How to Use Options Instead of Stocks in the Stock Market
Selling Put Options
In the world of stock market investing options selling can be used as one of the best strategies in place of buying stocks. The strategy is to sell puts against one’s cash position instead of investing the money in company stock. Perhaps the best way to explain this is to illustrate an actual experience I had many years ago.
In 2013 I was approached by an investment club and was asked if I could show them the exact methodology of how to use options to improve the returns on their various stock holdings. They asked me to show them how the technique of selling options will increase their investment returns over a given period of time.
They asked me to do my trading using options following their stock selections, i.e. on the same stocks they are investing in. The request was posed to me in such a way that it appeared to be more of a challenge than a serious request for assistance.
Just like many thousands of stock investors they viewed options trading with much skepticism. They were still with the mind-set that options trading is extremely risky and should be avoided. The club members expressed serious doubts that I could do better than them and wanted to see actual proof of my being able to outperform them.
I accepted the challenge and the contest was on.
The plan was that I would follow the stock they selected to purchase but I would be using options in most if not all my trades. I would only buy the actual stock if it became absolutely necessary as a consequence of my options being exercised or assigned. It was agreed that we were each to start with the same amount of cash investment. They would use their cash funds to buy stocks while I used mine to trade options on the same stocks that they purchased. I would confine myself to trading put options all the way and only get into stocks when absolutely necessary.
After a given period of time, we would compare how each of their stock selections performed against my option trades on the same stocks.
Our trading adventure lasted some nine months from August 2013 to June 2014.
The club's total portfolio of selected stocks ended up with a net loss of $4,849.
I generated a total net profit of $698 on my portfolio trading put options on the same stocks they selected.
Here is a summary of our trades:
CLIFF NATURAL RESOURCES (CLF): In August of 2013 they purchased shares of Cliff Natural Resources at a price of $22.82. At the same time, I sold put options on the stock and continued trading options (buying and selling) for as long as the club held on to the stock. In December of the same year, they liquidated their holdings at a price of $24.55 for a gain of $865. They received a total of $225 in cash dividends raising their total profit to $1,090. Per agreement I had to liquidate my options positions when they closed their stock position. My net profit was an astounding $2,304 after commissions/fees.
WESTPORT FUEL SYSTEMS (WPRT): In the same month as above the club bought shares in WPRT at a price of $28. I followed by selling put options on the same date. Shortly after our entry into this security the stock started dropping and continued its downward trend until April 2014 when the club decided to cut their losses and liquidate their position. The price was then at a low of $13.77 with the club absorbing a total loss of $7,115. No dividends were paid by the company. I too took a loss of $3,545, a much lesser loss than they did.
VANECK VECTORS GOLD MINERS (GDX): The investment club bought into this ETF in December of 2013 at a price of $20.95. I followed suit by selling put options on the same date. They held the ETF for five months and in May 2014 they liquidated their position at the price of $23.39. Including dividends of a measly $95 their total gain amounted to $1,315. I didn’t do as well with a gain of only $524.
SPDR S&P METALS AND MINING (XME): The club bought into this ETF in August 2013 at $37.19 and held it for ten months until June 2014 when they closed the position at the price of $38.70. Their total gain for the ten months, including dividends, amounted to $1,018. My options trading produced a total gain of $1,439.
ISHARES MSCI EMERGING MARKETS (EEM): This is another ETF which the club entered at a price of $42.06 in November 2013. They kept the stock for only four months and sold out in March 2014 at a price of $39.38 for a total loss of $1,340. They received dividends of $183 thus reducing their loss to $1,157. By comparison, my options trading sustained a small loss of $24.
Total final tally: Investment Club -$4,849; Options +$698
Needless to say, the investment club decided overwhelmingly in favor of adding puts and calls in all their stock positions.
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© 2018 Daniel Mollat