Options Trading

After Amber Tree Leaves gave a passionate presentation during the BENL FIRE meetup in Antwerp about options trading, I got interested in this trading method. Based on the presentation, we made the decision to only write options in an attempt to either:

  1. purchase additional dividend shares (via put options)
  2. try to earn some extra money (in addition to dividend) on dividend paying shares (via call options)

Options writing

I’m not going to write an entire tutorial here with regards to options, but here are a few useful sites if you are interested.

For the Dutch among you that want to understand the basics:

https://beleggenmetplezier.nl/opties-uitgelegd/

https://www.aex.nl/beleggen/begrippenlijst

For those of you that want to go into a bit more detail (both are in English):

http://www.investopedia.com/articles/active-trading/040915/guide-option-trading-strategies-beginners.asp

http://www.investopedia.com/university/options/

A great blogroll for options trading can be found here:

Blogroll of Options Traders

Short options summary

What’s important to realize is that there are 2 “types” of options. You have “call” and “put” options. The differences are as follows:

Stock Option Process Chart

Stock Option Process Chart. Source: http://investintowealth.com/wp-content/uploads/2015/02/Stock-option-process-chart.jpg

  • Call options: These options give the buyer the right (not the obligation) to purchase the shares of the underlying asset at the predetermined price on or before the specified date.
  • Put options: These options give the seller the right (not the obligation) to sell the shares of the underlying asset at the predetermined price on or before the specified date.

You can buy and sell both call and put options. Giving you 4 ways to trade options. The chart below gives you a visual indication.

The other important thing to consider is that when you write options, you can earn a premium as you take the risk that you have to either buy (put option) or sell (call option) the underlying shares (usually at 100 shares per contract) at a given price (the strike price).

This writing of options and collection of premiums is what we are after.

Initial trades

We bank with the ING and also have our trading account with this bank. This is temporary as we may eventually move to an actual broker such as DeGiro/Binckbank/Lynx/Alex at a later date to keep trading costs in check. DeGiro actually has a nice overview of trading costs of the various Dutch  brokers.

With the ING we are only able to trade options at the AEX (Amsterdam Stock exchange). Here is a list of the options we can trade:

https://www.aex.nl/koersen/aandelenopties

Not a whole lot of choice but because we are just starting to trade, we are more than happy with it.

This week we wrote a total of 8 contracts, 6 puts and 2 calls. The puts were on AH, RDSA and VPK; the calls on UNA. An overview of the options we traded can be found below.

Options Trading Overview

Options Trading Overview March 2017

Potential outcomes

With the above noted options we have a “best case” and “worst case” scenario.

The “best case” scenario is that we earn all of the received premiums (about €577) and our holiday in April is pretty much paid for. This would be nice for an first attempt at trading options 🙂

In the “worst case”, when all contracts are exercised and we have to buy/sell all shares at the various strike prices, we suddenly own about €16.300 in additional shares of AH, RDSA and VPK. But we would get about €9.300 in cash and lose all our UNA shares (making about €2000 in profits along the way due to the UNA share price increase since our purchases).

The final results will be somewhere in the middle. We might sell a few of the option contracts if we are happy with the profits made. And perhaps some will be exercised and we will receive some more dividends in April, May and/or June. These are the upcoming dividends payment dates for VPK, AH and RDSA respectively.

Time will tell! But I’m definitely are having fun trying this new trading method. Just need to get a better feel for the risks, prices and define our buy and sell strategies. Any tips of tricks are more then welcome!

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18 comments

    1. We have a bit of play money (as ATL puts it) and options were an interesting idea put forward during the last FIRE meetup. Since we like to try all “options”, we had to give this a shot too. For you as a DGI, it could be interesting too.

  1. The coolest thing about writting options for me is that you actually CREATE the option. Shares are created by the issuing company and exist before you buy them. Whether or not you buy them, the shares will continue to exist. But options, when you write them you create them. And then, if you have a created a long dated option, there is even the possibility other people will trade them!
    Even cooler, it is something that only exists on the basis of the future obligation you accepted. Your promise has created a financial product. In essence you have sold an insurance for a certain risk. Congratulations Cheesy finance, you are now in the insurance business!

    1. Cool point actually! Can we add that to our list of income sources, an insurance business? We might end up with too many side hustles this way 😉

  2. Very interesting Cheesy Finance. Several well known financial blogger types are option traders, so I’ve followed it with some interest.

    I don’t claim to have more than a basic knowledge, but the process looks like a lot of speculation. Not saying people can’t make money at it, but at its heart it looks like gambling — betting money on what looks like a fairly random outcome.

    Am I wrong? Is the probability of return higher than random noise?

    1. I think you certainly have a good point with regards to the gambling part, but the benefit of trading options is that you have a buffer (in the form of a premium) that you can play with. Depending on the size of the buffer, your return reduces but also your risk (of having to either buy or cell shares). However, we only plan to use the option strategy to supplement our DGI efforts. Either outcome is good for us: buying dividend paying stock or collecting a premium. The only risk in my mind right now is that I still over pay for a perticular stock because I get too greedy with the premium (i.e. I take too much risk). I’ll keep you posted!

      1. Albeit that being true, for you as a DGI investor it would be a great tool to supplement your dividend income. It’s worth looking into this trading strategy to see how it could aid your dividend portfolio.

  3. I’ve read ‘Beleggen voor dummies’ (fan of the series!) and I’ve decided that options are not really my thing. I think I’m starting and sticking with index funds. Still need to start with it. Thanks for the reminder. 🙂

    1. Thanks Stal! Options trading does come with risks, as noted, I need to get a better feel for this in the coming months. But there is no better way then trying it out and “failing” a couple of times!

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