Dabbling in Options in my Portfolio

If any of you noticed, I have recently sold 2 Put Options in my recent transactions for Axos Financial.

Figured I pen down what I read up on.

I recently was interested again in Options after starting to dip my toes into the US markets, particularly by TTI's post here. Not to mention Warren Buffett sells long term European Puts.

I remember a long time back, there's quite a few trainers who teach them, Sean Seah VIOS, Clement Chiang Live Freely, etc, but I didn't have much time to do much reading up except tiny bits here and there.

Note that I'm new to Options and this post is just about what I understand and what makes sense to me.

And do be very CAREFUL when implementing as it could be rather risky

Options kinda work as an insurance contract where it is the right, not the obligation to buy or sell shares if it meets a price (called the Strike Price).

Thinking of it from this perspective, I do notice insurance companies earn a fair bit by SELLING insurance, not trading such contracts. That leads me to WRITING Options than trading them.


Also, I would like to point out that my approach would be to find something sensible that complements the investment strategy rather than going around churning/hedging.

Kinda like a Continuous Education for myself as an investor.

I read some materials I could find namely:

• Handbook of Options Trading by Dave Foo
• TTI's posts here, here and here
• Adam's article on The Fifth Person
• FullyInformed.com
• Investopedia
• Morningstar Guide to Equity Option Investing
• TheBlueCollarInvestor
• Buffett's comments on Options

These might not be the right materials to go about learning it frankly; I'm still piecing everything together. I have heard recommendations for these books that I might read one day (not sure how applicable they are for a straightforward usage):

• Generate Thousands in Cash On Your Stocks Before Buying Or Selling Them by Dr Samir Elias
• Get Rich with Options by Lee Lowell
• Option Volatility & Pricing by Sheldon Natenberg
• Options for Volatile Markets by Richard Lehman and Lawrence McMillan

Here are my findings:

• Sell Options on companies you wish to own (very important)
• You may get assigned shares
• Sell only covered calls and cash secured puts
• No margin
• Use limit orders to get a better price when you write the option
• Use support and resistance zones to choose your strike prices (helps to earn a bit of premium)
• Premiums are higher when prices are falling or rising, not bottomed or topped
• Premium is about 1% usually
• Avoid Selling Options when the contract expiry timeframe has monthly reports/earnings reports release
• Use Puts as fanciful buy orders while you get paid to wait
• Still figuring out how to use a Call, only one I would probably be a short/mid term play. And you have a target exit price (maybe discounted to fair value) in mind
• Ensure as prices reach your strike price, the long term fundamentals are intact

Other suggestions that I have yet to try:

• Delta of -0.16 to -0.31 for Puts 
• Delta go above 0.3 to 0.4 for Calls, below -0.3 to -0.4 for Puts, close the position (?)
• Trend IV and see how it affects performance
• If Bid Ask of the spread is more than $0.10, can queue at a price slightly below the midpoint
• For liquidity
• Share average volume is >250k per day
• Options minimum Open Interest of 100 contracts
• Ideally, a tight spread of $0.30 or less for the options
• If the shares drop significantly or gap down for Puts, and you wish to get it lower
• Buy back the Put
• Consider the cost of buying back with the further drop
• Queue a limit order for the share or Sell another Put
• If the shares rise significantly or gap up for Calls but you do not wish to
• Buy back the Call
• Consider the cost of buying back with upside
• Sell another Call or just let the share price run
• During First or Second half of the contract prior to the Expiration
• Buy back option if option is 20% of the initial sale in the first half of the contract 
• Buy back option if option is 10% of the initial sale in the first half of the contract 
• Sell the next month Option to roll over

Not sure if I have missed anything.

Hope this post makes sense.

I made a flowchart with most of these information in a post here.