In 2015, I’ve challenged myself to generate income by selling call/put options.
With that said, here is the 2015 Avrex Options Income Challenge
I would like to make a $12,000 profit in 2015. (i.e. $1,000 per month).
However, the problem with options, is that the resulting returns are highly variable. There is a large range of possible outcomes.
What are my past results in selling options?
2014. n/a. (I didn’t trade any options. Life was too busy.)
2013. -$2,720 (After sustaining loses early in the year, I shut things down.)
2012. +$17,940 (This was a great year. I hope to get back to this level of success.)
What is my options strategy?
1. Sell options for premium.
The purpose of the above portfolio is to generate income by selling call/put options. Sometimes I will sell these options naked. Sometimes I’ll employ an option spread to protect against excessive downside losses. In all cases, I’ll be selling for a credit and a potential profit.
In general, I look for options with volatility. By selling this volatility, I want to gain premium dollars.
In this challenge, I will be sharing my transactions of selling these calls and puts in my non-registered portfolio. (I do buy long calls and long puts in my registered RRSP/TFSA accounts. However, that won’t be included here.) My goal is to demonstrate profits by short selling.
The average contract length in my opening portfolio is 6 months. By initiating contracts that are about 6 months away, I hope to be lazy and not do too much trading in the interim. I’ll just monitor and make changes as I need to . (I do also occasionally dabble in weekly options).
3. Directional bias.
I select options in which I have a directional bias in the underlying. With short contract durations, I can’t necessarily expect the underlying to move in the expected direction in that time frame. However, a directional bias is still important, as I’m still playing the probability that it might move in that direction.
Why do I call this a challenge?
Options are a zero-sum universe. Somebody wins and somebody loses. For every transaction, there are an equal number of dollars won and dollars lost. The theoretical return on options is zero. (To take this further, the return is actually negative, due to commissions.)
The second reason that this is a ‘challenge’ is because I’m openly posting this here for all to see.
This is not a paper account. This is a real account. If my positions crash and burn and I lose a lot of money, you will see it documented here.
There is substantial risk here. Each individual option position contains a fair amount of risk and will fluctuate wildly. i.e. I could have some big winners and some big losers.
Does this worry me? Not overly. I look at this like stock diversification (or in this case, options diversification). By holding many (different) options, in aggregate, I believe that my risk is reduced.
For example, here’s what I expect my individual returns will look like: small win, small win, BIG LOSS, small win, small win, BIG LOSS, small win, BIG LOSS, small win, etc. Aggregated, I expect to have a positive result.
Options as part of a diversified investment portfolio.
I hold low-fee bond and equity index ETFs plus individual stocks in my overall investment portfolio. Options can be a good alternative investment class to add for further diversification of your portfolio.
Did I mention that this was risky?
I did a stress test on my opening account positions.
If all of my underlying stocks crash by 30%, I will lose -$20,000.
If a short term major event happens, that unhinges the market, there’s nothing I can do about it. I accept it. I’ve calculated the probabilities and believe that over the long term (years), I have a positive Expected Value.
If Options are a zero-sum universe, why do you bother?
I believe that options are like insurance. There are many investors that are willing to pay an insurance premium, in the form of an option, to ensure a minimum return on their associated stock positions. I believe that option buyers are paying a higher premium to protect their underlying position, than the expected value. Therefore, I believe I can be profitable, long-term, by net selling option premium / extrinsic value / volatility / time decay.
I hope to update the 2015 Avrex Options Income Challenge spreadsheet regularly. You can access it, by selecting the menu action “Resources – 2015 Avrex Options Income Challenge” or just click on the above hyperlink.
Disclaimer: By no means am I recommending that you do what I’m doing here. Everyone has their own method of investing. The risk profile of my option subset has a particular fit in my overall portfolio. The method of this subset suits my style and I understand the risks involved.