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Summary
This was a busy week for me. A number of trades were closed, all for a profit. Here's the trade blotter for the week:
There are two images because I am trading two accounts and TradeStation will not permit a combined orders retrieval across all managed accounts.
Details
Here is the accounting:
- ETFC 180223P51 was sold on 2/21 and I collected $15 at $1 commission. I bought the position back on 2/23 for $0.05, netting $15 - $5 - $2 (commissions) = $8. The duration was 3 days, inclusive of start/ending dates. ROO was $8 / $5100 = 0.53% and AROO was 0.53% * 365 / 3 = 64%, including all commissions. Barely worth the trouble to do, but I had a great probability of profit when I placed the trade.
- COP 180223P55 was sold on 2/5 and I collected $50 at $1 commission. I bought the position back on 2/23 for $0.05, netting $50 - $5 - $2 (commissions) = $43. The duration was 19 days, inclusive of start/ending dates. ROO was $43 / $5500 = 0.78% and AROO was 0.78% * 365 / 19 = 15%, including all commissions.
- AMAT 180223P55 was sold on 2/21 and I collected $25 at $1 commission. I bought the position back on 2/23 for $0.05, netting $25 - $5 - $2 (commissions) = $18. The duration was 3 days, inclusive of start/ending dates. ROO was $18 / $5500 = 0.33% and AROO was 0.33% * 365 / 3 = 40%, including all commissions.
- SRNE 180316P5 was sold on 2/12 and I collected $100 (4 contracts at $25) at $4 commissions. I bought the position back on 2/22 for $0.05, netting $100 - $20 - $8 (commissions) = $72. The duration was 11 days, inclusive of start/ending dates. ROO was $72 / $2000 = 3.6% and AROO was 3.6% * 365 / 11 = 119%, including all commissions. I like this trade.
- CF 180223P41.5 was sold on 2/21 and I collected $17 at $1 commission. I bought the position back on 2/22 for $0.05, netting $17 - $5 - $2 (commissions) = $10. The duration was 2 days, inclusive of start/ending dates. ROO was $10 / $4100 = 0.24% and AROO was 0.24% * 365 / 2 = 45%, including all commissions.
- PYPL 180223P75 was sold on 2/5 and I collected $100 at $1 commission. I bought the position back on 2/21 for $0.05, netting $100 - $5 - $2 (commissions) = $93. The duration was 17 days, inclusive of start/ending dates. ROO was $93 / $7500 = 1.24% and AROO was 1.24% * 365 / 17 = 27%, including all commissions.
- ITB 180223P39.5 was sold on 2/21 and I collected $10 at $1 commission. I bought the position back on 2/21 for $0.05, netting $10 - $5 - $2 (commissions) = $3. The duration was 1 days, inclusive of start/ending dates. ROO was $3 / $3950 = 0.08% and AROO was 0.08% * 365 / 1 = 28%, including all commissions (note my comment above regarding picking up a quarter that you find on the ground). Factoring my personal time finding, executing, and documenting this trade here I've lost virtual money, but now I've found my "inside number" on what is too small of a trade.
"Red" means that the position is moving against me (paper losses) and "Green" indicates that I have paper profit. I do not put too much consideration into the colors given the amount of calendar days between now and contract expiration for each of the options.
Note: SQM's Average Price is incorrect. As I disclosed in last week's blog (here), SQM was put to me at $55 on 2/16. I sold SQM 180216P55 on 1/18 for $0.95, so the basis should be lowered by $0.94 (to include commission), resulting in a real Average Price of $54.06, not $55.00. Note that I've also sold a call against the position, further lowering the basis (see below). TradeStation does not chain transactions, nor does it give me the ability to chain transactions, so it has no knowledge in the reports of what the true cost basis should be.
I only have three contracts pending for the upcoming weekly expiration on 3/2 and two for 3/9 so feel "light". Total premium collected for the 3/2 expiration is $32 + $28 + $75 = $135 and for the 3/9 expiration is $45 + $80 = $125.
Is this light? Let's look at the total premium collected.
Is this light? Let's look at the total premium collected.
The 3/16 monthly expiration equates to a value of $42*5 + $85 + $115 + $47 + $105 = $562. This means that I've collected $822 with the weekly and monthly premium, will spend a total in $30 in commissions (15 round-trip contracts), and will most likely buy these back for $5 each (total 15* $5 = $75), so will net $822 - $30 - $75 = $717 on a cost of positions of $47,906. This is 1.50% return in total gain, and if we annualize it across the earliest entry to 3/16 (29 days from 2/16), it equates to 1.50% * 365 / 29 = 18.9% on the amount obligated, including commissions and buy-back costs. Note that this is the minimum annualized rate -- because many of these positions have been added since then, and expire BEFORE 3/16, the actual number is between the number from the 2/16 date (18.9%) and yesterday's close (2/23, 22 days), which produces an annualized rate of 24.9% on the invested capital.
Of course, this is with all of these options expiring worthless. There is a considerable amount of water to flow under the bridge between now and 3/16, so this may all be moot.
Another consideration is that SQM has earnings this coming week. I hate holding a position across earnings, although if you look closely, I have both a CC as well as another CSP in place on SQM. The implications of this are significant -- I'm heavily weighted to falling off the cliff below $50. Here's the P/L chart:
Click on the image to enlarge.
Above $60 my profit is capped. Below $50 I fall off at a delta of -2.00: -1.00 for the stock that I own and another -1.00 once the $50-strike is put to me. My current breakeven on SQM, since I sold a call against it, is the previous value of $54.06 (55 strike less the premimum received offset by commission $95 - $1) less the amount received on selling the covered call.
I received $85 less $1 commission on the covered call, so my new basis for SQM is $54.06 - $0.84 = $53.22. Soooooo, I'll make money as long as the price remains above $53.22, but below this I start losing at a delta of -1.00, and once expiration kicks in, I start losing at the -2.00 rate.
To get an idea of what the crowd thinks will happen, it is useful to look at an at-the-money (ATM) credit spread in SQM. The closing price on 2/23 was $58.01. The bid for the 60 strike on the call side is $1.55 and the 55 strike on the put side is $0.90. Together, we have $2.45 as an expected standard deviation move, so we could see (at any time) a move from $55.50 to $60.50 (rounded numbers -- this isn't an exact science). A 2-standard deviation move is call: (1.55+0.35) + put (0.90 + 0.30) = $3.10 each way, so the market thinks that there is only an 15% chance the price will drop outside of $58-3.10 = 54.90 or $58+3.10 = 61.10.
This analysis needs to be done the day just before earnings reporting, but I think my break-even of $53.22 is safe. There is no adjustment that I need to do right now, unless I want to close the 50-strike put and not be exposed as sharply on the down side.
My bias on SQM is that earnings will improve but revenues will drop, causing the stock to drop. I think the 50 put strike and 60 call strike are safe, and if the stock does go over 60, I'll have $500 in gains from the stock being put to me at $55 (($60-$55) * 100).
Takeaways
Of course, this is with all of these options expiring worthless. There is a considerable amount of water to flow under the bridge between now and 3/16, so this may all be moot.
Another consideration is that SQM has earnings this coming week. I hate holding a position across earnings, although if you look closely, I have both a CC as well as another CSP in place on SQM. The implications of this are significant -- I'm heavily weighted to falling off the cliff below $50. Here's the P/L chart:
Above $60 my profit is capped. Below $50 I fall off at a delta of -2.00: -1.00 for the stock that I own and another -1.00 once the $50-strike is put to me. My current breakeven on SQM, since I sold a call against it, is the previous value of $54.06 (55 strike less the premimum received offset by commission $95 - $1) less the amount received on selling the covered call.
I received $85 less $1 commission on the covered call, so my new basis for SQM is $54.06 - $0.84 = $53.22. Soooooo, I'll make money as long as the price remains above $53.22, but below this I start losing at a delta of -1.00, and once expiration kicks in, I start losing at the -2.00 rate.
To get an idea of what the crowd thinks will happen, it is useful to look at an at-the-money (ATM) credit spread in SQM. The closing price on 2/23 was $58.01. The bid for the 60 strike on the call side is $1.55 and the 55 strike on the put side is $0.90. Together, we have $2.45 as an expected standard deviation move, so we could see (at any time) a move from $55.50 to $60.50 (rounded numbers -- this isn't an exact science). A 2-standard deviation move is call: (1.55+0.35) + put (0.90 + 0.30) = $3.10 each way, so the market thinks that there is only an 15% chance the price will drop outside of $58-3.10 = 54.90 or $58+3.10 = 61.10.
This analysis needs to be done the day just before earnings reporting, but I think my break-even of $53.22 is safe. There is no adjustment that I need to do right now, unless I want to close the 50-strike put and not be exposed as sharply on the down side.
My bias on SQM is that earnings will improve but revenues will drop, causing the stock to drop. I think the 50 put strike and 60 call strike are safe, and if the stock does go over 60, I'll have $500 in gains from the stock being put to me at $55 (($60-$55) * 100).
Takeaways
Takeaway on SQM earnings: there is no reason to adjust anything because my break-even is so low (outside of the 2-standard deviation expected move on Monday, 2-days before earnings), and if it moves higher outside of $60, my gains will offset any negative downside.
Your takeaway on the CSP-CC strategies that I am employing is that these methodologies are producing an annual gain of between 18% and 25%, on invested capital, depending upon how you run the numbers.
The other takeaway is that it will pay to be fully invested... or will it?
The risks of this method are significant:
- An exogenous event, such as what occurred to VMW last month, took the share price from over $150 to around $108. It's trading around $126 as I write this. If you sold anything lower than $142 strikes for a February expiration you were put a stock substantially below your break-even. While it's possible to climb out of the hole, you're selling premium for a long time on an uncertain stock just to get back to even (remember, you only want to do this on stocks that you want to hold). If I were fully invested and were put the stock at a deep in-the-money level I would not have any other capital to deploy as the market dropped and stabilized until I unloaded several positions. Having to wait until they recover may mean I miss significant opportunities to repair the damage because I have no capital to do so.
- Option premium is dropping right now, not increasing. I'm being paid less to take the same amount of risk, relative to a higher market volatility. If I have no capital to invest because I'm trying to maximize the gains I can pocket right now, then I cannot move into positions that stand to gain as the market conditions change until I unwrap my current positions.
So, the "other" takeway is NOT to be fully invested -- but to have some cash in reserve so as market conditions change, opportunities can be taken advantage of when they present themselves and in the natural course of order flow, not some manually-forced liquidation of positions prior to expiration or when value in the option has collapsed to near zero.
Right now I have $21,714 sitting on the sidelines, or about 31% of my account capital, waiting for opportunities to present themselves.
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Final Thoughts
Final Thought 1: I was having lunch with a colleague last weekend and he and I were talking about how skeptical we were regarding the gains reported by others from selling CSPs or CCs. This is why I'm being transparent in my numbers to you -- it forces me to go through the math and analyze the rewards as well as the risks, which I do not think others do. If I'm presently achieving 18% annualized gain but am only 69% invested, straight-line math shows 18% * 69% = 12% annualized gain is realistic, for the entire portfolio, if no exogenous events occur over the next year. There is ALWAYS an exogenous event around the corner so my actual gains most likely will be lower. I know this, and I respect this.
Final Thought 2: I alluded to it above, but after reading the published blog, I'm editing and adding this comment to be more explicit. Money management is key to attaining ANY given rate of return. If we have $100,000, and we have a series of alternatives, e.g. the 1-month Treasury risk-free rate of 1.33% (see link here), then we had better be collecting premium that at least beats this alternative, whatever it is, in the time frame of the contract (note that this flies against my comment above regarding "picking up a quarter on the sidewalk"). The key takeaway though is that the timeframe that capital is tied up really impacts this value. For example, 8% yearly simple interest on $100,000 is .... wait for it .... $8,000. Bi-monthly, which is 6 periods, indicates that to attain a 8% simple interest on $100K I must be collecting $1,333.33 every 2 months or I will fail. Contrasting, I have to collect $666.67 every month to hit 8%. If I invest in weeklies that are 2 weeks out I have to make sure that on those bi-weekly contracts I'm collecting $307.69 to hit 8% simple interest. If I'm investing in weekly contracts then I need to regularly collect $153 in premium, week over week. This really sets the minimum account/position size that you can safely trade. It also presumes no exogenous events, and see my note in Final Thought 1 regarding this. More on these rules in future blogs...
Final Thought 2: I alluded to it above, but after reading the published blog, I'm editing and adding this comment to be more explicit. Money management is key to attaining ANY given rate of return. If we have $100,000, and we have a series of alternatives, e.g. the 1-month Treasury risk-free rate of 1.33% (see link here), then we had better be collecting premium that at least beats this alternative, whatever it is, in the time frame of the contract (note that this flies against my comment above regarding "picking up a quarter on the sidewalk"). The key takeaway though is that the timeframe that capital is tied up really impacts this value. For example, 8% yearly simple interest on $100,000 is .... wait for it .... $8,000. Bi-monthly, which is 6 periods, indicates that to attain a 8% simple interest on $100K I must be collecting $1,333.33 every 2 months or I will fail. Contrasting, I have to collect $666.67 every month to hit 8%. If I invest in weeklies that are 2 weeks out I have to make sure that on those bi-weekly contracts I'm collecting $307.69 to hit 8% simple interest. If I'm investing in weekly contracts then I need to regularly collect $153 in premium, week over week. This really sets the minimum account/position size that you can safely trade. It also presumes no exogenous events, and see my note in Final Thought 1 regarding this. More on these rules in future blogs...
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If you see anything wrong in my calculations, please let me know. I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.
As with all my ramblings, you are responsible for your own investment decisions and I am not. Please do your own diligence, and please take ownership for your actions. Nothing I've written here is to be used as a recommendation to buy/sell any security -- you need to do your own work. I'm simply giving you a detailed glimpse into my thinking.
Regards,
pgd
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