Picking Up Pennies In Front of a Steamroller: Covered Call on $FCEL

According to this article (which I found via googling, “picking up pennies in front of a steamroller”, so take it with a grain of asphalt…), “The term `picking up pennies in front of a steamroller’ is linked to Nassim Taleb, an acclaimed author on randomness and risk, whose books describe an investment strategy that has a high probability to yield a small return (pennies), and a small probability of a very large loss (steamroller).”

I didn’t look further into what specific types of investments Taleb wrote about, but one clear example, at least through the lens of this blog, is writing puts and calls in options trading. We are collecting “pennies” at high probabilities, but once in a blue moon the “steamroller” is going to sneak up on us. Will all the pennies be worth it? Well, that of course depends on how shiny those pennies are and how many you pick up.

Let me tell you about how I just got steamrolled by over $1,100 while picking up $55 worth of pennies. The steamroller was $FCEL. I opened a position on FuelCell Energy on October 8 by purchasing 100 shares at $2.34. I then went on to sell multiple covered calls over the next couple of months at the $2 and $2.50 strikes, proudly picking up $10 to $15 at a time. With a $234 initial investment, each of those premiums represented a 4-7% return!

Things were looking just fine until mid November when the stock price shot up, way past my strike price. The price eventually reached over $10 (and over $13 today)! Had I not had that covered call position at $2.50 strike expiring December 18, I would have been up almost $800. A 336% return! Instead, I got my $55 worth of premiums and $16 in capital gains… a ~30% return.

Lesson Learned?

Well, the short answer is no, I didn’t learn a lesson here. I am still selling covered calls on positions. There is one thing I might do differently with these types of positions in the future.

$FCEL was a pretty speculative play. In fact, my original covered call was an in the money call at the $2 strike. I expected to make about a 6% return after selling for a capital loss and be done with it. I didn’t know if it was going to go up, down or sideways.

In the future, if I’m in a similar speculative play, I could potentially participate in the upside by buying “protection”: buying a cheap, long call at a strike price way out of the money. This would make my covered call a call credit spread. For example, if I had bought a call at the $4 strike, it probably would have only cost me a couple bucks. Sure, my return if the contract expires out of the money would have been those couple dollars less, but I could then have participated in the upside a bit. In this case, if I had a long $4 Call position, that would have been worth over $600 when the stock rocketed up past $10!

Remember, as an option seller you are playing the part of the insurance company selling insurance (put writing), or in this case, the casino (call writing). Sometimes, the gambler is going to win big. That’s OK. In the end, however, the house always wins.

Disclaimer: I am not a financial advisor. This is not investment advice. Please do your own research before investing in anything discussed herein.

Update: Creating my own Ford dividend

Here’s my update on Ford’s dividend: they’re still not giving one!

Since writing my post about creating my own dividend while I wait for Ford to resume theirs, I’ve done just that by selling covered calls on the position I already have in Ford. I have more than 200 shares currently, so I’ve been able to sell two contracts at a time.

Since writing that post, $F price went from $8.80s to almost $9.50 and now has pulled back down to nearly $9 again. We all know volatility is great for options sellers!

Here are the trades I’ve made and the current positions I have open:

Prior to writing that post, I actually had two open covered call positions on $F, one that was right at the money at $9 due to expire on November 20. Rather than risking the shares being called away, I closed that position and sold the December 24 $9.50 Call for a net credit of $.11. $.11 may not sound like a lot, but if that was a dividend payment, it would be the equivalent of an 11.5% yield! I used that credit to buy 1 share of $F for $9.00.

I had another $9 Covered Call position for December 18. I rolled that one out to January 15, this time keeping the $9 strike price. I took in a net credit of $.16 that time (11.9% annualized yield). Again, I reinvested that net credit by purchasing one share of $F at $9.10.

On December 3, I rolled the December 24 $9.50 out again to January 8 for a net credit of $.11 (10.7% annualized yield). I purchased one more $F at $9.26 with the credit.

On December 9, I rolled the January 15 $9 Covered Call (which is now pretty well in the money at this point), out to February 19 for a net credit of $.21 (11.3% annualized yield). I then purchased two $F at $9.43 with the credit. It’s unlikely $F will come down below $9 by February, but I will continue to roll this one out for as long as possible.

As the price of $F continued to tick up, I decided I wanted to try to roll out and up this time. I took that $9.50 January 15 covered call and rolled it out to February 19 for a net credit of $.08 (7.9% annualized yield). Since I didn’t get enough in credit for this one to buy another share of $F, I just pocketed the cash. However, it puts me in a great position to start selling covered calls at the $10 or higher strike price in the future.

Overall, I have taken in $67 of credits, less commissions, by doing this strategy over a fairly short time period. Let’s say that $67 was the quarterly yield amount for holding 200 shares of $F at the current trading price of $9.03, that would be equivalent to a dividend rate of 14.8% ($67 * 4 / (200 * $9.03) = 14.8%)!


I always want to be mindful of what risks I am taking. 14.8% yield sounds pretty good for a savings account, but of course, this isn’t in an FDIC account. This is real money that could be lost. With that said, before beginning options trading, I was OK with the risk of holding $F, at that point, because I thought the reward of the dividend payments and maybe some modest growth was worth it. In that case, I have no more risk than I had prior to selling these covered calls.

On the other hand, I have limited my upside potential. This isn’t a risk per se, but may make the risk I am taking less worth it. Some argue that option selling is the wrong kind of asymmetric risk… limited upside and unlimited downside (although in this case, the downside actually is limited because the stock can’t go below $0, but you get the point). To that, I would ask them would you rather be casino or the gambler? I’ll pick playing the casino every time. In addition, I’ve demonstrated that sometimes you are able to roll positions up to allow for even more upside from the stock. This is often an option so long as the stock hasn’t had an incredible run up in a short amount of time. And if it has, since I have been reinvesting my credits back into the stock, I still get to participate somewhat in that upside.


I do hope that Ford chooses to reinstate its dividend in 2021. There is still lots of chatter over at SeekingAlpha on when that might occur. However, as long as I am able to continue to roll out and, hopefully, up, I won’t be missing it much!

November 2020 Trading Review

November was an incredible month for the markets. The S&P 500 rose 10.8% for the month and hit an all-time high. The Dow Jones’s 11.8% return for the month is the best single month since January 1987!

Because of my option writing (aka selling) strategy, my option trading returns weren’t able to beat the market. However, a large portion of some of my portfolios remain heavily invested in the markets, which keeps me from feeling too much FOMO and giving me the confidence to continue on with this strategy. I’m looking for lots of base hits here, from month to month. Over a long period, I think I can outperform the market, but only time will tell.

For the month of November, my profits from option trading were $2,114. That’s a total portfolio return of 2.3%, which is well below the S&P 500’s 10.8%. My total portfolio value across all accounts – which includes options trading profits, current stock & options positions, contributions & withdrawals for extra mortgage principal payments – was up 10.7%, inline with the markets. Contributions to these accounts were small this month, and $114 was withdrawn, so actual return is probably right around 10%. Remember that the markets were down 2.5% last month, and I generated options trading profits then, too. I closed 71 trades with a win percentage of 91%.

I continue to split my accounts between two strategies. One is to trade mostly credit spreads in margin accounts and the other is to sell cash-secured puts & covered calls (i.e. “the wheel” strategy) in non-margin and IRA accounts. The goal for the margin accounts continues to be to 1) raise cash to increase trading capital and 2) run through my mortgage pay off strategy. The other accounts are reinvesting the profits into stock positions for future growth or passive income via dividend stocks.

Last month almost half of my profits came from my margin accounts despite being just 11% of the total portfolio size. Many of my non-margin accounts had longer holding periods with expiration dates further out, so I realized a lot more profits in those accounts in November than I did in October. As a result, 84% of the profits came from the non-margin accounts this time. The margin account profits were a 3.7% return on total capital (43.1% annualized) and the non-margin profits were a 2.1% return (24.7% annualized).

10% is often cited as the historical annual performance of the S&P 500 since the 1920’s. Every month that I am beating that annualized return with options trading profits (and I crushed it this month with a combined 27.4% annualized return) and my total portfolio value is roughly inline with the overall market when it’s up (which I was within by about 1%), that’s a huge win. Just a couple years of this type of performance will have huge effects in my family’s longterm wealth creation. Let’s see if we can continue!

Biggest Winner

My best trade for the month in terms of profit was a wide Put credit spread on $FSLR. First Solar has been moving a lot over the last few months so the option premiums are really good. My original intent was to sell a cash-secured put (“naked put”), but decided I wanted to take some of the risk off the table so went with the spread instead. On November 13 I sold the $76 strike December 4 Put for a $2.04 credit and bought the $65 strike December 4 Put for $.35, giving me a net credit of $1.69 before commissions. When the stock moved up shortly after, I decided to close the position to lock in most of the profits on November 20. After commissions, I ended up with a profit of $130.36 on a 7-day trade which is an 11.9% return (541% annualized).

$FSLR chart from Stockcharts.com

With the initial credits I actually purchased 1 share of $FSLR for $80.30, which is now up 11.9% to $89.26.

Biggest Loser

My biggest realized loss was $52 on a Call credit spread on $SPY. On November 2 I sold the $348 strike December 2 Call for a $3.57 credit and bought the $349 strike Call for $3.26, for a net credit of $31 (commission free trades with Robinhood). This trade had a 74% chance of profit when I placed it, making the $31 possible gain with a $100 risk worthwhile. However, the market went way against me and I decided to cut my losses early on November 9 for a $52 loss. In hindsight it was the right move because the market just kept going and going, so I saved myself another $17 in potential losses ($100 risk – $31 credit – $52 loss = $17).

$SPY chart from Stockcharts.com

This trade was part of a strategy I coined “ETF Challenger” that I mentioned in previous posts. Essentially I am challenging the ETF to continue moving in the same direction when it made a greater than 1% move. So when $SPY is up more than 1% on the day, I sell a Call credit spread above it near the .30 delta (Investopedia: Understanding Position Delta). If it’s down more than 1%, a Put credit spread. I’m seeing just as many losers as winners on this, so I’m probably going to be ditching it going forward.

My biggest paper loss is actually much worse than $52. I sold the November 20 cash-secured Put on $GOLD at $27.50 for a credit of $.30. At expiration, the stock was trading down at $24.28, so I was assigned the 100 shares at $27.50 and immediately had a paper loss of $292 (+$30 – $2,750 + $2,428 = -$292). Unfortunately $GOLD has continued to pullback to $23.50 currently. I took in a small credit $7 credit for selling a December 18 $28 covered Call, which makes my current paper loss at $363 (+30 +7 – $2,750 – $2,350). I’m going to be patient with this one and continue to sell covered calls above my originally assigned price of $27.50. This position is in an IRA, so when I look at a horizon over many years I expect there to be an instance where I will want the hedge against the market in gold (while $GOLD is actually a mining stock, it generally moves in the same direction as the price of gold).

$GOLD chart from Stockcharts.com

Funding ROTH IRA

My last update for the month of November is that I finally funded a ROTH IRA! My wife and I are still under the household income limits for funding a ROTH, but I hope and expect that to no longer be true at some point in the future. I’m hoping to be able to fund that account with the maximum limit of $6,000 until we no longer qualify.

The obvious benefit of a ROTH over a traditional IRA is that future withdrawals are tax-free. Because of this, I’m hoping to create a stream of dividend income that can grow to a sizable amount at age 59.5. At that point, we will be able to take those dividend payments out each month/quarter and pay no taxes on them! For now, I’m planning to build the portfolio with REITs. My first trade: a cash-secured put on Realty Income $O, of course!

The second benefit I like about funding a ROTH is that, since contributions have already been taxed, they can be withdrawn at any age without penalty. It can essentially be used as a savings account where the principal is always available but the interest can’t be touched until age 59.5. My wife and I are keen on getting more involved in real estate, which means we will have a need for capital at some point in the future. By funding the ROTH rather than putting more money into a traditional IRA or regular 401k, we aren’t giving up control of that money for the next 30+ years.

Using Options to Pay Off My Mortgage Early: Month 2

In my first month of using options trading profits to pay off my mortgage early, I earned a total of $152 and put $73 of that towards my mortgage principal. Over the life of the loan, that $73 is worth a total of $113. My goal as stated in my introduction post was to earn 1% of my initial $3,000 starting principal and put just $21 towards the mortgage principal. I was off to a great start, though my principal was down 16%.

I am very happy to report that my second month was even better than my first: $167 in profit! This is a 6.2% return on capital for the month of November (75% annualized).

Thanks to the overall market’s strong month, my long positions went up and I was able to completely reverse the 16% my principal was down. It is now at $3,240.86, which is 1.3% higher than the $3,200 I have added to the account thus far.

My positions & trades

$AAL, 109 shares at $13.98 ($1,523.73 total principal). Principal is currently up 2.3% ($34.97). I closed a total of four positions for a profit of $34. I currently have a $15 covered call position that I expect to collect another $34 from on New Year’s Eve.

$AAL November 2020 chart from StockCharts.com

$34 is a 2.4% return on my initial principal on American Airlines, well above my 1% goal each month, but much lower than the total portfolio’s returns of 6.2% for the month. The higher returns came from the other positions this month, but I’m happy to hold onto American Airlines for now. I think it will continue to move up and down with the COVID vaccine news, and I plan to ride that wave.

$FCEL, 100 shares at $2.34 ($233.78 total principal). At the close of November, Fuel Cell was trading at $10.18. That’s a 335% return! However, I sold a call option at $2.50, meaning my upside is limited to just $16, or less than 7%. Picking up pennies in front of a steam roller is a common metaphor used for selling options, and I think this is a perfect example of that. I plan to have a future post on this after it all shakes out. It will have a catchy title like, “How I missed out on $784.”

$FCEL November 2020 chart from StockCharts.com

As for the trades, I had a $2.50 call option that I collected $15 on due to expire on November 20. Rather than letting the shares be called away, I decided to roll the $2.50 to the next month for a net credit of $10 (the November contract was bought for $1.55 and the December contract was sold for $1.65). This is basically a guaranteed $10, or 4% return on the $250 principal I would collect if/when the shares are assigned. For me to lose money on this, the stock would have to retreat all the way back below my purchase price of $2.34. I am now so far in the money that I’m not sure I will be able to continue to roll the position for a profit. However, I will still try as long as I can get 2% or so.

$M, no open position. Macy’s is another stock that I missed some big upside gains on. However, I was able to milk it a little more than the $FCEL trade. I closed two trades for the month, netting me $54 on a position size of $617, which is an 8.8% return. When I finally had the shares called away at $6.50 on November 20, I profited $33 on the sale, but missed out on an additional ~$250 since the stock was then trading near $9. The stock is now above $10. I most likely won’t enter $M again unless there is a pullback.

$M November 2020 chart from StockCharts.com

$GPRO, no open stock position. Go Pro was my third position that was called away this month. I had 100 shares at $6.46, and the shares were called at $7 on November 6. You can see in the chart below that there was a big spike that I got caught in.

$GPRO November 2020 chart from StockCharts.com

In total I closed three trades for a net profit of $52. I currently have a $6.50 put due to expire this Friday, December 4. It is only an $8 credit, but that exceeds my 1% goal and was only a one-week contract. I expect to trade more cash-secured puts around the $6-$7 level going forward.

$APHA, no open stock position. Marijuana stocks are going nuts right now and option premiums are juicy. Aphria has been especially volatile due to a recently announced acquisition of Sweetwater Brewing Company. I currently have a $6.00 cash-secured put contract for December 11 that I collected a $17 credit on (2.8%). If I get assigned, I will sell a covered call in the $6.50-$7 range most likely.

$APHA November 2020 chart from StockCharts.com

Extra Mortgage Principal Paid

With $167 in net credits earned for the month, I am setting $53 aside for tax purposes. Last week I said I would be using $GNMA for my “tax escrow.” I have since been enlightened with the “The Ultimate Liquidity Portfolio” (ULP). I will have a forthcoming post on the idea as well as the book How to Stash that Cash by Chris Kawaja. In practice, the ULP can be implemented by putting 88% into intermediate term treasuries (e.g. $VGIT) and 12% in the US total stock market (e.g. $VTI). This puts my tax escrow account value at $99.82 as of this post.

So after taxes, I’m left with $114 that I decided to put directly towards my mortgage principal. With a combined $187 put towards my mortgage principal after two months, I will save $288 over the life of the loan.

Benchmark Comparisons

In my introduction post I identified three different benchmarks I will be comparing my performance to. Benchmark #1 is putting all of my savings from my refinance, plus a 1 month skipped mortgage payment, into a savings account. When I wrote that post I was actually getting 0.6% APY, but it has reduced to 0.4%. Benchmark #2 is putting all of those savings straight into extra monthly payments to the mortgage principal. Finally, Benchmark #3 is simply buying $SPY.

After losing to all three Benchmarks in my first month, I am now well ahead in all three. When considering the value of my principal in my trading account + the monthly contribution of $64.21 and interest into my savings + the difference between the original loan and what is actually remaining this month, my total value is at $3,356 after the month of November a 27.8% improvement over October. That beats Benchmark #1 (all savings) of $3167 by 6.0%, Benchmark #2 (extra mortgage payments) of $3,172 by 5.8% and Benchmark #3 ($SPY) of 2.2%. I’m pretty impressed that I managed to beat $SPY since November was the best month in the market in over 30 years.

I plan to put all these details onto my Using Options to Payoff My Mortgage Early page, including some tables and charts to show my progress from month to month. I’m still trying to format that so it’s easy to read, but hopefully I get that done before the end of the year!

Thanks for following along. I’m very happy with my progress, but it is just early days. Please don’t follow what I’m doing without doing your own research. Trading stocks and options can be risky. I hope you are inspired by these series of posts and my website to learn more about the strategies I am using to trade options and build wealth rather than attempting to follow blindly.

When will Ford resume its dividend? I’m creating my own while I wait

Almost immediately after the COVID-19 pandemic struck, Ford announced that it suspended its dividend. This was unfortunate news for me since I had been accumulating shares over the previous 6 months, having been allured by the 6%+ yield Ford was providing at the time in this yield-starved world we continue to find ourselves in. After wetting my lips with a couple tasty quarterly dividend payments (which I reinvested), the stock tanked from the $12 range to a 52-week low of $3.96 on March 23. I accumulated a few more shares here and there to lower my cost-basis, but without the promise of a dividend, my thesis on the company was broken. I wasn’t in it for the growth potential after all (most car companies that don’t end in “ESLA” have limited growth potential, in my opinion), I just wanted that dividend!

But then the stock started creeping back up as car sales proved to not go to zero as many feared during the varying levels of shutdowns we have seen throughout the US. Around this time I began trading options and immediately found an opportunity here with Ford. I began writing cash-secured puts below the market, using premiums earned to purchase shares and continue to lower my cost-basis, following the stock steady move up past $6, $7 and now $8. With my cost-basis now at $8.86, I’m nearly back to even with the stock closing at $8.75 at the close on Tuesday, November 17. I now find myself at a point where I can’t lower my cost-basis further by buying shares at the market price and I’m not interested in investing more capital, especially while there is still no dividend on offer. I still think there is a bit more upside to the stock, however, so I’m also not interested in selling at this point.

Creating my own dividend

I read this article on Seeking Alpha and was inspired to write this post. Rather than sitting on my hands while I hope that Ford resumes their dividend, I will be selling covered calls instead, essentially creating my own dividend. With my cost-basis at $8.86, I can now sell covered-calls at any strike price from $9 and above and still guarantee a profit in the event the shares get called away. I plan to sell the calls at least one strike price above the current trading price, as long as the premium I receive is above that 6% annual yield I was initially after. I would also like the credit I receive, less fees, to be more than the current trading price so that I can reinvest the credit just like I would with a standard DRIP.

Below is a table of credits I could receive for selling calls at various strike prices and expiration dates. These credits are subject to market conditions, so they change constantly. However, they generally move up or down in unison, so I find this to be helpful in comparing my different covered call options.

With these data points known, I’m leaning towards selling the December 11 $9.50 call.


Like any options trading strategy, there are risks and downsides associated. I’m going to briefly review some of them.

Stock drops

If the share price drops, I get to keep the credit I received up front, but my underlying shares of $F will have gone down. I got a return on my investment, but my principal is now diminished. I get to sell another call after expiration, hopefully at a still-attractive strike price/credit. This is still a risk even if I had not sold a call option and I was just waiting patiently for my dividend.

Shares get called away

If the shares go above my strike price, the shares will get called away at the strike price. Again I get to keep the credit I received up front AND I sell the shares for a profit since I picked a strike price above my cost-basis. If $F rips several dollars higher than my strike price, then I will have some FOMO for not getting to participate in the full upside. Such is the plight of option sellers.


Besides losing some of the potential upside by writing a covered call, I am also increasing my taxable income with every option contract sold. I am doing these trades in a taxable account. If Ford was still paying a dividend, I would be collecting qualified dividends and therefore only being taxed as a capital gain (which 15% for my income bracket). Credits from option trading, however, are taxed as ordinary income (over 30%). While this is a factor to consider, I would rather pay taxes on income that I wouldn’t have had otherwise.

October 2020 Trading Review

Recently I have become an avid reader over at Seeking Alpha. I find the analysis to be good, varied, and I like the more personal takes by the individual contributors than what you typically see on an investing website. It is my current go-to for analyzing stocks. My favorite types of posts at Seeking Alpha are the monthly or quarterly portfolio updates (Dividend Derek’s are one of my favorites). It’s great to see what actions people are taking with their investments and how they are performing. While I am not going to go over each and every options trade I made this month, I plan to go over some of my performance metrics and my strategies.

October was my first full month of options trading. Overall, I was able to net $723.57 across my various portfolios that I am now trading options in. The market was down over the month, with S&P 500 pulling back 2.5%, so to generate that kind of “revenue” in my first month highlights one of the key advantages to being an options trader – there is money to be made regardless of the direction of the market, even if it doesn’t move at all!

I am currently splitting my strategies in two. One is to trade mostly credit spreads in margin accounts and the other is to sell cash-secured puts & covered calls (i.e. “the wheel” strategy) in non-margin and IRA accounts. The margin accounts are focused on building cash to increase my trading capital and the other accounts are focused on investing profits into stocks for future growth or passive income via dividend stocks. Almost half (46%) of my profits came from the margin accounts despite only representing 11% of all my portfolios combined. The profits from options trading in my margin accounts generated a 3.5% total portfolio return (41.4% annualized) and the other accounts generated 0.5% total portfolio return (5.4% annualized). It’s worth noting that the non-margin accounts have the majority of their funds invested in stocks and much less in cash than the margin accounts, making total portfolio return potential from options trading limited.

Going forward I am looking forward to continuing to learn new strategies as well as perfect the ones I am using. I am very happy with my performance thus far, especially in the margin accounts. I anticipate better performance in November in my non-margin accounts as I have more contracts expiring this month than last, allowing me to realize those gains. In the past few days we have seen a huge move up by the market, which is generally good for those accounts currently since I have more short Put positions (bullish trades) than Call positions (bearish trades) currently.

Using Options to Pay Off My Mortgage Early: Month 1

I have been looking forward to making this post since I wrote my introduction post earlier this month, stating my intention to pay down my mortgage principal early using extra monthly cashflow from recently refinancing our home to a lower interest rate. Rather than simply putting the money saved thanks to our new, reduced payment straight into the principal, I am investing the extra cash flow with options, and then using those profits to pay down the mortgage. You can read more about my general options trading strategy I will be using in this post.

I officially began this strategy on October 8. $SPY, the S&P 500 ETF, was trading at $350.10 at the time. It closed the month at $326.54, down 6.73%. Thanks to option trading, I was still able to generate premiums well in excess of my 1% monthly target. I was able to profit $152, representing a 4.9% return on my capital (that’s 78% annualized!).

As I wrote in my previous post, the difficult part of option trading is often preserving your capital. And my holdings were far from immune from the market pull-back. After taking my premiums out to pay down the loan and setting aside a portion for taxes, my portfolio value is actually down 12.9%. I am not concerned (yet, anyway) as my positions are still at a value that I can sell premiums (with covered calls) at strike prices that would still be profitable if I had to sell at expiration and still meet my 1% portfolio goal for the month. I actually already have open positions due to expire next month that will provide at least a 2% return. I will explain the details below.

My positions & trades

O.K., confession: I actually started this journey with an existing long position, rather than $3,000 in cash like I said I would. I had 68 shares of $AAL with an average price in the low $14.XX’s. Since I was already fairly close to a 100 share position (which is required to sell covered calls), I decided to just purchase the remaining 32 shares at $13.07. I actually bought another 9 shares later in the month at $12.31 per share, bringing my average price down to $13.98. Now I can sell covered calls at $14 knowing that if my option contract is exercised, I will get all of my principal back.

$AAL, 109 shares at $13.98 ($1,523.73 total principal). Principal is currently down 19.5% ($297.48). I closed a total of four positions for a profit of $63. I currently have a $14 covered call position that I opened for a $16 credit. After the big pullbacks last week I decided to open a put credit spread at $10.50/$10, taking in a $10 credit for a $50 risk.

After my $AAL position, I had about $1,500 in cash left to work with. I wanted to try to split this among at least two different positions for diversity sake. Rather than selling cash-secured puts to put my capital to work, I decided to purchase 100 shares of these stocks and then immediately sell covered calls on those positions. Honestly I’m not really sure why I decided to go this route. I must have been happy with the call premiums I could get at the time.

$M, 100 shares at $6.17 ($616.76 total principal). Principal is currently up 0.4% ($2.24). I closed one position for a profit of $26. I currently have a $6.50 covered call position that I opened for a $20 credit. Macy’s is pretty volatile right now, which is why I’m able to collect some solid premiums (that $20 credit is 3% of $6.50 for an 8-day long contract!).

$GPRO, 100 shares at $6.46 ($646 total principal). Principal is currently down 8.0% ($52). I closed a total of three positions for a profit of $33. I currently have a $7 covered call position that I opened for a $17 credit. Implied volatility is great on this stock as well, giving me an opportunity to likely sell another intra-month contract at a profitable level (strike price of $6.50+).

$FCEL, 100 shares at $2.34 ($233.78). Principal is currently down 14.4% ($33.78). I closed a total of two positions for a profit of $30. I currently have a $2.50 covered call position that I opened for a $15 credit. I had a couple hundred dollars left and decided to be a bit more risky. Fuel Cell is an alternative energy play from way back in the .COM days (it’s all-time high is almost $7,000 per share!). Both of the positions I closed were actually in-the-money calls ($2 strike price) that I closed because most of the value of the contract was gone once the stock price dipped. If this contract expires out of the money, I will probably look to sell another in-the-money call if I can guarantee a profit (e.g. if I sell a call at $2, it needs to be worth more than $34 to be a guaranteed profit at expiration).

Extra Mortgage Principal Paid

With $152 in net credits earned for the month, I am setting $47 aside for tax purposes. I am currently using $GNMA as my tax escrow account, so I bought $47 worth of it. $GNMA is an ETF that holds mortgage-back securities issued by the government and currently yields about 2%. It is a pretty stable ETF and I feel better about setting this cash aside for next year in something that will earn a bit of interest rather than sitting on the sidelines.

So after tax, I’m left with $105. I have decided to take $73 of that total to put directly toward my mortgage principal. That $73 puts me 254% ahead of my goal for the month and will amount to $113 savings in interest over the life of the loan. It’s a great start!

Why didn’t I use the entire $105? Since my principal had such large paper losses this month, I decided to keep a bit of that cash in my portfolio. I came up with $73 by balancing the difference between my starting principal, deposits, premiums earned, stocks purchased and the tax I’ve set aside.

Benchmark Comparisons

In my introduction post I identified three different benchmarks I will be comparing my performance to. Benchmark #1 is putting all of my savings from my refinance, plus a 1 month skipped mortgage payment, into a savings account. When I wrote that post I was actually getting 0.6% APY, but it has reduced to 0.5%. For comparison this month, I will stick to 0.6%. Benchmark #2 is putting all of those savings straight into extra monthly payments. This one will probably be the hardest to “beat”, but the funds are the most illiquid, which is important to me at this point in my life. Finally, Benchmark #3 is simply buying $SPY.

So how did I do this month? On paper, it doesn’t look so good. If you take my paper losses on my stock positions, add the extra principal payment I made, cash remaining in my portfolio, my $3,000 is actually down to $2,576.41. Had I put the $3,000 into my savings account, it would now be worth $3,001.50. If I had put the $3,000 into my mortgage principal, I actually wouldn’t have gained anything yet since it hasn’t compounded, so it would still only be worth $3,000. Had I bought $SPY, that $3,000 would now by just $2,798.11.

So I’m actually down 14.2% to Benchmark #1 (savings), 14.1% to Benchmark #2 (extra mortgage payments) and 7.9% to the S&P 500. Currently, putting everything into a savings account is the winner! But that will definitely change.

So here is where I rationalize my performance this month. First, a big portion of my paper losses come from those 68 shares of $AAL I had bought months ago that were already down more than 10% when I got started. That alone makes the difference in my performance deficit to the $SPY. The $73 I put towards my mortgage principal hasn’t had any time to compound yet, so that will start to grow and grow, quickly closing the gap to Benchmark #2.

Overall I am still quite optimistic and excited to see where I continue to stack up against these benchmarks. Looking forward to another month of options trading!

Weekly Options Trading Review: October 12 through October 16, 2020

Rather than listing out every trade I made last week, going forward I am most likely going to highlight a couple trades only. Like my options trading skill level at this point, this is all still a work-in-progress and hope to settle into a posting routine that is regular, sustainable and still achieves a level of transparency.

First, the basic numbers: Closed 18 trades for $23.63 profit (78% win rate). Opened 17 trades.

This week I plan to highlight two of my biggest losers to date: a trade in Nike and Tesla. One of which I would probably make again, the other I hopefully have learned something from and won’t make the same mistake in the future.

First is my trade in NKE.

NKE Call Credit Spread (October 16, 2020 $125/126 @ +$.22 Credit)

  • NKE Call Credit Spread (October 16, 2020 $125/126 @ +$.22 Credit)
    • Contracts: 1
    • Max Profit: $22
    • Collateral: $100
    • Max Loss: $78
    • Opened: September 22, 2020
    • Closed: October 13, 2020
    • P/L: -$73

I opened this trade the day before earnings were to be announced. I made a guess that, due to COVID-19, the earnings report would not merit the recent rise in the stock. I guessed wrong, as Nike’s online presence appears to be taking off. In addition to the stock price immediately blowing past both my short and long strike prices, implied volatility had increased as well. So not only did I pick the wrong direction of the move, I also was on the wrong side of volatility. On top of all this, the liquidity in NKE options trading isn’t all that great. If I was set on making a trade, I should have either waited until after the earnings to see what happens, or I really wanted to make a speculative play, buy either a long put or call so that I still have defined risk and I don’t lose to the increased volatility, as well. I’m curious how a basic calendar spread would have done here.

Next is my trade on TSLA.

  • TSLA Call Credit Spread (October 16, 2020 $423/425 @ +$.75 Credit)
    • Contracts: 1
    • Max Profit: $75
    • Collateral: $200
    • Max Loss: $125
    • Opened: September 25, 2020
    • Closed: October 13, 2020
    • P/L: -$97

This one is my biggest loser to date. It is my first time trading a spread with more than a $1 spread, with this one being $2. I took in a decent premium thanks to the high implied volatility, limiting my possible loss to $125. One thing I also was able to do was sell some put spreads below the market, effectively making an iron condor. I rolled those up a bit as I approached expiration, picking up a credit each time to help decrease my total loss. Tesla goes all over the place, often for no apparent reason, which is why we see such high premiums in the option contracts. For that reason, I will chalk this one up as just a loser and nothing more, rather than a bad trade like the Nike one above.

My biggest winner from the week? Not surprisingly: TSLA. I made $25 on a Put credit spread at $388/387 with the same expiration as the previously mentioned Call credit spread. I was actually able to roll this one up closer to the money for an extra $6, putting me at $31 on the put side for TSLA. Not enough to cancel out my loser, but certainly is better than just taking the full $125 loss I would have had if I didn’t react at all.

I Just Rolled My 401k Into an IRA

Earlier this year I left my job to take a similar role at a company with a better location and hopefully a bit more upside growth potential (and a little bit more money, of course!). In just over four years there, my 401k had grown to nearly $40,000. I let it sit there for the past six months while I considered how I wanted to proceed. Once the COVID-19 induced pullback happened shortly after I left, I was reluctant to move it since I would have to close all my positions at a big loss. The account balance dropped down to about $31,000, which was actually a negative overall invested return at that point (i.e. I had contributed more to the 401k than it was currently worth)! I felt the market would recover most of its losses fairly quickly (I was right… and am happy I invested extra cash in our taxable brokerage accounts during that time) and was concerned some of that recovery would happen while I moved funds around. So there it sat for about 6 months.

I considered rolling it into my current employer’s 401k plan so I could keep it all together. The other benefit to doing this is that I would have a larger amount in my 401k to take a loan out against in case I found the right deal I wanted to pull the trigger on and needed some extra resources (I know most of the literature out there says 401k loans are a bad idea, but I’m not considering it to buy a truck or an RV! This would be exclusively for buying assets like rental properties.).

One thing I don’t like about the 401k’s is that I don’t have that many options to invest my money. With an IRA, I can pick and choose my investments. And in the event I get tired of picking and choosing, or I’m unhappy with my performance, I can always just put my money in some ETF’s or just buy the same mutual funds I used to have in my previous 401k.

As I started to see the power in options trading for increasing portfolio returns, I began to lean much more favorably toward an IRA. I considered rolling it over into a Roth, but my household income is still below the maximum income limit to contribute to a Roth, so I still have the option to fund a Roth going forward without paying a large tax bill now for the rollover. If I ultimately open up the Roth, I will definitely discuss my strategies for that account as well. For now, it’s just another traditional IRA. A final point that I think is worth pointing out is that my wife and I still have 401ks that we contribute to regularly, which gives me more freedom to invest this portion myself.

How I am investing ~$42,000

After the bounce back from the COVID-19 panic, my portfolio climbed back, and eventually comfortably surpassing its previous highs, to almost $42,000. This past Friday morning I opened my account and to my delight found the wire transfer was complete! So much cash! So many possibilities. Without going into too many gory details on how I plan to trade this account, here are the trades I made in day 1:

  1. I bought SPY, QQQ and IWM. These are my reference point. I think it will be fun to always check these holdings to get an idea of where I would be if I had just invested all my cash into one of these (or all three) index funds. The bar has been set!
  2. I sold a put on AAPL. As long as I’ve know what a cash-secured put was I wanted to “write a put” on Apple! Finally I have the resources to do so. I sold the November 20 $106.25 put for a $170 credit. I immediately bought one share of Apple at $120.31.
  3. I sold a put on O. REITS are on my wish list for this account, including O first and foremost. I sold the November 20 $60 put for a $128 credit. I then bought 2 shares of Realty Income at $60.56.
  4. I sold a put on SBUX. Starbucks and Apple. A match made in heaven. I sold the October 30 $85 put for a credit of $100. I then bought one share of Starbucks at $88.70.
  5. I sold a put on T. I sold the November 6 $26.50 put for $45 and then, you guessed it!, bought one share of AT&T at $27.46.

I now have two-thirds of my opening balance put to work, with $1,1512 in long stock, $28,677 being held as collateral, and an extra $75 in cash generated. Things are off to a fine start!

$1 Million Portfolio

Here’s my pie in the sky: turn ~$42,000 into $1 million by the time I retire (which we will say will be 30 years from now). Since my wife and I both have 401k’s, we won’t be able to contribute to this account going forward, which means I will have to do all the heavy lifting myself. In order to do this, I need to achieve a CAGR of 11.2% (or 0.89% compounded monthly). A lofty goal indeed. Let’s see what happens!