GDRX - Q2 2023: Option Strategy Simplification Working

2023-07-26 08:00:00 ET

Summary

• Regular readers will remember I was simplifying my approach to writing options this quarter. This article gives explanations on how that is working (very well).
• I also review each trade and how they did, plus listing all my open option positions. Trades are listed by strategy execution style.
• I close by covering where I am now in my option strategies and plans for the current quarter. Lower market volatility is making it harder to earn high option ROIs.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

During the first quarter, I decided to do all my CSP writing trades only in my Roth IRA, no longer in my Regular IRA or my taxable account. This eliminates my trying to calculate my overall CAGR, no simple task when there are open trades across the quarter end. My return will be supplied by Fidelity going forward and incorporates all position changes and any cash flows. I am still writing CSPs instead of using CDs and a few Covered Calls in my taxable account and those trades are listed in the Other Option Activity section.

I listed all the option trades in sub-groups based on the strategy behind their usage. In the Performance section, I summarized how my new approach is coming along. That strategy was outlined in my last quarterly summary article .

Factors effecting option premiums

The stock's volatility and market interest rates (less so) are two important inputs into the Black-Scholes option pricing model . For the math wizards, the Call formula is:

This is how both have moved over the past decade.

The VIX index is approaching the low levels seen prior to COVID. Barely offsetting that in terms of driving option premiums, is the hike in interest rates.

Author's note:

All the ROIs shown are annualized since that is how most investors relate to a trade's success/failure. Achieving those ROIs becomes harder the shorter the position was open. Also, option trading is not for every investor as the risks are different from stocks and bond trading and even between the different types of option trades. I talk more on that under Final thoughts.

Clean-up trades

At the start of the quarter, there were four holdings in my Roth IRA account I decided to remove so the cash would be available for the CSP writing. Not all were completed before July.

iShares MSCI Frontier and Select EM ETF ( FM ): I own shares of the FM ETF elsewhere so liquidating this position was an easy call. I accomplished that task by writing APR $25 Calls. FM closed just over that price and the shares were Called.

The February peak was before I decided to alter my strategy, the April peak was not so there was a chance to exit at $.40/share better than I did: the nature of the game.

The above list shows I was also willing to sell some of my other FM shares at $26: that trade expired OTM.

GoodRx Holdings ( GDRX ): I violated my own rules to some extent on GDRX as I never bought into their business model and bigger players were entering the same game. I bit on the high ROIs and lost big as a percent of my investment; rounding error for the account itself. Since GDRX pays no dividend, with strikes far apart and options hard to trade, I finally tried offloading my 600 shares. My option write trade was only executed against 400 shares and those were called against my JUN $5 Calls. I still have 200 shares, against which I have a JAN'24 $7.50 Call with a 10+% ROI if not assigned. Here is my complete history with GDRX. If Called next year, the net result will be about a 55% loss.

iShares MSCI EAFE Small-Cap ETF ( SCZ ): After reviewing this ETF's results, selling became easy decision; US Small-Cap are doing much better. For that reason, I actually used CCs to try exiting back in January; the successful April ones were the second attempt: low volume and wide Bid/Ask spreads required writing 3-month contracts.

While I again missed the top, the April contracts kept me from panic selling at the March low. Both option returns were nice and do translate into exiting slightly above the expiration-date price.

Covered Call trades

National Health Investors ( NHI ): I bought these shares years ago when the initial Baby Boomers were supposed to drive demand (read profits) for this industry. Between expanded facilities, poor management, and then COVID, it hasn't worked out well for NHI. With a yield superior to CD rates, I have chosen to take my time exiting; okay - hoping for a rally to $65, which looked promising and I used that as my strike price. With the renewed focus for the account being CSP trades, my last CC write was the JUL $55 Calls.

Notice when the April options were written; this reflects how difficult these are to execute.

PennyMac Mortgage Investment Trust ( PMT ): I am split as to what to do with my PMT shares. Holding no shares is the new purpose of my Roth IRA but the 12% yield matches most option trade ROIs+5% from the underlying cash return. So I did the obvious by only covering half my position. With the recent rally, odds are those shares will be called in July as the strike price is $12.50.

PNC Financial Services Group ( PNC ): Like most mid-size regional banks, PNC has been crushed by the banking crisis that started in March. I have lowered the strikes used as writing CSPs against PNC generates high ROI because of said concerns. One set of APR $130 Calls were assigned, one wasn't as they expired on different Fridays. I have JUL $130 covering my shares and an AUG $125 I wrote in May expecting that would be the bottom; it wasn't as PNC dipped as low as $112.

ROIs + Yield make waiting to exit worth it, assuming no more bank failures.

Schlumberger Limited ( SLB ): I have been trading this ticker for over three years and have seldom not had some exposure. My current 400 shares comes from the assignment of my MAY $50 Puts two days early before I had the chance to roll them out. Two days later, my MAY $45 Puts expired OTM. With my new strategy of selling off assigned shares more quickly than before, I wrote 7/21/23 $47.50 strikes against my position.

Cash-Secured-Put trades

My Adding Income Using Cash-Covered Puts And Covered Calls article explains my use of Cash Secured Puts and Covered Calls. These can be some of the least risky ways of being a Put or Call option writer. Regular readers will notice I am now marking some trades as "Rolled", indicating I did not let the option expire but did a simultaneous trade into a new one later in the year; possibility at a different strike price. These were done for one of two reasons:

• The option was ITM and CSPs looked better than being assigned and then writing Call options, or booking the loss.
• The benefit of capturing the time value of the weekend if done on a Friday expiration date.

Alcoa ( AA ): I added this ticker as its ROI was high enough for the perceived risk even if the FOMC caused a US recession. With four options expiring OTM on 6/16 and the market closed on the 19th, I successfully rolled this forward to capture those days.

The Chemours Company ( CC ): This stock had elevated risk that was partially solved with the agreement on the PFAS-related drinking water claims. The $5+ price jump moved me into an OTM place. Here the Rolled marking reflects both reasons, with the last being a Juneteenth trade.

The first roll was done at a Net loss of premiums; the second at a small gain. The high ROIs are related to the fact both were written ITM when executed.

Cracker Barrel Old Country Store ( CBRL ): Recession fears and high gas prices for a chain dependent on travelers at many locations has possible returns staying aloft for this stock that I have used for years. Currently I hold no shares so I have my largest exposure thru two different options. For this stock, I also chose to write longer-dated options to capture the extra risk present during the debt ceiling talks; that will show in the Open Position list later.

Freeport-McMoRan ( FCX ): FCX mines copper, which is tied to the world's economic demand and a growing importance to the EV market. With recession fears in many Developed nations, plus China, its volatility has not declined as much as I have seen in many of the other tickers I write against. The first listed trade was rolled over from the first quarter to avoid a loss and was written deep ITM, which explains the high ROI achieved.

Marriott International ( MAR ): Stocks tied to consumer spending and travel still sport decent volatility scores. I like the Marriott company with their diverse set of hotel chains; Fairfield Inn being my "go to" choice. My one trade made over 12%, one of the best for the quarter, partially due to not going down my usual 10% for the strike price.

Morgan Stanley ( MS ): One of my taxable accounts is with Morgan Stanley, providing me an opinion on how their brokers operate. The March banking crisis brought the stock price down and the option premiums up, the perfect combination.

I entered near the low price point and sold just over two weeks later, avoiding the mid-April earning release; something I try to do. I wrote July contracts after MS settled back down post-announcement.

ONEOK ( OKE ): The week the May options were set to expire, ONEOK announced a merger with Magellan Midstream Partners (NYSE: MMP ), causing OKE to drop almost 10% and bringing it close to my $55 strike: I sold. With the options selling for $.10, I chose to close out early in case OKE kept falling or the debt ceiling talks broke down: neither happened. The close-out cost me but the earlier closing-date changed the potential ROI little but saved lots of worry. It also allowed me to sell 4 JUL: $52.50 Puts a few days later after the merger pain seemed to have settled.

T. Rowe Price Group ( TROW ): In a "baby with the bathwater" scenario, TROW got caught up in the banking crisis too, which allowed me to enter a second APR Put contract to those sold in January. Like MS, the ROIs topped 10% on both.

Other option activity

This section will include option activity, such as using CSP trades in place of CDs, and the limited non-Roth account trades I might do. I do not consider either as part of my main CSP strategy executed in my ROTH IRA.

CD substitution trades

I reviewed the idea of using CSP trades in lieu of 3-month CDs in this article . With cash now earning close to 5%, the need for this is less or when using, less risk required to get a total return that is acceptable.

The Boeing Company ( BA ): The company's ongoing plane issues keep the volatility up on this stock. Foregoing my prior use of only ETFs as CSP-CD trades, I wrote 20+% OTM PUTs using the APR $160 strikes when BA was over $200. When the potential return dipped below 2%, I closed these out a month early, netting a 7.63% ROI on my "CD" trade (plus 4.5% for the underlying cash).

iShares Russell 2000 ETF ( IWM ): My preferred CSP/CD choice has been this ETF for its many strikes to pick from, heavy trading volume, and the fact it has quarter-ending expiration dates.

To show how volatility drives ROIs, similar trades last year at this time were over 8%; today I might get 3%. That has me looking at doing another stock CSP-CD trade.

Position adjusting trades

In my taxable and IRA accounts, which I consider outside my CSP strategy, I will use options to increase/decrease the shares I hold if not in a rush for the adjustment to happen.

VanEck Vectors Fallen Angel High Yield Bond ETF ( ANGL ): This ticker is very hard to trade so I only do it when I think my position should be reduced in size. Strikes are usually between $1-2 OTM and out several months.

Even with a strike just over $1 out and three months of time, the low volatility only yielded a 2.76% ROI.

iShares U.S. Medical Devices ETF ( IHI ): I like this sector-focused ETF, thus writing CSP to possibly pick up a few more shares occurs occasionally. I would do more if they were more tradeable. The smaller-than-usual OTM strike used resulted in the almost 11% ROI.

Quarterly results

Fidelity reports the quarterly results were 3.7% or over 14% annualized. YTD results are just over 10% annualized. The 1-Year CAGR is tops among our six retirement accounts at over 13%. The option income from all trades of $10,577 for the quarter came from:

• Covered Calls: $1781
• CSP/CDs: $1352
• Cash Secured Puts: $7444

Open contracts

Portfolio strategy

Trading options can be used for many different portfolio strategies, many of which I have covered in detail with articles over the last four years. As an option writer of Puts, you have control over the level of risk you want to take on by your selection of the strike price, as illustrated in my article on that topic.

I have seldom been the buyer of options as I think a writer has a better chance of profiting from options. That said, if used judicially, Call buying is a means by which an investor can add leverage to their strategy without trading on margin, using CEFs, or owning 2x/3X ETFs. That concept was covered in my Using Options To Add Leverage To Your Portfolio Strategy article.

Used properly, option trading can enhance the investors income, employ leverage to a chosen level, or even provide insurance against large market drops. The key is being an educated option user.

Where I am today

Currently I have about $120,000 in my taxable account I could do CSP/CD trades against; trying to decide if using stocks to gain 2% more than the IWM ETF is worth the risk. The Roth cash is almost 100% in use but I could convert some of my Roth 401k balance over but that is waiting for better CSP opportunities than where it is currently invested. With the idea that the market is feeling steady, I am writing longer expirations to capture today's "low" prices. By targeting 10% OTM strikes, I have some protection if things do go "south".

Final thoughts

As mentioned in all my option articles, such trading is not for every investor! For investors new to option trading strategies, knowing basic rules and common mistakes are a good place to start learning. I think the writing strategies I use are some of the least risky, but that is also due to my conservative strike price selection .

For further details see:

Q2 2023: Option Strategy Simplification Working