SUMMARY:

  • 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)

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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.

In Conclusion

GME is a cigar butt investing play of mine.

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.

 

Disclosure: I am long on GME. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. 

Disclaimer: The information provided is for general information purposes only and is not intended to be a personalised investment or financial advice.

Important: Please read my full disclaimer.

Further Reading:

UPDATE: Sold Off All My Stocks In Mobile Telesystems (NYSE: MBT) And This Is What I Learnt From It

[Edited] Apple Sued Qualcomm. Here Is Why I Bought It.

CHRIS LEE SUSANTO

CHRIS LEE SUSANTO

Founder

Hi, my name is Chris and I am the founder of Re-ThinkWealth. A blog that focuses on Value Investing and Options Selling.

Since early 2015, I manage money for my family and invests it in Singapore and United States equities and options achieving above market return.

I use Value Investing and Options Selling strategies used by Warren Buffett (World’s richest investor) coupled with the core theory of inversion. Inversion meaning that in every investing idea, we have to scrutinise on why it would fail.

This will result in us being more conservative, and being conservative is the key to protecting and growing wealth in the long run.

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