Options Trading Income Report – 2014

-431.91
Annual Income Generated
-3.36
Annual Return

2014 was educational to say the least.

I’ve definitely moved forward on my options trading education and have captured some lessons learned to share. Before I head down that path though, let’s take a quick look at a summary of the year.

Some of these numbers may have changed slightly from previous reporting due to long-term trades closing, but the big picture is easy to understand.

Month Income
March $ 51.80
April $ 110.55
May $ 64.77
June $ (960.68)
July $ 51.84
August $ (299.64)
September $ 134.61
October $ 160.38
November $ 115.84
December $ 138.62

 

2014 Net Income:  -$431.91

2014 Average Monthly Income:  -$43.19

2014 Average Monthly Income w/o two down months:  $103.54

2014 Return: -3.36%

Adjusted CLF Share Price:  $ 22.07

Adjusted TRN Share Price:  $44.20

 

A negative 3.36% return on the year. Not really the outcome I was shooting for. I think my basic strategy of finding a good company and trading around it is still sound. If you haven’t read my about my trading strategy, you can jump too it quickly here.

So where did the problems occur? We’ll quickly break down some of my bad trades this year and see if there are any lessons we can take away, however the biggest problem exists with one of the companies I was trading around…Cliff’s Natural Resources.

Where there’s smoke there’s probably a fire

I’ll be candid.

I don’t think I did enough homework/analysis on Cliff’s to understand the company well enough. Don’t get me wrong, I did do quite a bit of analysis on the financials, reading of annual reports and trying to understand the global mining industry.

However, there is LOTS of talk about Cliff’s becoming insolvent or bankrupt. Halting payment of its dividend to common stock holders, which is a key requirement for me to own a stock, is also becoming a distinct possibility prior to the company’s implosion.

But my analysis either wasn’t deep enough OR it was poor analysis. I tend to lean towards the former since my “real world” job involves in-depth analysis on a variety of topics. But this is also my first time really digging into a company.

So, how can I do this better in 2015?

Well, you see I have another problem…I’m lazy.

I really don’t want to sit around for days analyzing a company only to find out it’s not worth my time and have to start the process all over again. That’s one of the reasons I chose the Blue Collar Investor for my first membership review. It provided a relatively quick solution to the problem I was having.

If you look at my Trinity Industries (TRN) trades, you’ll see the overall stock hasn’t performed well at all however there is little fear of the company imploding like with Cliff’s.

Let’s return to my problem. How do I find quality companies which have a miniscule chance of imploding, I wouldn’t mind owning for the long-term (think dividend collection) and still are worthy of trading options around?

My initial thought is to focus on blue chip companies (i.e. GE, AT&T, JNJ, etc.) which have a strong history, lots of staying power and pay decent dividends. The one problem I run into with them is the lack of volatility to make selling their options worthwhile.

However, I think I’ve found a way around this concern and I’ll put it all together for you in an upcoming post on my “2015 Trading Plan”, so be on the look out!

Now, let’s take a look at some specific trades and see some of the lessons I need to carry into 2015.

 

Losing Trades

11.

That’s the number of losing trades I had this year out of 38 trades, or about 29%…not horrible, but not great either. And when I look across those losing trades I see two which stick out. Let’s take a look at the first.

On June 5, 2014 I bought a CLF Oct 2014 18.00 put for $955.07. The idea behind this trade was to use this roughly five month put as a “protective put”. This would allow me to sell my shares for $18/share or sell the option back to the market and collect the change in premium.

Take a look at the chart below and you can see where I bought this put (green arrow) on the Cliff’s roller coaster ride and where I sold it back to the market (red arrow) for $394.91 on August 4, 2014 for a loss of $560.16.

 

CLF Protective Put Fail

CLF Protective Put Fail

Fail.

What went wrong with this trade? Two things.

One issue was not holding onto the option longer. I got too caught up in the craziness of the move up to realize that nothing fundamentally about the company changed. There was no real reason for the bump up the company received in July. But it scared me out of the trade anyway.

My thought at the time, and what I even wrote in my trade journal was, “Close protective put to capture capital”. I still had almost three full months left in that option when I closed it out to pull back some of that money.

Lesson learned.

The other issue concerning this particular trade was my plan with it. I didn’t really have one.

If we do quick math, I would have had to sell five months’ worth of calls at a $1.91 each to just break even! On a good CLF trade I only made on average $.15-$.30/trade. So, you can see I obviously didn’t do my homework when I made this decision.

Lesson learned.

The other really bad trade occurred in July/August. On 14 July, I sold 2 Aug 14 16.00 Calls for $.35/ea. On 4 August I bought them back for $1.40 each with a net loss of $220.16 on the trade.

The problem with this trade was I didn’t take into account the 24 July earnings announcement OR the 29 July annual meeting for Cliff’s. By nature, earnings announcements are volatile events, and Cliff’s at the time was trying to dig itself out of a hole.

Additionally, the annual meeting was a HUGE event for Cliff’s this year. An activist investor made a move to push out the CEO at the time and won. This added to the volatility around this time and was something I definitely should’ve kept in mind.

The bottom line is I need to keep tabs on both earnings announcements and if there are other big events on the company’s calendar.

 

What went right

If 11 trades went bad, then 27 went well!

On average my individual trades captured 64% of the available option premium. This means if I sold a call for $1.00 I usually bought it back for $.36. Not too bad for my first year I think!

One of the best traits of my trading this year was my consistency in trading. My trades’ average 1-2 weeks in time, and once closed I frequently was back into a trade within 3-5 days depending on the underlying stock’s activity.

I consider this a good thing when trying to learn how to generate a monthly income with options trading.

One other aspect of my trading which went well was picking dividend paying stocks. Over the course of the year I captured $100 in dividends.

Now, I know that’s not really getting anyone excited, but it’s good to get paid for just owning something. There are many stocks out there I could trade on with this strategy and not get paid to own. I’ll definitely keep this aspect of my strategy.

Speaking of strategy, let’s talk about my strategy for the New Year.

What’s next

Admittedly I didn’t have a strategy this year, and I think I’m lucky I made it through in as good of shape as I did. That’s a must change for the upcoming year.

I don’t plan on deviating far from selling puts and calls; however I’ll look into how I can work collar trades into my strategy. The details are still yet to be worked out, but I’ll let you know how it turns out in a later post.

Beyond just a trading strategy, I need to figure out how I’m going to pick which stocks to trade around. If anyone out there has any suggested techniques, sites or methods I’d be interested in hearing them.

Of course the monthly income trading updates will still be coming so you’ll get to see how the new strategy works out as I adjust in the New Year.

Hope you’re enjoying these trading reports and I’m always happy to hear your thoughts!

Have a great New Year!

Patrick

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