I can honestly say that I have never been interested in trading options. For one thing I never really understood them and secondly it seems more like a gamble than an investment strategy.
There are numerous bloggers that not only invest in dividend paying companies, but sprinkle in a few options here and there as well.
What seems to be most prevalent is to sell calls on stocks that are currently owned or sell puts on companies that would like to be acquired.
One of the owners of the company I work for has many different options in companies like AAPL, BIDU, and GOOG. He has been encouraging me to jump into options but I really didn't feel comfortable since my main investment strategy is to accumulate stocks that will provide an income for my future life. To me, these two strategies always appeared to be in conflict with each other.
I eventually asked him to look up some of the premiums on companies like T, KO, RDS-B, and a few others. After watching more than a few transactions over the year from different bloggers, I decided to start off in the shallow end of the pool using a cover call strategy.
Two weeks ago when GE spiked after the news of Jeff Inmelt's plan to reduce GE Capital I decided to sell a covered call. The price was trading in the $27-$28 range at the time. The usual transaction people would make is to find a date sometime in the future and a price that is high than the current trading price. A premium amount would be set based on the time and price requested. Since GE was at the high end of its multi year range, I felt like it might drift back down.
I should have set a strike price in the $30s in Jan 2016, but I did not do this. Instead I did something totally stupid and sold an in the money call which has been bothering me ever since.
Here are the transactions that took place.
- 4/10/2015 --- SELL GE SEP 18 2015 CALL (OPEN) ---2 @ $5.89 --- Proceeds --- $1169.55
So essentially I was paid a premium of $1,169.55 to sell 200 of my GE shares for $22. Immediately after I opened this trade Sharebuilder showed the Option at the bottom of my screen with ITM.
I have been watching this option every day for the last two weeks and every day it said I had a loss of $1300.
Between the ITM (in the money) icon and the fact that my option value never changed values, I thought that I screwed something up and had my shares called away. Shares of GE actually traded above $28.50 so this just reinforced my original thoughts that I had lost my 200 shares @ $22.00 and received the $5.89 premium less commissions.
I actually felt pretty stupid and kept waiting for my shares to disappear. Each day for the next couple of days I would check my Sharebuilder account expecting to see my shares disappear. They didn't so I would then check the option value and it continued to remain unchanged at $1300.
This actually created some confusion because GEs shares had started falling and were in the $26 range. I kept thinking if I haven't lost my shares when it was trading above $28.50, why am I still showing a $1300 unrealized loss when GE's price keeps dropping.
Finally I decided to click the button that says Close just to see what would happen. Again I wasn't certain whether I still owned my shares or not. I did this on Tuesday when the shares were trading around $26.50.
What popped up next was an estimated amount needed to close the account. It said I didn't have enough cash to make the transaction. Yes I used the premium to buy other stocks. I should have not done this. Apparently I can't transfer funds from my bank to close options like I can when I make weekly investments. The good news is that it said I needed $990 to complete the transaction. At least I knew that I still owned the shares.
I guess it's good that I tried to close the option because now I know to keep some funds available if I ever need to close out future options. I set up a transfer so I could try again. Anyway today just before close the thought of always being in the money bothered me too much so I closed out the position just to get it off of my mind.
- 4/24/2015 --- BUY GE SEP 18 2015 CALL (CLOSE) --- 2 @ $4.90 --- Cost --- $988.45
As I listed above, I had to pay $988.45 after commission to close the account and I originally received $1169.55 so I pocketed $181.10 for my 14 day experiment.
To put this in perspective I will be receiving around $99 in dividends on Monday from my 400+ shares of GE. This 2 week experiment netted me almost twice that amount on just 2 options or 200 shares.
Going forward I am going to continue developing a strategy that includes options along with my regular investments. While I haven't posted about it, I actually have Jan 2015 calls on BP@ $48 and VZ at $50.
I guess the summary of my experiment is be careful because you can EASILY lose shares you own and EASILY buy shares of a company you might not want to own. The one thing I am happy about is that I am keeping all of my GE shares. Seeing that option premium in relation to the dividends I will receive is pretty powerful to say the least.
Anyway that is my first experience with options and it was a learning experience for sure. While Shareholder is great in my opinion for buying stocks, I don't think it is the best option (no pun intended) for trading options.