Realizing that retirement is not so far out anymore and that I need to start working on finding ways to generate extra income, I have explored several ways to earn more money.
I have already traded stocks for many years, but not very actively. Until recently, I never looked at options since they looked too exotic and complicated.
Until one day in January this year, during a search on the Internet, I downloaded a PDF on options trading for beginners.
I started taking free courses, watching videos, and reading articles, blogs, and books on options trading. And I became instantly addicted.
I tried out paper trades, used option screeners and created watchlists, drafted a first plan and strategy, set up a trading journal format Excel sheet to track trades, and subscribed to Tradingview, Barchart.
As of April this year, I have started doing my first small options trades using tastyworks as a platform. I felt confident enough to dip my toe into the murky waters of options trading.
I gave myself another three months, up to and including June, to test and develop my skills in options trading and further refine a plan and strategy. As of July, I want to start tracking all my ideas, trades, thoughts, and sentiments related to my options trading.
My goal is to use this WordPress site as my trading journal. At the same time, I travel the world and enjoy life. And blue skies! I will have to see whether this is the best way to earn a passive income.
Preparations, set-up, and research
I have been doing a lot of research into the right options trades. Especially in this somewhat choppy market and uncertain situation with a war going on in Ukraine, this is quite hard. Success in learning options trading in a bull market is much easier than knowing how to trade in a volatile environment.
In addition, I have set up goals that have much to do with how I want to live a good and (also financially) healthy life when I retire and how options trading can help me achieve this.
I have been preparing in two forms:
Long term
- Set up a trading journal or option playbook (which is this blog/website and Excel sheets I will use)
- Create and refine a trading plan and strategy
- Select/manage (a) broker(s): I am working with tastyworks
- Set an options trading account budget: I have started with $6.000, and ‘invested’ $1.500 as from April this year learning the ropes (well, making beginner mistakes that is), so $4.500 left
- Create a standard weekly trading schedule
- Select a limited number of (e.g., mostly short premium) option strategies
- Follow other options bloggers (e.g., optionsbydamocles, tastytrade, SMB)
- Follow weekly webinars on various options’ strategies
- Set up matrices for general market-awareness
- Set up live data watch lists: tastyworks, Barchart, TradingView
Short term
- Update market news and sentiment
- Review trades each week
- Set up a trading schedule for the upcoming week(s)
- Select and stage possible options strategies
- Set and confirm entry and exit rules
My first options trades until today…
Based on the online courses, videos, books, and articles I read about options trading before starting with options trading, I focused on defined short premium option strategies, mostly with bull credit spreads and some (short) iron condors.
The first was a bull put credit spread SQQQ 31/30, expiry 20 May 2022. This was a very good start with this first options trade; I gained some money here when I closed it.
The second one was UNG; a deep OTM bear put debit spread UNG at 12/13, expiry also 20 May 2022. This was a mistake because I was not yet proficient with how to use the tastyworks platform. In rolling the strikes of a pure put credit spread down, I managed to move the short strike under the long strike. Thus creating a deep OTM pull debit spread. It only cost me a few dollars.
I am still getting used to the Tastyworks platform, and I have to admit that the second one was a real mistake. I thought I was entering a deep OTM (out-of-money) bull put spread. Since UNG is quite bullish, although all signals say it is overbought. I clicked the sell put leg one time too much down, and it became a bear put debits spread. I am now going to see what happens with UNG. SQQQ and MRVL are bull put credit spreads, where I took more risk with MRVL by selling the put significantly (too?) close ATM (at-the-money).
The third one was MRVL 62.50/60, again a bull put credit spread, and again the same expiry date. This one quickly went into ITM, so I promptly closed it long before its expiry. Too early and without having any exit strategy. I lost $45 there.
The trades after that in AMD, DAL, GDX, HAL, MRVL, and XME ended in considerable losses. I had a lucky stint with Twitter and (utterly irresponsibly) did an iron condor with SNAP just before earnings and gained $54! RIOT was deepm in OTM but recovered wonderfully and is now showing a nice profit, but I have to close the positions this week since on 19 August there will be earnings.
So, my first options trades until today….
… have not been a big success …
I already have had a rough ride in this bearish market and lost money.
As of April in what I consider to be my ‘test phase’, I traded with 14 symbols in a mix of bull credit spreads and (short) iron condors and one naked short put (RIOT at $4: I did’t mind getting 100 of their shares because I still believed RIOT would recover and in August now I can confirm it did).
I started with over $6,020 and lost $1,473 P/L YTD (realized loss of $ 1,776 plus unrealized gain of $303), in addition to $135 in commissions and fees I paid. So my net liq is today $4,412.
My Cash balance is now $4,841 ($4,841 -/- $4,412 = $429 net liqs for the three positions open).
Cash: Cash is the current cash balance in the account. Your cash value will be a negative number if you are borrowing money (or on margin). Cash is the sum of all the debits/credits in your account. Source: Tastyworks
Three positions are still open: FXI, GDXJ and RIOT.
Today my P/L YTD is -$1,473. This does not include commissions and fees ($135). An amount of -$1,776 was already ‘realized’ (in this case, lost). The unrealized remainder of this amount (so $303) is mainly due to RIOT. The other two are an ITM bull put and iron condor I need to manage.
P/L Realized: This figure displays realized profit/loss. In other words, this is the resulting profit/loss from closed positions. This is a relatively static figure and should only change when positions are closed.
P/L Open: This figure displays the current profit/loss of any open positions in an underlying. This is a dynamic metric and is marked to mid-price.
P/L YTD: This figure, as its name indicates, displays profit/loss for the year-to-date. Its value is arrived at by way of the following simple formula: P/L Realized + P/L Open = P/L YTD. P/L YTD is a relative number that measures your P/L from the beginning of the year. Additionally, P/L YTD is based on the closing mark of any position held from one year to another. So, if you held position(s) into a new year then P/L YTD will base on the closing mark of the previous year. Remember, P/L YTD is a gross figure and does not factor in commissions and fees
Source: Tastyworks
My Net Liq is $4,412 today.
Net Liq: Net Liq is short for “Net Liquidation Value.” Net Liq for your account is the current value of the account. Source: Tastyworks
I would gain $303 of today’s Cash value if I would liquidate all my positions today.
$6,020 starting capital -/- $1.776 lost = $6,442 cash
So, status today: 24% trading loss ($1,473/$6,020), and I paid an additional 2% for commission and fees.
The RIOT position I have still has extrinsic value, but the short strikes of the GDXJ and FCX positions are ITM and therefore have negative extrinsic value. The OTM strikes are purely made up of extrinsic value.
Extrinsic value
Time & IV changes can impact extrinsic value pretty drastically. At the money (ATM) options are closest to the stock price, and have the most extrinsic value. Extrinsic value is highest in ATM options and trails off as you go further OTM and further ITM.
Extrinsic Value (EXT): Extrinsic value is the time & volatility value of an option. Regardless of whether your option is in the money or out of the money, there will always be extrinsic value in the option before expiration. Theta takes this value and spreads it out over the options expiration cycle. It is important to note that theta is not a linear value, meaning it grows exponentially as expiration nears. Extrinsic value is inherent in all option contracts and has different implications depending on whether you are buying or selling contracts.
When you buy an option, the extrinsic value has a negative effect on the option’s value due to theta. Theta is a negative number and gets larger as expiration nears.
When you sell an option, extrinsic value has a positive effect on an option’s value. Theta is a positive number and gets larger as expiration nears. If the trade moves against you and starts getting closer to your short strike, the EXT value will also increase.
From a portfolio perspective, extrinsic value refers to the amount of money you stand to make in a specific expiration cycle if all short premium trades expire worthlessly.
Source: Tastyworks
The total Extrinsic Value left in my positions is now at 114 (again mainly due to RIOT).
If this happens, the ‘theta’ becomes negative (to be explained further in one of my next posts on ‘option Greeks’), and that same extrinsic value decay will work against us. The extrinsic value will be shown as a negative number in this situation.
Learning from beginner mistakes in options trading
Of course, I can blame the market, the Ukraine war, COVID, and bad advice on Internet; the trades are all try-outs, but that would be too easy.
Since April, I have made many beginner mistakes:
- Starting without a completed trade plan or trade entry- and exit strategies
- Creating unrealistic trading goals
- Having a clear and realistic understanding of how you can generate income with options trading
- Wasting too much time on the thousands of trading ‘experts’ on the Internet trying to sell courses
- Not taking world geo- and economic events into account enough
- Forgetting to check the market before the trades
- Not basing my trades on VIX and stock implied and other volatility (changes)
- Not choosing an appropriate set of stocks or ETFs with the right characteristics
- Selecting stocks or ETFs of companies, I don’t know or didn’t investigate enough
- Selecting stocks or ETFs that are not liquid, are ‘hard to borrow,’ or have too wide bid-ask spreadsKnowing too little about the ‘Greeks’ and the maths behind options trading
- Choosing the wrong underlying
- Constructing the trade in the wrong way
- In position sizing, increasing the number of options instead of widening the spread
- Not respecting the rules for the contract duration
- Focusing too much on too few defined risk option strategies
- Disregarding the Greeks (especially the ‘delta’)
- Making the wrong directional assumptions
- Not correctly using technical and other analysis to enter trades
- Having too many technical indicators and not understanding what they mean
- Not managing the trades correctly
- Letting trades run up too long and or to the expiry
- Entering trades incorrectly in the Tastyworks platform
So, in summary, a total lack of discipline, following a plan, and having a solid strategy.
And probably, I have made many more bloopers that I can add to this already extensive list. Let’s call it ‘learning on the job.’
The good news is it also forced me to learn ‘ on the job ‘ how to adapt to extreme circumstances faster. So I see the money lost as ‘tuition fees.’ But I have to get my act together quickly.
I did some things well (I believe). I set up trading goals and the first set of rules related to position sizing, portfolio capital allocation and management, and constructing a trade.
As much as possible I avoided stock/ETF dividend and earning dates, except for a small experiment with SNAP.
Finally, to reduce risk I traded only with defined risk options strategies (except for a makes short on RIOT because I don’t mind to won the stock at this low price).
In a future post, I will show you how I set my trading goals.
