Monday, October 24, 2016

Revisiting My General Electric Straddle

option strategy, call options, put options, income investing, dividend growth investing
General Electric (GE) $31 Strike Long Straddle Option
As part of running this blog that chronicles my journey to financial independence I like to be open and honest with all of my transactions.  Typically that revolves around buying shares of high quality companies that I deem to be at fair value or less.  And occasionally there's a sale of a company like when I closed one of my positions earlier this month.  Being open about the moves I make allows for better discussion with all of you and helps spread ideas around.  If it creates my own "investment journal" to detail why I made the move and my expectations, well that's even better.  

Over the last couple of months I've been fairly active in the options market as opposed to purchasing companies outright via the market.  Much of that has to do with the stretched valuations that can be found among many of the dividend growth companies that I want to invest in.  Of course having a lack of cash is another good reason to not be investing.  

This past week I my long straddle position that I opened on General Electric in early September reached expiration.  

Revisiting the General Electric Straddle

Back in early September I opened a long straddle position on General Electric.  A straddle is essentially a way that you can play both directions that a company's share price can move and it's essentially a bet that the share price will move a certain percentage higher or lower, but won't stay where it's at.  

To open a long straddle you buy a call and put option at the same strike price.  So on expiration day one of the options will be in the money while the other one will expire worthless.  As a buyer of the options that meant I had to pay the premium which worked out to a total cost of $132.78.

I ended up closing the put option half of the straddle early on October 6th by selling my put option back on the market.  I sold the put option for $1.70 netting me $161.45 after commission and fees. 

The call option portion of the long straddle ended up expiring worthless this past Friday with the share price of General Electric at $28.98 which was less than the $31 strike for the call option.  So that part of the straddle was a complete loss.

straddle, calls, puts, option strategy, General Electric, dividend growth investing, income investing
General Electric (GE) Straddle Returns
Overall everything worked out to a gain for the straddle.  The total cost to open the position was $132.78 and total proceeds worked out to $161.45.  That's a net gain of $28.67 which works out to a solid 21.6% simple return.  

A Few Thoughts About The Straddle

I'm not complaining about making a profit, but I left a lot of money on the table considering that a lot of things went right for me during this experiment.  For starters, the share price took a big dip the day after opening the straddle position and I should have closed out the entire position in just a few days for net proceeds of around $190.  

One lesson I learned from this is that you have to be quick and take advantage of opportunities when you're taking a more aggressive options trading strategy.  However, I got greedy and figured there was a lot more profits to be made if I waited.  You can see how well that worked out.

This could be a bit of hindsight bias, but I also closed the put option too early.  Looking at where the share price ended the value of the put option would have been $2.02 for net proceeds of around $194 after commission and fees.  However, I closed the put early because I was able to make sure I could lock in a gain on the entire position.

While the straddle worked out well for me I don't think I'll do one again in the future.  In all honesty there was too much maintenance on the trade and having to check it daily to try and figure out whether I should close it out or let it ride.  This just isn't for me and I think I'll stick with my normal strategy of selling calls and puts for my exposure to the options market rather than some of the more exotic strategies.

I've updated my Option Summary page to reflect this change.

Do you incorporate an option strategy with your portfolio by selling covered calls or writing puts?  Have you ever explored the more advanced option strategies?

Please share your thoughts below!

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2 comments:

  1. Thanks for sharing your experience. My problem with straddles is the same as your. Too much maintenance. They require constant monitoring of the market. I bet these are great for robo traders though

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  2. Thx for the story. I do not yet buy options, I only sell puts and calls.
    Look at it this way: 21pct return to learn something. Sounds great to me

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