I had a strategy early this year of getting further into options. Here’s my latest update.
I took some initial steps in my option strategy journey early this year by making a few selective options investments. I’ve largely restricted myself to writing put options on stocks that I’m happy to hold for the longest time.
My strategy thus far has been to write out of the money put options that are longer term in nature. That is, options that have strike prices that are 10 to 15% below current market price with expiries within 6 to 9 months.
The reason that I adopted this kind of option strategy is consistent with my philosophy around providing insurance to the market in the event of a catastrophic event that sends the price of otherwise solid companies down.
My hope is that these are generally events that are temporary in nature. That is, over the long haul the prices of these companies eventually are restored.
For this reason it’s important to select options on companies that are strong, stable and have positive long-term fundamentals and that’s typically what I’ve tried to do. I generally write longer dated options rather than shorter dated options for a few reasons.
Firstly they provide an increased premium than shorter dated options. Additionally, as time goes on, these companies generate higher levels of earnings and become more valuable. Thus the likelihood that an option gets triggered further in time generally becomes reduced.
Really, the way I view writing an option is that I am giving myself the chance to purchase a high-quality stock at a 15% discount to its current market price. Of course, in many instances I won’t actually have the ability to purchase the stock at the reduced price, in which case I have to make do with the option premium that I would receive, which is not really a bad outcome.
The time I started writing options in January of this year was a particular volatile time in the market.
I was able to get good premiums on companies like BP and Starbucks. The first of these option that I have written has now harmlessly expired, with the BP option that I wrote not reaching its exercise price.
I had written a put option on BP $27 for which I received $138 in premium income. As it turned out BP finished well above $35 which made me wonder whether I should have written something a little more aggressive in terms of its strike price.
In fact, the lowest that BP got in fact over the last seven months was $27.01. GE is my next option is due for expiry in mid-September. I had written the GE option at a strike 28. The company is currently trading close to $33. The position is up close to 80%.
I’ve been doing a lot of thinking around my options strategy in the last month or so and have decided to more closely couple my options writing with my longer-term growth strategy.
That is I’m not looking to write options just for the income that they provide, as opposed to putting in place a disciplined strategy of looking to acquire high-quality quality growth stocks that I already own in my portfolio at attractive prices.
That is, what I intend to do is write out of the money options on stocks that I already own in my growth portfolio and that I’m happy to own for the long-term. I’ll actually be satisfied if some or all of these options actually do get exercised, because it is my aim to acquire more assets for in my existing companies, but I want to do that at attractive prices.
Some of the new options that I’ve written are:
MasterCard: $80 a put option on MasterCard with an expiry in September 2017 for which I received $660 in premium.
Under Armour: $35 put with expiry in January 2017 for $255 premium
VWO: $35 put with expiry in March 2017 for $255 premium.
These are all businesses / indexes that I’m interested in accumulating for the next 10 years at least so writing put options with a view to regularly buying them makes a lot of sense to me.
I believe that writing a put will form a far more integral part of how I selectively add high-quality businesses to my portfolio over time.
The reason for this is that put writing creates and instills the discipline of only buying stocks at attractive prices. You don’t get carried away by buying at market as markets roll higher and the ‘fear of missing out’ kicks in.
I understand in many instances that I’ll probably miss out on these buys and that the options will just expire.
However given I already have a good chunk of each of these businesses in my current portfolio that will only mean that my portfolio would’ve shown good appreciation and that I’ll need to continue to be patient to adding these high-quality businesses at the right time and at the right price.I expect to be writing many more put options on my core portfolio positions/ I will keep you updated as to how these progress.
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