2023 Nov Option Trade Report: $3519 Gained & Lessons Learned

# Blog: Nov 2023 Trade Reflections

In Nov 2023, the total cash I earned from Option trading was US$3519 (about 2.9% return on my capital), that brings my total earning from the Option Wheel strategy to US$38,414 in 2023 till date.

What made up the $3519 gain in Nov?

This earning came from two parts of the strategy:

premiums pocketed = $2329: 4 trades expired / assigned in Nov, so the capital were released back to sell new Options

trading gains = $1190: the trading gains were a results of my selling away my previously assigned Put Options at a slightly higher price, specifically my two Call options for NVDA and SHOP expiring on 10 Nov. (I will share more about the learnings from these two trades below)

New Trade Activities in Nov 2023

Open 1 new position: sold 9 contracts of 2023-Dec-22 Call Option for SE to generate cashflow from SE stock shares I am currently holding. This is a pure covered call strategy to generate income from my SE stocks to create "dividends" arbitrarily.

I didn’t do a whole lot of new trades in Nov 2023 because I did not find very good / suitable opportunities based on my screening template.

I learned early on to respect the trading principles / entry-criteria that I set up. So that I could make decisions less emotionally. If there are no good opportunities to open new positions, respect that.

Inactivity is not a bad thing.

Closed 2 trades earlier to lock in the profit earlier: closing the trades earlier to capture the majority of the profit is an good way to boost the rate of return on your capital.

For example, I sold an Put Option on NVDA expiring on 24 Nov 2023. The original XIRR is 25% for this trade.

However, on 16 Nov, I noticed that the price of NVDA has increased a lot so my Put Option is very unlikely to get assigned. Instead of waiting for it to expire worthless, I closed the Put Option and it allowed my capital set asside for this Put Option to be released about 1 week earlier.

So I earned almost the same amount of premium in shorter time. The actual XIRR from this trade increased to from 25% to 52% instead.

Mistakes I made & Lessons learned: Covered Calls are bad for long term profit, so use it purposefully

Although I made a total of $3519 cash gains this month, I could have add another about 10K profits if I didn’t sell the the “Covered Calls” for AMZN & SHOP.

Previously, I sold some puts for AMZN and SHOP following the Option Wheel strategy because I was seeing a great XIRR. So the return on the capital I set aside for these puts were great:

I ended up getting assigned with 300 shares of AMZN at $132 and 500 shares of SHOP at $48, which I was not worried because:

• these two companies are businesses that I don’t mind holding for the long term because I understand their fundamentals and believe in its long term prospect

• I have already gain a high return on the capital I set aside to buy these shares because of the high XIRR

As part of the Option Wheel strategy, after getting assigned with the shares, I can start selling Covered Calls on these shares that I hold, so it’s like these shares are generating cash dividend for me when I own them, putting my capital to continuous use.

So I sold the following covered calls:

There were sold at a good XIRR, so my capital continue to generate good cash return for me. However, my Covered call strikes are only slightly higher than my previous assigned price. (e.g. if my Covered Calls get assigned for SHOP at $49, I would make $1 per contract only, because these shares were assigned to me at $48 from previous Put Options).

The result is that the two covered calls were indeed assigned because the two stocks (especially SHOP) rallied up in Nov and closed above my Covered Call strikes. On the expiry date, AMZN closed at $144 and SHOP closed at $61, but I had to let go of the stocks at $136 and $48 only because of my Covered Calls. I lost of trading gain was almost $10K.

What did I learned from this?

Firstly, Covered Calls limits the long term upside potential of your positions. It helps to gain short term cash premium, but if we believe in the long term prospect of the company, we are better off holding on to that stock and let it run.

Secondly, we need to know that every tool has its pros & cons. What’s more important is to use it for your intended purpose.

In this case, I am using the Covered Calls as part of the Option Wheel strategy to continuously generate a cash return from my capital set aside. As long as I am earning and generating a good cash return (premium collected + slight trading gain), I should not be too worried about the paper loss on the capital appreciation.

Lastly, set up two pots of capital for two different purposes:

• capital to generate cashflow through Option Wheel

• capital to capture long term growth of the high quality businesses

In my portfolio, I still hold a sizable amount of Amazon and Shopify. These are shares that I hold for the long term and I don’t sell covered calls on them. So these positions are really benefiting from the share price increase this month.

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