trade #52: Bought 1 RCL put option strike 60 exp 6/19/20 for $951.09 on 3/6/20.  I meant to sell the put, but accidentally bought instead. After realizing my error, I closed the position at essentially the same price for $950.18, netting a short term loss of $0.91. I wanted to sell the put because bad news about cruises were all over the news and the cruises had fallen 50% already. I thought there can't be much further to fall. Boy, was I wrong, as I watched the cruises fall another 70% from there. I wished I had held onto the put I bought and not sold put instead. 

Rolled Options

An option can be rolled forward by buying back an option and selling another option with a later expiration date. Rolling is done to avoid options assignment for in the money options.

I did not roll any options this month.

New Call Options Sold

Selling calls is a way to earn premiums from time decay on securities that are unlikely to reach a certain strike price within a certain time frame. This is best done on stocks you already own so as to limit liabilities should the underlying security shoot to the moon.

I did not sell any call options this month.

New Put Options Sold

Selling put options is a way to earn premium for agreeing to buy a stock at a given price for a period of time. This is best done with high quality, buy and hold stocks that have limited downside.

I sold 3 put options this month:
Trade #53: Sold 1 RCL put option strike 60 exp 6/19/20 for $1398.87 net premium on 3/6/20, when the stock fell to $60. If the stock plunges below 60 by expiration, I would effectively be buying at 46, which seemed a ridiculously cheap price. Well, the stock only got cheaper, but >50%, to end the month at 32. That's the danger and price you pay trying to catch a falling knife. I still anticipate a rebound by mid June when the option expires.

Trade #55: Sold 1 FFIV put option strike 110 exp 1/15/21 for $1398.87 net premium on 3/9/20, when the stock fell to new lows. I figured there is no way the stock will not rebound by next year and even I get assigned I get to lower my cost basis in the stock. In retrospect of course, I should have waited for the stock to drop even more.

Trade #55: Sold 2 XOM put option strike 35 exp 1/21/22 for $1799.43 net premium on 3/27/20, when the stock traded at 36. I anticipate selling 409 shares of XOM in my DSPP account, so this trade would effectively buy back half my stake should XOM continue to trade lower in the next 2 years. That seems unlikely, and I would be much happier securing the premium instead. 

New Call Options Bought

Buying calls is a bet that the underlying security will go up significantly before option expiration. It is high risk, as most options expire worthless, but potentially high return, especially when the price of the security has dropped significantly.

I bought one call option this month:
Trade #54: Bought 1 RCL call option strike 60 exp 6/19/20 for $1100.79 on 3/9/20, when the stock fell to new lows. I'm betting for a recovery by mid June. In retrospect, of course, I should have waited till the stock dropped even more later in the month.

Options Expiring Next Month

No option will expire next month.

Cumulative Options Income Summary

As of March 2020:

                             Cumulative      Cumulative Secured
                          Options Income    Options Income
         
This Month:           $ 18,476.13            $   7,788.10
Last Month:           $ 15,940.84            $   8,699.74
Difference:             $   2,535.29            $    (911.64)

Current unrealized gain/(loss): ($6,125.82)
Total realized and unrealized gain/(loss): $12,350.31

Note: Unrealized gain increases the chance of eventually securing option income, while unrealized loss does the opposite.

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