Earlier this year, I decided to try to generate some additional income by writing options contracts. I’d use the income to help make additional purchases in my Dividend portfolio.
I submitted an application at my brokerage to get approval to trade options in my account, requesting approval for Level 2 trading which allows me to write covered calls, as well as write cash-secured puts.
For background on trading options, take a look at “Characteristics and Risks of Standardized Options”…. https://www.theocc.com/components/docs/riskstoc.pdf
I also found several options-related posts at DivGro, Two Investing and Investment Hunting to be helpful.
The covered calls are written for a stock that I own and don’t mind selling at a selected strike price. The cash-secured puts are written for stock positions that I don’t own, but wouldn’t mind buying at a selected strike price.
Thus far, I’ve only written single contracts – 1 contract constitutes 100 shares of stock. In addition, the contracts I’ve written are fairly short in duration – the shortest being a few days, and the longest being a few weeks. This minimizes the amount of time value by minimizing the number of days to contract expiration.
I’ve usually had 1 to 2 contracts open each month. This small number has allowed me to get acclimated to options trading, and keep my invested time at a manageable level.
Ideally, the contracts I write will expire “out of the money”, my gain being the collected premium for writing the contract. Alternatively, I may buy the contract to close it prior to expiration. However, some contracts are Assigned. In this case, the option holders end up exercising their right to buy the underlying stock (in the case of a call) or sell the underlying stock (in the case of a put) at the strike price should it move “in the money” prior to expiration. As the option writer, an assigned call means I sell the shares, and an assigned put means I buy the shares.
Below I’ve provided a snapshot of my options spreadsheet, which I use to help keep track of the options activity. I started with something I saw at both Two Investing and Investment Hunting, and tweaked it a bit since then.
I have no Open contracts at this time.
Notes: Open DTE = Days To Expiration at the time the contract was opened, DOC Price = stock price on Date Opening Contract
Since I started trading options in March, I’ve exceeded my expectations with regard to the options income I’ve generated. As you can see, I’ve collected $1,229.81.
Here’s a breakdown of the options income by month.
Even though I collect the premium for writing the contract up front, I don’t realize the income until the contract is Closed or Expired. If a put option is Assigned, the premium decreases the cost basis of the purchase. If a call option is Assigned, the premium will increase the amount realized in the sale.
I plan to keep trading options as I move into 2018. In addition, I plan to add a Monthly Options Income post here on the blog starting in January. Hopefully, I can continue to steadily generate some options income, and in turn use it to generate even more dividend income by making additional purchases for the Dividend portfolio. I hope you will follow along.
Are you currently an options trader? Writer or Holder? If so, do you feel you’ve been successful at it? What’s been your experience? Please let me know in the comments.
I have been interested in writing covered calls forever. However, I need some serious hand holding as my brokerage UI is not very intuitive. In the mean time I have been looking into ETFs that write covered calls. I am hoping TD Ameritrade is much better in terms of options UI.
Hey DG, I was reading and learning as much as I could for a month or two before taking the plunge. Even now, I attempt to control my amount of activity, and only write options that I can handle if they get assigned. I can’t say my brokerage UI is too exciting, but I don’t know any better since it’s the only one I’ve used. Thanks for the comment!
Hey ED,
good to see, you’re also getting used to write options to increase your income.
I’ve sold a put on UNIT this year and already bought them back. At the moment I’ve one sold put on SBRA. The moment the put is written, I’m opening a buy order at -50% value to decrease the waiting time.
Cheers and good luck to you
-DivRider
Yes, I’m easing into options writing. I’m certainly happy with the results so far, so I’ll continue to work at it. Thanks for the well wishes, and good luck to you as well. Hopefully, we can grow the options income along side the dividend income.
Nice job with the option income. That’s a huge chunk of change for the year! I’ve recently begun selling some covered calls as well. Almost lost my CVS after the tax plan progress as announced on Friday. Just barely kept my contract. Anyway, keep up the great work. I’m very interested in following your progress with your option income!
Thanks, Blake. Hopefully, I can be consistent with generating options income. I had a recent put for CVS, but decided to close it early since I could realize the majority of the premium. Happy to have you follow any progress (options or dividends), and I look forward to getting your thoughts. Thanks for checking in and commenting!
I’ve been using options with my Rollover IRA funds for just over the past year and it’s been great. Over $1.2k for the year is a great start for you. Keep at it and if you have any questions feel free to ask. I’ve been teaching one of my friends about options and it can go from the super simple to the very complex.
Wow, you’ve had a monster year for options income, JC. Congrats. What led to the big jump in 2017?
Thanks for the offer to send any questions your way. I may just do that. Take care, and thanks for stopping by and commenting.
Nothing special in particular. Once I rolled my 401k over to an IRA I had a good chunk of capital and was trying to decide what to do with it. So it’s mainly just a function of capital and pursuing the use of options. Instead of just buy and hold I wanted to see what I could do with that capital to see if there’s a possibility to use option income as a way to supplement my dividends in order to cut down the time to FI. It’s still very much in proof of concept mode, but so far so good.
Hi ED!
Perfect timing as I am starting to read all I can currently about selling option puts.
I want to experiment starting with selling puts since it seems to complement well my dividend investing strategy.
Very nice spreadsheet! I’ll have to create one for sure.
I am a bit confused about the 2 puts you wrote where the strike price is slightly above the current price (they have the small red corner)… how do you know they won’t be exercised right away?
Also are you trading in a taxable or or tax-deferred account? Planning on using a taxable but still debating it.
I plan on doing cash secured. Do you find yourself having to use stocks where the price is not too high so in case of assignment your portfolio is not out of balance? wondering if as a beginner I should select stocks I want where price < defined price, so that no position is above let's 5%…
Thanks
Hello, Elie. Welcome.
Regarding the 2 puts you mentioned, good eye, they were “in the money” at the time I wrote the option, but due to the premium the option holder had to pay for the option, the break even price for the holder was actually lower. Thus, it wouldn’t have been profitable yet for the option holder to exercise the option.
I’m trading in a taxable account. For the puts, I’m only writing cash-secured puts. If I can write puts for a stock that is trading below say $50/share, and generate a decent amount of options income, that’s nice, as I don’t need to set aside too much cash for the put in case it gets assigned… most of my stock purchases are below $5K, so paying that or less for the stock in an assigned put option would not be an out of the ordinary stock purchase. For stocks that trade at a higher price, I really need to make sure I’m comfortable owning the stock should the option get assigned.
Thanks for your answer!
Noticed on last line of your spreadsheet for CVS. Shouldn’t profit be $87? i.e. 100 * (1.10 – 0.20) – $3 … you had a second trx cost right?
Also wanted to make sure… for taxes reporting, do people actively track their options or can people usually rely on the 1099 which most brokers give?
Thanks again
Yes, good catch, Elie. My formula should have subtracted the commission, not added it, so the profit is $87 as you noted. I didn’t notice the formula issue in the previous “Buy to Close” transactions, as those commissions were $0. I’ll plan to update the snapshots in the post in the next day or so. Thanks!
I would think one could rely on the year-end brokerage statement to correctly reflect one’s options activity, but I haven’t received one yet to compare with my own records, as this is my first year trading options. I’ll be interested to see how my brokerage tracks and records my options activity.
What happens when a call is assigned – do you generally re buy the security right away or do you only use these on securities where you want to sell at a certain price?
Hi TITM, I usually write the covered call when I’m looking to exit the stock due to it no longer being a fit for my portfolio, or it being overvalued at the strike price I select. In these cases, I wouldn’t look to re-buy if the option was assigned.
I don’t trade options. But if I did, I would only buy options. Selling options is a poor asymmetric trade. Your gains are limited, and your theoretical losses are unlimited. With selling options, it’s like your making 1 nickel, 2 nickels, 3 nickels, 4 nickels, 5 nickels, and then lose a dollar on the next trade.
Hi Troy, I can’t speak to selling options being a poor trade, but your comment about sell-side gains being limited and theoretical losses being unlimited are true. Trading options is certainly not without risk, on either side of the trade. However, I think the sell side works best for me, where I hopefully obtain small gains more often while attempting to avoid a large loss, as opposed to having small losses on a regular basis while attempting to secure a big gain. Thanks for stopping in and commenting!
Hi ED,
I’ve got to admit – I am not that familiar with options. But after reading your article and comments below it, I am thinking that I should really start looking into them. I guess I should add it to my list of goals for 2018 🙂
Just a quick question – do you need a lot of capital in order to start writing those options or is it similar to buying dividend stocks?
-BI
Hi BI, for writing cash-secured puts you’d need the same amount of capital as if you were buying the stock. Let’s say the strike price is selected to be $50, and the option you wrote is for 1 contract (i.e. 100 shares). In this case, you’d be required to have $5,000 ($50 x 100) in your account, in cash, in the event the option gets assigned. The $5K is tied up (unusable by you) until the option expires, the option is closed, or the option is assigned. If assigned, your $5K is used to purchase the shares at the strike price. If you have lots of open cash-secured puts, then you can see that it would require more cash to have in your brokerage account. Hope that helps.
Thanks for a quick explanation! And what happens if the price does not reach the desired level and contract expires? Do you earn some premium then?
Yes. The premium is actually paid to me once my written option gets purchased by the option holder (buyer). However, I don’t realize the income until the option expires, gets closed, or assigned. The premium can get treated differently from a tax perspective in the U.S. depending on how the option plays out. As the put writer, if the option is assigned, then I reduce the cost basis of the stock I’m buying by the amount I received for writing the put. If the option expires, I report the amount I received for writing the put as a short-term capital gain. If I “buy to close” the put option, I report the difference between what I paid to close the put and the amount I received for writing the put as a short-term capital gain or loss.
Also, forgot to mention earlier, if you are writing covered calls, you wouldn’t need any additional capital. Instead you’d need to own at least 100 shares of the stock for each option contract you write.