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.
I have made a lot of mistakes in my life. I have been conned, cheated and have lost money in business deals and investments. Today is my birthday so I thought it would be good to summarize the important lessons I have learned so far about […]
Return on Invested Capital is an important formula we should look at when analyzing stocks. ROIC, in short, focuses on analyzing the profitability of a company. What is the formula for ROIC?
Return on invested capital […]
My take on SIA Retail Bond 2019 where I discussed the pros, cons and overall, my thoughts on it. And whether I would invest in it or not. A few good things to say about it, and some things I thought that people should at least be informed on. Instead of using […]
Quick Summary: VIM Club is a Singapore startup I founded with the aim to be the ultimate value investing course in Singapore — and globally. The approach is using exclusive one to one educational lessons […] Who is it for? Complete beginners in stock investing […]
Having multiple streams of income is important in my life. In stock investments, most investors I know get their streams of passive income from capital gains and dividends. Getting premiums/cash flow through selling options is another strategy I often use. But all the serious investors will tell you […]
Warren Buffett said that The Intelligent Investor is the best book ever written on investing. This book contains over 600 pages of wisdom. The wisdom that serves as the building blocks for all value investors. This is The Intelligent Investor Summary. Enjoy! Warren Buffett […]
The quality of our thinking creates the quality of our life. If the above sentence is true, then Charlie Munger must have made plenty of high-quality decisions over the course of his lifetime. Charlie is currently worth about US$1.8 Billion. He is the right-hand man of Warren Buffett who […]
If you are an investor of stocks, you would know that currently (as of November 2018), we are in a (or nearing) stock market correction/bear territory. Before things get worse, here are 5 intelligent things to do during any stock market crash. Here is your playbook for successful investing:
This list summarizes 100+ of the best investing quotes (and most intelligent) of all time. They are spoken from some of the best value investing minds in the industry that I have modeled after for my investing philosophy. Both that have passed away (Benjamin Graham) and those that are […]
Daniel Ek has built a great business with Spotify. Now that it has recently IPO-ed in 2018, is this digital music streaming service of his, invest-worthy? I am sure that by now you would most likely have heard of Spotify before. But I am sure that not many of you know that Spotify was founded and […]
Want new articles before they get published? Subscribe to our Awesome Community.