1st Year of Options Trading: Recap
- Invest a set amount of capital each month into individual securities until the funds were fully invested
- Invest in widely diversified index funds over a 3-6 month period
- Pursue options trading/investing
My reasoning for opting for choice 3 was two-fold. One being that I wanted to experiment with it to see if I could earn decent returns on that money. And two, after getting another taste of FI/RE after getting laid off in April 2016 and being able to be a stay at home dad I wanted to see if options trading/investing could be a way to provide that extra bit of income to fill in the gap allow me to stay at home.
Call it a bit of a test case to see if it's a viable strategy. It's still very much in the proof of concept mode because I wouldn't feel comfortable pursuing this without seeing how things go during a downturn. However, the results from year 1 look like there's at least potential here.
I have 2 accounts where I'm using options as the primary investment/trading vehicle my Rollover IRA and my Roth IRA. The strategies vary because there's a very large difference in the available capital within each account.
Within my Rollover IRA my primary strategy is the most basic of option strategies, sell puts on companies that I want to own at a price I'm comfortable with and then turn around and sell calls against the shares. By selling puts and then writing calls against the shares I'm effectively reducing my cost basis on the shares that I own if the shares aren't called away.
I do mix things up a bit by selling strangles or straddles around positions as well if I need to bring in more option premium, but for the most part the basics is strategy that I employ within my Rollover IRA.
However, my Roth IRA had much less capital to start with so I'm testing out the possibility of full on options trading. Thinking, vertical spreads, calendars, iron condors, iron flys, broken wing butterfly's and many more of the more "exotic" option strategies out there.
Rollover IRA Results
On November 3, 2016 I completed my 401k transfer into my Rollover IRA. That was $138,919.97 of starting capital. On April 11, 2017 I added an additional $990 of capital, the amount we could contribute to a Traditional IRA and get a tax break, to bring the total amount of capital to $139,909.97.
At the end of 2017 the final marked to market balance, including open positions, for my Rollover IRA was $159,448.12. That's $19,538.15 of total profits from the combination of option premium, dividends and capital gains/losses on shares.
That's a solid 13.96% return over the approximately 13 months since the account was opened. The internal rate of return, which gives a better idea of the annualized return, came to 12.03%.
Roth IRA Results
On April 11, 2017 I contributed $4,510 to my Roth IRA at Tastyworks and those were the only contributions that were made throughout the year.
As of the end of 2017 my marked to market account balance, including currently open positions, sits at $5,037.13. That's a decent $527.13 of profits solely via option trading gains/losses.
That works out to a 11.69% return in approximately 8 months. The internal rate of return, or annualized return, came to 16.65%.
*Shameless self promotion incoming*
If you're interested in using options Tastyworks is one of the cheapest brokerage firms out there with $1 per contract commissions to open and $0 to close. Not to mention one of the best trading platforms that I've used. If you sign up for an account through this link and deposit at least $2,000 I will receive a referral credit that can be redeemed through Tastyworks' referral program.
Results vs the S&P 500
While I'm pleased with those results in and of themselves 2017 was not the year to have any kind of positions that were bearish in nature or capped any upside price movements. Based on price appreciation alone the S&P 500 gained 19.42% throughout 2017.
In order to do a comparison versus the S&P 500 I used the historic prices of the S&P 500 Total Return Index which assumes all dividend payments are reinvested. I tracked the historic prices of SP500TR for the days that capital was deposited into each of the accounts and assumed a purchase of the SP500TR index with the full capital. This gives a fairly good, although not entirely accurate picture, of the returns I was able to generate compared to a 100% passive investment in the S&P 500.
|Option Trading Results vs S&P 500|
My Rollover IRA had an IRR of 12.03% through the end of 2017 compared to the SP500TR's 26.43%. Yikes! My Roth IRA had an IRR of 16.65% compared to the SP500TR's 21.80%. Better, but still not good.
One thing I do need to point out is I was never 100% invested in either my Rollover or Tastyworks accounts. It'd be really difficult to track and quantify the capital in play at any given time and adjust for those effects so for me the easiest way to compare is to just use the starting and ending values as I did above. Although, it's encouraging that the returns were solid considering that there as less capital "at risk" at any given time compared to a passive investment into the S&P 500.
Difficulties During 2017
Last year was a tough year for anyone that wasn't long the market and didn't BTFD even though the dips were only like 1%. When the broad based S&P 500 moves up nearly 19% that makes the hurdle to outperform even harder. Nevertheless the results are what they are and while they're disappointing I'm also encouraged to keep at it. However, I do want to point out some of the difficulties that 2017 and options trading in general presented.
For starters, fees! Taking an active approach to investing means more commissions. In 2017 I spent nearly $2,600 in commissions/exchange fees between the 2 accounts. Compare that to a low cost passive investment in the S&P 500, assuming a 0.10% expense ratio and no commissions, would have worked out to somewhere around $160 in fees. That's a huge hurdle to overcome and will definitely be something I'll be tracking and monitoring at the end of 2018.
Another big issue that I faced was that the markets were on pretty much a one way train higher which meant volatility was on an elevator to the ground floor. That combination hurt me in two ways.
One being that I kept losing out on to the upside when my covered call strikes were breached and the underlying share prices kept moving higher and higher. That meant I kept losing out on potential additional option premiums or higher capital gains by moving my strikes out to higher levels. I kept expecting the market to at least fluctuate, in the hopes of rolling out in time, but the markets rarely accommodated me.
With the markets moving higher, without any downside movement of note, that meant that volatility kept getting crushed*. As a net option seller you get the most bang for your buck in terms of option premium when implied volatility is high. Higher implied volatility means higher option prices.
*Side note when there's stories of ex-retail employees selling volatility because it only goes down and then I think even starting a hedge fund because he happened to get lucky it might be time to start expecting some volatility to return to the markets. There's no doubt that short vol was one of the most profitable plays of 2017, but at some point volatility will return and I have enough faith in "the powers that be" that they can't keep everything "Goldilocks".
Looking Forward to 2018
This year should be a more telling year as to the viability of my options trading as a means to produce income. Assuming 2018 doesn't continue the one way move higher with persistently low, and falling, volatility I should be able to close the gap between my own performance and the SP500TR. A little two way price movement in the markets sure would be nice.
Commissions and fees will still be a big drag on my performance compared to the SP500TR. I consider the results both promising and disappointing with no clear edge/winner to either side as of yet. 2017 was an outlier year for the markets and while it sucks to miss out on those potential gains the end result was that I was still profitable in the infancy stage of my foray into options trading.
I'll check back in around the middle of this year, hopefully with some better results to report.
Do you use options as a means to supplement your investment income? Do you think it's a viable strategy to use as a means to reach FI/RE earlier than just dividends alone?