Options Selling
Options Selling Strategy – Wk 3 June 2017 (GameStop Inc (NYSE: GME)
Chris Lee Susanto, Founder and CEO, Re-ThinkWealth
16 June 2017
SUMMARY:
- Options are a form of financial derivatives
- Options selling strategy have stocks as the underlying financial instrument
- You cannot sell options in Singapore stock market
- You can sell options in the United States stock market
- You can sell put or call options
- This article will focus on selling put and call options for GameStop Inc (NYSE: GME)
Fundamentals of Selling Options
Many of you in Singapore might have heard of selling options as an income generating strategy. Maybe you have attended an investment course on it or you have read about it somewhere online.
But for the benefit of you who are not familiar with selling options, I will explain it again in this article.
If you would like to find out more about selling options, feel free to email me at Chris@Re-ThinkWealth.Sg.
Options are a form of derivates — financial instruments whose price is derived from other underlying financial instruments — In the case of options, their prices are derived from stocks.
Not all stock market allows options trading. For example, we cannot sell options in Singapore stock market but we can sell options in the United States stock market — which is what I do very often.
We can either buy or we can sell options. For this article, we will be focusing on selling options.
There are two kinds of options — put and call option.
You can either sell covered options or naked options.
When you sell covered put options — which is what I do — you have the obligation to buy the stocks if the price of the stocks is below the price you sold the put options.
You need to make sure you have sufficient cash to buy the stocks (covered put).
An example of selling covered put options:
I see that Apple Inc (NASDAQ: APPL) is currently selling at 143 USD. I want to buy 100 of the stocks — only if it is below 135 USD.
So what I do is that I sell 1 contract of the put option for the expiry date one month from today at the price of 135 USD. In return, I get 200 USD for doing that.
The danger is that if Apple Inc stocks fall to 100 USD one month from now, I still need to purchase it at 135 USD (that is a 35% immediate unrealized capital loss).
However, since I view anything below 135 USD as undervalued, it is alright for me.
When you sell covered call options — which is also what I do — you have the obligation to sell the stocks at the price you sold your call options.
You need to make sure you have the stocks to sell it (covered call).
An example of selling covered call options:
I see that Apple Inc (NASDAQ: APPL) is currently trading at 143 USD. I had already bought 100 the stocks at 135 USD.
So what I do is that I sell 1 call option for the expiry date one month from today at the price of 143 USD. In return, I get 234 USD for doing that.
The danger is that if Apple Inc stocks rise to 171.60 USD one month from now, I still need to sell it at 143 USD (that is a further 20% potential capital gain that I missed out).
However, since I view anything above 143 USD as overvalued, it is alright for me.
My Experience With My Options Selling Strategy
While there are many options strategies in the financial world, what have served me well for the last couple of years is the combination of selling put and call options.
This strategy works especially for a value investor.
Because I have never borrowed money to invest (using margin), I have the holding power to take advantage of market opportunities during unexpected times.
In such opportunities, I receive a high amount of income via selling options and at the same time, leveraging on only buying stocks when my valuation says it is undervalued and only selling when it is overvalued.
AAR (After Action Review): GameStop Inc (NYSE: GME)
I recently sold put and call options for GameStop Inc (NYSE: GME) on a few different occasions.
On 24 March 2017, my put option got exercised and I bought GME at 21.5 USD — I received 0.55% profit in 2 days. It rallied up to about 25 USD and fell back down to about 21.5 USD again as of 15 June 2017. In between, I also received dividends payment of about 1.7% which will be paid 20 June 2017.
It rallied up to about 25 USD and fell back down to about 21.5 USD again as of 15 June 2017. In between, I also received dividends payment of about 1.7% which will be paid 20 June 2017.
After I bought GME, I sold 30 days call option for the strike price of 26 USD — which expired last month for a profit of 0.14%.
On another 4 occasions, I sold puts for GME which ranged from 17 days, 2 days, 1 day and most recently 15 days (not expired yet) — receiving 2.25%, 0.44%, 0.29% and 1.21% in profit.
In Conclusion
GME is a cigar butt investing play of mine.
I do not plan on holding GME for the next 10 years.
Simply because the price of GME is too cheap given their fundamentals, I sold put options on it.
If by end of December 2017, my thesis which says that GME could go up to about 25 USD and above proved to be false, I will sell GME — even at a loss.
Disclaimer: The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.
Important: Please read our full disclaimer.
7 Offline Channels For Leads And Their Real Cost
7 Offline Channels for leads and their real cost So much ado has been made about leads and their real cost. But what are the channels that you, the business owner or salesperson, can use to get more leads? The role of face-to-face event prospecting is in the business...
[Part 2 of 2] Do You Know How To Find The Discount Rates For Stocks’ Valuation?
The Discount Rates Are The Combination of The Asset’s Cost of Debt and Cost of Equity. If you have not read the first part of this article, please read it first here. The combination of the cost of debt and equity is known to most as the Weighted Average Cost of...
[Part 1 of 2] Do You Know How To Find The Discount Rates For Stocks’ Valuation?
Discount rates are used to value stocks and businesses. There are many types of valuation methods that we can use. For this article, information on "How To Find The Discount Rates" is used for valuation using the Discounted Cash Flow (DCF). Understanding The Sources...
Keppel Corporation (SGX: BN4): My Key Takeaways From Attending Their Annual General Meeting On 19 April 2016
As a shareholder, I attended Keppel Corporation's Annual General Meeting (AGM). It was held at Raffles City Convention Centre. I was excited to attend it because it would be interesting to see the facial expressions and the management's ways of handling the questions...
Mobile Telesystems (NYSE:MBT) New Dividend Policy Sends The Stock Soaring!
I extracted the excerpt below from the newly released Form 6K for Mobile Telesystems (NYSE: MBT). Which happens to be my top stock holdings- Check it out! "Moscow, Russian Federation — Mobile TeleSystems PJSC (“MTS”, the “Company” or “the Group” — NYSE: MBT; MOEX:...
Do You Know How To Value Dividend Stocks?
About Valuation of Stocks There are many ways to value stocks- such as the use of discounted cash flows, relative valuation as well as contingent claim valuation. Did you also know that there is a simple way to value dividend stocks? And all you need is 3 steps? The...
8 Financial Terms That Everyone Should Know
1) Income Statement This is where you can find out how well the company is doing on how much money they earned or lost. Official definition from Investopedia: An income statement is a financial statement that measures a company's financial performance over a specific...
Here Is How I Earned $613.75 in 46 Days Using Only 15 Minutes of My Time
My Thought Process Nearing the end of March, one of my top stock holdings, Keryx Biopharmaceuticals (NASDAQ: KERX) announced that they had a positive result from their phase 3 study of ferric citrate for the treatment of iron deficiency anemia in adults with...
Here Is How I Earned 17% Profit in 3 Months
Stock Name Designer Shoe Warehouse Inc (NYSE: DSW) has two reportable segments: the DSW segment, which includes DSW stores and dsw.com, and the Affiliated Business Group (“ABG”) segment. DSW offers a wide assortment of brand name dress, casual and athletic footwear...
[Edited] Here Is Why I Would Not Buy ComfortDelGro (SGX: C52.SI) Stock…
How I Decided To Take A Look At This Company I already have my Indonesian Driving License from around 4 years back and I wanted to convert it to Singapore Driving License. Little did I know that It is not that simple- One of the criteria for conversion is that I have...
Want new articles before they get published? Subscribe to our Awesome Community.