What Are My Options?

It is not a great time for bargains.

To avoid frustration, I have been keeping myself busy by taking a deeper dive into the world of options.

For quite some time now, I have used naked puts and calls and to get in and out of stocks. It lets me squeeze a few extra drops of value, and enforces a certain price discipline. This is similar to some people I know, who use GTC limit orders as a way to enter or exit a position, when it hits their target.

I’ve never tried hard to optimize for the premium (the few extra drops of value) in the past. But this will probably change in the future.

I have become more cognizant of time value and volatility.

I knew about these factors, but I never really cared for them much: my thinking was “I am not in the option trading business.” For example, I never really thought seriously about how far out, I wrote my options.

My commissions were quite steep ($7 + 0.75/contract), which made me reluctant to write a series of short duration options, instead of  a single longer duration one. [I subsequently renegotiated my commission structure, and also opened a new account with Interactive Brokers ($0 + $0.70/contract). I plan on doing most of my “option trading” in this account.]

While I have been reading and digesting a lot of information on options, and learning the wonderful ways in which complicated option strategies let you express nuanced expectations about stocks or markets, it did not take me long to realize that I don’t have the time, foresight, or stomach to become a trader.

My interest in options is primarily as an overlay on my core strategy of value investing. For kindred souls, the following resources might be useful:

  • Chapter 6 in Joel Greenblatt’s “You can be a stock market genius” on using LEAPS to synthetically create stub stocks. I haven’t used this strategy yet, but I might if the stock market corrects itself sharply, and I find something that I don’t mind applying leverage on.
  • Erik Kobayashi-Solomons “Intelligent Option Investor“. The book is interesting in that it summarizes many common option trading strategies, but uses the lens of a long-term value investor. Again LEAPS are the tool of choice, but this is contextualized with interesting diagrams, and a discussion of other strategies. I found the website associated with the book too intrusive, and haven’t explored it much.
  • While the two sources above focus on buying long dated ITM calls, the website “Great Option Trading Strategies” (if you can get beyond the cheesy name) offers interesting perspectives on writing short-dated naked puts and calls. It crystallized a lot of information in my mind.

I am trying to synthesize my own options strategies which combines the elements discussed in the sources above. This will no doubt involve some trial and error with real money, and I pray that the cost of this education won’t be to steep.

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