Friday, April 24, 2015

First Options Experience with GE

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.



  1. In playing with options, I've come to realize it's not much different than a logo ticket. Sometimes you win, sometimes you lose. But I still like it and will continue to sell covered calls and sell naked puts.

    Come to think of it, I should have sold a call on MAT today but instead I sold my 100 shares @ 29.93. My main reason for selling was the div payout ratio.

    Good luck with options. After selling a few, you'll quickly get the hang of it.

    1. ADY,

      I still am holding on to my shares with MAT, but most likely will dump them pretty soon. I will stick with basic options like you mentioned. I really don't like the idea of having to make many buy/sell decisions so I will just dabble in it a little here and there.


  2. The big thing with options is to make sure that you have your strikes and times right. I typically don't sell calls because whenever I buy the shares I buy them for the long haul. However, if I have at least 100 shares and want to exit the position I will use calls. I tend to sell a lot more puts though so I can acquire excellent companies at better prices than are currently offered in the stock market. But that requires a good chunk of capital for each put option since you'd have to buy 100 shares. If I end up building a large cash pile then I plan to start using some buy-write (calls) on some positions as a means to generate extra income and earn the dividend in the mean time.

    1. PIP,

      I too want to keep my shares for the long run and that is a big reason I closed out my positions after only two week. I had a small profit and was deep in the money so I didn't want to lose my shares. I will stick with the covered call and maybe some puts like you mentioned. Selling the puts makes me a bit nervous because you always have to have quite a bit of capital on standby in case you are assigned shares.


    2. I think I always sold puts and have never sold calls. This is because when selling a call, I essentially limit my gains and leaving downside open; I think all my companies are awesome, and will increase in price over time. So if I sell now for a small premium, I lose out on all dividends and capital gains in the future. Plus, if I sell today, i may end up buying back at a higher price.

      With put selling, I ended up collecting a lot of premiums on companies like SBUX that went up in price. In retrospect, I should have simply bought the shares - my gains would have been better.

  3. Haven't tried doing options but been reading some books on this topic. I understand the concept but probably need to execute an actual options trade to learn the in's and out's.

    1. Tawcan,

      Nothing is more educational than experience. I too have read some books on the subject, but that doesn't help when you are sitting at the black jack table in a real life situation with real money. :-)


  4. After reading some good blogs on this, I am leaning towards puts since I want buy for the long term. I need to understand it a bit more and the related fees. Also, I need to boost up my account a bit.

    1. Div4son,

      I think that is a sound strategy. However for the opportunity to make a hundred or two, you have to be will to commit several thousand in the event you are assigned the shares. Good luck with you decision.


  5. Thanks for sharing your experience, MDP. It is stressful when you first dive in...Ive tried options trading a bit in the past and of course, lost money...then found the covered call options - which Ive used occasionally to generate some passive income ... but at the same time, ended up being called - which meant that I had to sell those shares. Fortunately it was in companies that I didnt mind selling. For now, I stay away from there is still some gap in my understanding of how to price them.

    Best wishes

    1. R2R,

      It was a bit stressful. Selling an in the money call with a relatively short expiration date made for a volatile experience. I am glad to pick up the $180 and still maintain possession of my shares.


  6. Hi MDP, what do you think of $RIG? It's got a new CEO from $NOV and has a dividend yield of 18%. Thanks!

    1. Anonymous,

      Quite honestly I have a huge position in ESV which I am currently down about 30%, On top of that ESV cuts its dividend 80%. From a price point of view RIG looks pretty cheap, but I probably will be steering clear of the off shore drillers from this point forward.


  7. I don't understand much about options, though I haven't tried as much to learn about it. The more I read about it, the more I get confused. And since I don't trade options at all, I forget the concepts and when I try to learn about it later, it is back to step 1. Maybe I just need to do a trade or two to understand. Looking forward to reading more about your option trades and understanding them better.


    1. DGJ,

      I am new to options as well. It turns out I sold a "deep in the money" call in which I made a quick $181 because GE's price fell and the ratio of the stock price move to premium was pretty high. If GE instead had gone up over $30 I probably would have lost my shares. Next time I will stretch out the time and use a less volatile "out of the money" call.


  8. Hey MDP,

    Glad to see you experimenting with options. I do have a few recommendations if you're interested:

    1 - Only sell OTM calls. The idea of selling calls is to reduce cost basis and sell something that has a high probability of expiring worthless.

    2 - Avoid selling ITM calls. You want sell extrinsic value and not intrinsic value so that you have theta working for you. You are trying to maximize time decay, meaning getting paid for each day you hold the short option.

    3 - Be opportunistic when selling options - It's best to sell puts on down days due to the inverse relationship between price and volatility. An increase in volatility leads to increase option premiums and people buy put options in fear of market declines.

    4 - NEVER buy options unless its to close a short option you sold. 80% of options expire worthless.

    5 - Only sale puts in companies that you would not mind owning. Think of selling puts as locking in a price to buy the stock at lower than current market value. You get to pick you spot.

    Let me know if you ever have any questions around options. I have been using them for years and can really geek out on this stuff. I also use to run a options portfolio for profit when I worked for an oil company. I can talk Greeks (theta = time value, delta = directional exposure), implied volatility, probability of expiring OTM, probability of touching, intrinsic value, extrinsic value, covered calls, short puts, short spreads, iron condors, etc.



    1. GYFG,

      I like your idea of using selling puts and covered "out of the money" calls. Apparently I sold a "deep in the money" call which worked out well because GE's price dropped. This provided a very high return for the two weeks it was open, but is probably a bit outside of my comfort zone going forward. I really just want to juice up my dividend income a bit without getting to risky.

      As far as the last paragraph you wrote, I probably will have to read a few more of your very educational option posts before I can translate anything you said. :-)


  9. GYFG is exactly right. If you're buying options, I'll be the one selling them to you. When you hear about how "dangerous" options can be, that 80% of options expiring worthless is always the number quoted. I'd much rather be on the 80% that gets to keep the premium when the option expires. (Be it via selling calls or puts.)

    Unlike GYFG, who sounds like he really knows his stuff, I'm just getting started with selling options. I've been taking it easy for the last few months but had a pretty good strategy going regarding selling puts. I typically would buy the put back once I had 50% of total profit. That 50% profit level comes from research done by the people at Those guys created the thinkorswim options platform and now run a live educational show. I find them very entertaining to watch and learn a lot. They have shows for beginner to expert. Everything is recorded so you can watch it later too. It is quite addicting.

    For selling calls, I try to pick an OTM point that is hopefully also above my cost basis. That way, the worst that would happen is that I have to give up my shares. For those of us that love receiving dividends, this may be a hard thing to swallow. We may have been accumulating those shares for many, many years. However, the name of the game is in total return. By selling this call you sell your shares not only for a profit but also get the premium. Then, you might decide to buy back the stock and do the same trade again. Where it gets a little trickier is if you currently have an unrealized loss and you're trying to lower your cost basis by selling options. In that situation you very well could get the stock called away leaving you with a capital loss.


    1. And, almost forgot to mention: Glad the GE options trade worked out for you!

      One way to look at an ITM option is from the prospective of someone buying it from you. Since it was ITM at anything over 22, technically it could have been called away at any point above 22. However, for your option, the "break even" point was $22 + $5.89 or $27.89. Had you waited until expiration and the stock was over $27.89, then, yes, the stock would likely have been called away. However, most options buyers wait until right before expiration and has as it stays below $27.89, the chance of it getting called away was low.

      Watch it over the next few weeks. Theta decay isn't as high for the ITM option but it would still be working for you in this case.

      Yes, it can be easy to lose shares you own and buy shares of a company you might not want to own. However, you have to remember that you are the one picking the entry or exit point. Still, it is best to only sell puts in companies that you wouldn't mind owning, as GYFG stated.

      But otherwise how cool is it that you can decide at what price you own the stock?

      Let's say I want to buy AT&T, but I'd rather buy them at about 3% cheaper at $33 instead of $34.04. I could sell a put to buy 100 shares of T at $33 anytime in the next 41 days and receive a premium of about $31. (Using data as of close Friday.)

      If the stock doesn't drop to $33, then I get to pocket the money and sell another put. If AT&T comes out with great news, the option would drop in value and I could even possibly buy it back for cheap after only a few days. (Yes, I then do miss out on the stock gain since I was only willing to buy it for $33.) However, that $31 you received as premium is like receiving nearly a 1% dividend...continue this process monthly and you can see how powerful options can be. The "dividend" though is taxed at ordinary income so you have to take that into account.

      If AT&T drops to $33 and you get assigned shares, your cost basis for those 100 shares is actually $32.69 ($33 - 0.31). Not a bad deal since you might have also liked the stock at the initial $34.04.

    2. Scott,

      Like you I will probably stick with selling covered calls and naked puts as I am only interested in juicing up my returns a little here and there. I got lucky in that my "deep in the money" call made me a quick $181, but I very easily could have lost my shares. In this case it was better to be lucky than good.


  10. Please don’t play with options.
    Never buying call or put options because I think the stock will rise or fall.
    And especially if somebody had been encouraging you to jump into options.
    I guarantee you on the long run a certain 100 % loss.
    You wrote us: my main investment strategy is to accumulate stocks that will provide me an income for my future life.
    If you want to start with options read as much as you can about options.( blogs ,books )
    Never buying call or put options because I think the stock will rise or fall.
    You could generate extra income by selling call options or selling put options.
    In summary, a person holding a short position (contract writer) can sell to open (enter a contract) or buy to close (close a position). A person holding a long position (contract purchaser) can buy to open (enter a position) or sell to close (close a position).

    How to start, my advice : start on paper in other words no real money involved.
    You have for example Philip Morris as well Altria Group and Royal Dutch.
    You can start on paper to sell those stocks.
    You can do this three or four times a year.

    RD SELL ( 1) TO OPEN strike 70 exp july 15 0.45
    MO SELL ( 1) TO OPEN strike 57.5 exp sept 15 0.4
    PM SELL (1) TO OPEN strike 90 exp sept 15 0.9

    Received premiums ( 0.45+0.4+0.90*100 less commissions)
    Approximately $ 150 and you can do this two or three times a year.

    Royal Dutch Shell plc (RDS-B)
    -NYSE  Watchlist
    63.67 Down 0.07(0.11%) Apr 24, 4:05PM EDT
    As long the stock is or stays below $ 70 before expiration July 2015 nothing will happen.
    But if RDS-B is well above 70 before exp., you have to deliver.
    If RDS-B quotes $70,45 You shall lose MONEY.
    Only the case if you did not wrote your RDS- b stock or better said selling call options.
    If they call you stocks:
    You shall receive 100*$ 70 =$ 7000 less commissions and not to forget the already received premiums $150 and dividends if planned

    I could write about theta, gamma and decay and on and on .
    But then you got an overflow on information.

    Oh yeah It is free to download and do it : Thinkorswim. the best platform for options

    Met vrieindelijke groet van Nederland
    Warm regards


    1. You shall receive 100*$ 70 =$ 7000 less commissions and not to forget the already received premiums $150 and dividends if planned. excuse me it should be $45

    2. G.T.

      Thanks so much for coming by and commenting. You are correct about viewing options trading as a game. Going forward I will only be selling "out of the money" puts and calls and will be conservative with my choices...selling puts of companies I wish to own and selling calls on stocks I wish to get rid of.


  11. WOW! The one thing I always fear is pushing the wrong button. It sure is a heavy feeling.

    I read your post, and plan to read it again. I have always been careful to only sell calls ( the only options I do) out of the money. In that way, I know that I am getting cash, and if the stock moves higher, I get the move up to the strike price, if I get called.

    Also, if I go out of the money to the upside, as time gets closer to the date, the option erodes. Because of that, I can purchase the option back, and book the profit without fear of getting called out. It is really scary when you press those buttons without fully feeling completely confident on the outcome.

    I wish you continued success in your investment career, and hope this little error can be put aside so that you can stay focused on the goals you have laid out.

    Good luck.

    Keep cranking,

    Robert the DividendDreamer
    AKA-- Seeking Dividends

    1. Robert,

      Thanks for the comment. I think I was attracted to the high premium so I rolled the dice on the "deep in the money call" Luckily the share price fell and I was able to pick up $181 in only two weeks. I plan to use your strategy of OTM calls on shares I own. While it was nice to pick up a quick profit, I realize things could have gone the other way pretty quick or worse I could have lost the shares. It was definitely better to be lucky than good in this case.