Options Selling Strategy – Wk 3 June 2017 (GameStop Inc (NYSE: GME)
Chris Lee Susanto, Founder and CEO, Re-ThinkWealth
16 June 2017
- 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.
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.
Personal Investment Reflection Is GameStop Doomed? I Visited Their Stores in NY to Find Out Chris From RWOA.io, Re-ThinkWealth Content Expert 14 January 2018 My Thesis on Buying & Holding GameStop My average cost of buying GameStop shares for my portfolio is...
Personal Investment Reflection Last day of 2017 - a review of my investment journey so far Chris From RWOA.io, Re-ThinkWealth Content Expert 31 December 2017 Time to be cautious? This year, the stock market rally would have given many investors with a good profit -...
Investing Lessons [Advanced] Here's My Opinion on Bitcoin Chris From RWOA.io, Re-ThinkWealth Content Expert 8 December 2017 What is Bitcoin? Bitcoin is a currency that was founded/discovered pretty recently in 2009 by a person (still unknown) using the alias Satoshi...
Investing Lessons [Basic] What is moat in Warren Buffett's terms & why it's important Chris From RWOA.io, Re-ThinkWealth Content Expert 27 December 2017 Who is Warren Buffett? Warren Buffett is my favorite investor. He also happens to be one of the most, if not...
Investing Lessons [Advanced] GameStop Q3 17 Earnings — Glad Going Against The Crowd Was Right Chris From RWOA.io, Re-ThinkWealth Content Expert 22 November 2017 Almost all the articles in the universe were going against GameStop for these past few months. But I was...
Investing Lessons [Advanced] Re-examining GameStop as a cigar butt stock investing opportunity Chris From RWOA.io, Re-ThinkWealth Content Expert 9 November 2017 Earlier this year on 12 May 2017, I wrote an article on GameStop indicating that it is a cigar butt...
Investing Lessons [Beginners] Valuation Ratios - The Basics Bryan Wang, Re-ThinkWealth Content Expert 28 October 2017 There are two basic forms of valuation ratios - enterprise value multiples, and equity value multiples. What is the difference? Equity value is...
Investing Lessons [Advanced] Determining Value: Why Price Is Meaningless, and Multiples are Informative Bryan Wang, Re-ThinkWealth Content Expert 23 September 2017 One of the typical responses people give when talking about stocks is..."What's the price?" In the...
Investing Lessons [Beginners] 10 Mistakes an Investor should Avoid Benjamin Tan, Content Expert, Re-ThinkWealth 1 September 2017 Every investor has their own investment philosophy and discipline. Each philosophy has its own merit and what is important...
Investing Lessons [Advanced] Value Investing And Behavioral Finance Chris Lee Susanto, Founder and CEO of Re-ThinkWealth 15 July 2017 SUMMARY: Value Investing is inevitably linked to Behavioural Finance Value Investing is a stock methodology practised by many...
Want new articles before they get published? Subscribe to our Awesome Community.