Roth – Wealth from Options

January 2021 Trading Review

The market in January had a strong start before Game Stop mania threw a wrench into things. I actually participated in the craziness in a very small way. I sold a call credit spread that was WAY in the money for a few days (like… $300 in the money!) Since it was a defined risk trade I had no problem waiting it out. In the end I was probably the only person on that $GME trade that ended up with a $10 profit. I think most were were up or down 100x, 1000x or more than that. As the dust began to settle, $SPY retreated a bit and closed the month down 1.0%.

My total profits from trading were $2,623.63, another best ever month by 13%! That was a 1.5% total portfolio return from options trading. Not bad for a month where the markets were in the red. 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 0.6%. I did contribute $6,000 into my ROTH IRA in January, but that isn’t included in the returns for the month. In January I closed 71 trades with a win rate of 96%*.

(* That win rate is a bit misleading because it doesn’t count positions that were assigned as losses. The only way I get a loss according to my tracking is if I close a position with a negative net credit. I took assignment on 3 trades. If those 3 are counted as losses, my win rate comes down to 92%.)

I continue to split my accounts between two strategies. One is to trade mostly credit spreads and naked puts 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. As I wrote in my January update of my mortgage pay off, I am starting to do some “poor man’s covered calls” as well. 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.

Biggest Winner

My favorite part about writing these monthly reviews is looking back at what was my biggest winner and loser. Since I am doing so many trades in a month, each trade is closed and put behind me quickly. It’s only because I keep detailed records of each trade that I can look back and learn what’s working and what isn’t.

My biggest winner for January came from a poor man’s covered call on $AAPL. On January 26th I opened a $100 strike June 2022 Call LEAP contract for $49.50 ($4,950 total). I’m bullish on Apple going higher. This contract gives me almost 18 months to be right and gives me a break-even of $149.50. I then sold a covered call at $152.5 strike for the January 29 expiration for $1.85 per contract ($185 total). Due to the frenzy around earnings (which Apple killed by the way with quarterly revenues topping $100 billion!) the premiums were pretty rich even for such a short dated contract. I closed it two days later (one day before expiration) for a net credit of $178.34. This was all in an IRA, so it’s all mine to keep!

I will continue to sell covered calls at $150 or above to generate income from that LEAP contract and hope I don’t get assigned. If I do, however, I know I will make a profit because my break-even is at $149.50. I may occasionally sell credit spreads if I think there is a chance the stock price could blow past my covered call. Selling a spread is more likely to allow me to roll the position up when I move it out because of the long call as extra “protection” allows me to widen my spread.

You can see my LEAP is in the red at this point. With 16 months remaining in the contract, however, I’m still feeling pretty good about it.

Biggest Loser

I’m going to consider a cash-secured put that I was assigned at expiration on as my biggest loser for January. It was a January 29 short Put on $SBUX at the $99 strike that I sold on January 7th. I collected a $1.25 credit ($124.34 net commissions), but was assigned while the shares were trading at $96.79. Therefore, at assignment, I was down a net $96.66 ($1.2434 – $99 + $96.79). Looking at the chart below you can see I had a comfortable margin of safety until it really dragged down just before expiration.

Fortunately, I happen to think Starbucks is a fantastic business and was not worried at all by the assignment. I immediately sold a covered call that, as you might expect from looking at the rebound at the beginning of February, is now in the money and looking like I will get assigned in the other direction now! This one was also in an IRA so no tax-man to collect on all these trades.

2021 Goals

Another great thing about writing these blogs is that they hold me accountable. In my December review I posted some goals for the year. Here’s a look at how they are going so far:

Contribute $6,000 to my ROTH IRA. CHECK! I already funded my ROTH IRA in the first few days of the new year. Now the trick is to put those dollars to work!
Build $100/month in passive income, primarily from dividends. I want to finish 2021 with a forward looking $100/month in 2022. I am now tracking my dividends separately from my options trading. I collected $55.97 in January. The biggest contributor to that was a quarterly dividend from $SPY.
$10,000 in non-W2 income. It will take $833 per month on average to hit this. Adding the $55.97 from dividends and $751.86 from my taxable accounts puts me at $807.83. Very happy to be at 97% of the monthly goal in January!
Increase our 401k contributions. I have increased my contributions to hit the maximum $19,500 by the end of the year. My wife’s contribution has remained the same so far. We’ll see if we are able to maintain that throughout the whole year, but we are off to a great start.
Increase net worth by 30%. A 30% net worth increase for the year will take a 2.21% compounded monthly return. For the month of January our net worth was up 2.51%. So we’re on track! As I wrote in my post where I set this goal, an increased savings rate, at this point in our accumulation phase of growing our wealth, has a dramatic impact on our net worth. As we grow our net worth we will be more subject to market conditions (assuming we have a decent amount of our wealth in the stock market, for example).
Reduce mortgage length by 1 month. Not there yet, but we are chipping away at it with another $35 extra principal made from my mortgage pay off strategy. We currently would need to make another $610 in principal payments to reach that goal.

That’s a wrap on January. We are off to a slightly slower start than January so we’ll see if I can close the gap for another record breaking month. If not, no sweat. I’m trying to stay on a consistent path of progress and not looking for home runs.

Disclaimer: I am long $AAPL, $SBUX and $SPY. I am not a financial advisor. This is not investment advice. Please do your own research before investing in anything discussed herein.

December 2020 Trading Review

The market had another strong month, though not quite as great as November. $SPY was up 3.3% in December, closing on New Year’s Eve at an all-time high. If I had told you there would be a worldwide pandemic and most of the world would shut its doors in 2020, I bet you wouldn’t have guessed the S8P 500 would be up more than 16% by the end of year? Crazy.

Since I’m just a few months into this blog, it doesn’t make sense to have a big yearly review of my performance in my accounts. I will review some changes I made this year, what I plan to do going forward, and some goals. But first, let’s wrap up December!

For the month of December, my total profits from options trading were $2,320.73, my best month yet and nearly 10% more than last month. That’s a total portfolio return of 2.1% and below the market’s 3.3% for the month. However, 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 3.6%, just edging out the markets performance. The portfolios had net contributions of $246.30 for the month. I closed 69 options trades with a win rate of 97%*.

(* That win rate is a bit misleading because it doesn’t count positions that were assigned as losses. The only way I get a loss according to my tracking is if I close a position with a negative net credit. I took assignment on 5 trades. If those 5 are counted as losses, my win rate comes down to 90%.)

I continue to split my accounts between two strategies. One is to trade mostly credit spreads and naked puts 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.

Biggest Winner

My biggest win of the month, and ever by total profit, was a cash-secured put on $LOW. Lowe’s has shown to be very resilient during the COVID shutdowns thanks to many people taking up home improvement projects (myself included! In fact, I swiped my Lowe’s credit card countless times in 2020). There was a big pullback on November 9 and I decided to open the December 18 cash-secured put at the $150 strike for a credit of $3.75. At one point I was in the money, but held my ground and let it ride, knowing that if I was assigned I would be happy to own $LOW at $150. About a week before expiration the stock jumped back up and I took that as an opportunity to close the trade for a net credit of $340.68, a 2.3% return (25.1% annualized).

Biggest Loser

My biggest loss was on Chinese EV company $NIO. The loss was only $15, and looking at the chart below, would have been a winner if I had held until expiration. It was a Put credit spread for December 18 expiration at the $41/$40 strike. I opened the trade on December 9. The stock started moving against me, and rather than holding the line, I decided to roll out one week and down a bit. I also increased the width of the credit spread, allowing me to bring in some credit for this trade. I ended up with the December 24 expiration now at the $39/37.5. Once the stock began moving in my direction, I decided to let it go and pocket a $31 profit. So net was a positive $16. Not bad for my biggest loser!

My biggest paper loss by far was on $FCEL as I wrote about here: Picking Up Pennies In Front of a Steamroller: Covered Call on $FCEL. At expiration, I was “down” $680! Because this was a covered call, it is more of profits missed rather than an actual loss.

I had an actual paper loss due to an assignment on $PFE at expiration. I had a cash-secured put at the $41 strike. At expiration, $PFE was trading at $37.68, so the paper loss was $332 ($41-37.68). I did collect $102 in credit, so net is a loss of $230. Pfizer is obviously a very strong company and am not worried holding a long position. I will sell covered calls at above $41 and collect premiums until I get assigned. Currently I have the February 19 expiration $42 covered call for a net credit of $64. If I hold it until expiration, that is a 9.2% annualized return. In addition, Pfizer currently pays a dividend of ~4%, which I will collect until the shares are called away.

Looking forward to 2021

In my first few months of options trading I’ve had some really great success. While I’m not about to retire from my day job and go YOLO on selling options, I do see potential to make this sort of a side hustle. One thing I am realizing, and one of the things I am drawn to, is it is not at all a passive form of investing — at least not the way I’m doing it! I do, however, believe that passive index investing is a great strategy for building wealth and that is what my wife and I are doing in our 401k’s.

With that said, here are some of my investing related goals for 2021 (in no particular order):

Contribute $6,000 to my ROTH IRA. I opened my ROTH towards the end of 2020. With $12,000 in the account I should have some good options for… options trading.
$10,000 in non-W2 income. This includes profits from options trading, dividends, interest, etc. only in my taxable accounts. This is pretty aggressive, and definitely a stretch goal. Last month was my best month of option trading profits yet at $620 for the month in those accounts. I will need to average $833 per month.
Build $100/month in passive income, primarily from dividends. Again, this is in my taxable accounts. The goal isn’t to have $1,200 in dividend income for the year as I think that is too aggressive for me at this point, but to be averaging $100/month as I go into 2022 (or $300/quarter since most stocks pay out quarterly). I haven’t added up all the numbers, but I was probably around $60/month in 2020. I might start including dividend income in my monthly updates.
Increase our 401k contributions. We certainly won’t be in a position to max out both of our 401k’s this year, but I’d like to get there over the next few years.
Increase net worth by 30%. This one is also a bit of a stretch goal. As we become more invested each year, net worth increases will become more subject to market conditions and less due to our savings. We benefited from being able to put more into the market in March and April of last year, and it’s unlikely we will have another opportunity like that. But who knows! We ended 2020 up 32%.
Reduce mortgage length by 1 month. As a part of my mortgage pay off strategy, I’m hoping to be able to pay enough towards the principal to reduce the length of my loan by one month. As of this month, I need to put another $643 towards principal to accomplish this. At my current rate of monthly progress, that would take less than 6 months to achieve. However, I’m not putting quite as much directly towards the mortgage as I did the first two months. In the long run it will “pay off”, but may make this goal more difficult to achieve in 2020.

Onward to 2021!

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).

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).

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).

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.

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:

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!
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.
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.
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.
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!