MyTradingBlog

Cory said (https://youtu.be/1MBvejeUM1A?si=5w7Mx6nHM7AcaOEl) his account was up 18% in the last quarter (Oct-Dec, 2024). QQQ went up 5% in the same period. Well, I just checked my account and found my account went up 33.3%  (Oct-Dec, 2024).

I like Cory’s technical analysis, especially of the market trend, short term and long.  But I don’t day trade and don’t follow his trading style. I only do covered calls.

I had a PLTR trade (short 10 contracts of  Jan. 17, 2025 call, strike $70, for $4014) due to expire today. PLTR is trading ~$71/sh, above my strike price.  So I bought back the short call (#1350) and sold 10 contracts of PLTR long call (strike $75, exp. Jan. 16, 2026). This is called a diagonal credit call spread. Net income: $15.95/sh, or $15950 for 10 contracts. The income from the sale of $70 call was ($4014-1350=$2664). The long call just sold has a strike of $75. The margin requirement for 1000 shares of PLTR is $21000 (plus interest)

End result:

1. If PLTR reaches $75 by Jan. 16th, 2026, my total return for this trade will be: 15950+2664+3500 (the price appreciation to $75 from PLTR current price) = $22114. Subtracting the margin interest payment, and divided by the margin requirement, the annualized return on investment (ROI) is ~100%. Remember, this is slightly out of the money (the strike price is near the current stock price) call (slightly bullish call).  Also, I don’t have to management it for a year! (I have quite a busy schedule.

Downside? If US economy goes south, or if PLTR goes south…

Another advantage: this sale brings in more cash which I can re-invest to generate more income.

2024: Another Great Year for the US Stock Markets

2024 turned out to be another successful year for my investment account, delivering a remarkable ~63% gain. This performance significantly outpaced the broader market indices: ~25% gain in SPY (S&P 500), ~29% in COMP (Nasdaq), and ~13% in the DJIA (Dow Jones Industrial Average).

What makes this result particularly satisfying is the simplicity of the process. I didn’t spend hours analyzing financial reports or listening to endless expert opinions. Instead, I adhered to a few simple principles, which I’ve outlined previously (Covered Call 投资策略讲座, https://www.youtube.com/watch?app=desktop&v=HlwLHT2yQ7s). I focus on the “big picture” and ignore the noise and nuanced analyses.

This straightforward approach has not only provided excellent returns but has also saved me considerable time. I dedicate no more than 1–2 hours a month to investment-related tasks, usually addressing expiring options or allocating new investable cash. For instance, January 17th, 2025, is an upcoming expiration date for some of my call options. I’ll need to make adjustments for those expiring positions, before Jan. 17th, 2025.

A Philosophy Shared Between Investing and Medicine

Interestingly, the way I approach investing mirrors how I view medicine and health. I focus on overarching principles and ignore excessive details and noise. This approach has proven to be both effective and efficient in managing my investments and health strategies.

A Lesson from History

About 30 years ago, while learning about investing, I came across a story about a New York man who spent an extended period in Tibet, away from stock quotes (this was before the internet era, like in the 1950s-1960s). He had purchased certain stocks and, due to his isolation, left them untouched. Upon his return, he discovered that his investments had grown significantly.

A Similar Personal Experience

This story reminds me of my own experience. Two to three years ago, I opened a Robinhood account (mainly for crypto trading and its zero fees) with a small sum of money. I bought DOGE (cryptocurrency) and a biotech stock (VKTX). Shortly after, the account’s value dropped by about 30%. Frustrated, I forgot about it completely, even the name of the trading platform.

Recently, I remembered the account, found it, and logged in. To my surprise, the account had grown by 400%! It was a pleasant discovery and reinforced the idea that sometimes, doing less yields better results.

This experience further validates my approach to investing: focus on simplicity, ignore the noise, and trust in long-term principles. Whether in investing or health, the “big picture” often holds the key to success.

Dec. 13, 2024,

I had 40 SHOP contracts (strike 60), due to exp on 1/17/25. SHOP price has gone up quite a bit at ~$115/sh. I put in an order to buy back the short calls and sell more calls at a higher strike price, for a credit trade (i.e., generating some income for me). I wanted to raise the strike from $60 to $70, which is still deep in the money (i.e., quite safe). The only qualifiable trade is for call options exp.  1/15/2027, 2 years out.  A brief calculation shows this trade would give me >30% annualized return. And this trade is extremely safe, although boring (Nothing for me to do with this for 2 years). I can live with a safe investment of 30% return/yr, so I did it.

The order was executed and brought in extra trading cash, which I can put in to work, making more money for me.

What to trade? Out of the stocks I own (table below), I chose TSLA and PTON, simply because they give me better annualized returns.

1. TSLA: It is a simple math problem. With the extra trading powder, I bought 200 shares of TSLA and sold 2 contracts of TSLA $450 strike, exp 1/17/25 calls. Net price was  $415.58/sh. In 32 days, if TSLA stays above $450, this trade will give me 450 – 413.58 = $7,284, minus some transaction fees and some margin interest.

2. PTON. Similarly, I bought 5000 shares of PTON and sold 50 contracts of $10, exp. 1/17/25. The net cost was $9.1/sh. This trade could bring me $0.9 x 5000 = $4,500/32 days.

AMD (0.299), DJT(1), PLTR (0.267), PTON (0.223), ROKU (.284), SHOP (0.181), TSLA (0.267), ZM (0.475)

Adjusting the strike price and expiration length of call options in your Rolling Covered Call (RCC) strategy is a powerful way to modify the risk and profit ratio to suit your investment goals and market outlook. Here’s an expanded analysis:

1. Adjusting the Strike Price

Higher Strike Prices:

• Potential for Greater Capital Gains:
  • Setting a higher strike price allows your underlying stock to appreciate more before the option may be exercised.
  • You retain more upside potential on the stock price increase.
• Lower Option Premiums:
  • Higher strike prices generally result in lower premiums because there’s a reduced chance the option will be exercised.
  • This means less immediate income from selling the call option.
• Reduced Risk of Assignment:
  • There’s a lower probability that the stock will reach the higher strike price, so you’re less likely to have the stock called away.
  • This is beneficial if you wish to retain the stock for the long term.

Lower Strike Prices:

• Higher Option Premiums:
  • Selling call options with lower strike prices yields higher premiums due to the increased likelihood of the option being exercised.
  • This enhances immediate income generation.
• Limited Upside Potential:
  • Your profit on the underlying stock is capped at the lower strike price if the option is exercised.
  • You might miss out on significant gains if the stock price surges above the strike price.
• Increased Risk of Assignment:
  • There’s a higher chance the stock will be called away, obligating you to sell at the strike price.

Balancing Risk and Reward with Strike Prices:

• Defensive Positioning:
  • Use higher strike prices in a bullish market to retain stock appreciation potential.
  • Opt for lower strike prices in a neutral or slightly bearish market to maximize premium income.
• Income vs. Growth:
  • Lower strike prices favor income generation but limit growth.
  • Higher strike prices favor growth potential but provide less income.

2. Adjusting the Length (Expiration Date) of Call Options

Shorter-Term Options:

• Accelerated Time Decay (Theta):
  • Options lose time value more rapidly as expiration approaches.
  • As a seller, you benefit from this accelerated time decay.
• Frequent Premium Collection:
  • Selling monthly or weekly options allows you to collect premiums more frequently.
  • Potentially higher annualized returns due to the compounding effect of multiple premiums.
• Flexibility to Adapt:
  • You can adjust your positions regularly based on market movements and outlook changes.

Longer-Term Options:

• Higher Upfront Premiums:
  • Longer expiration dates command higher premiums due to the extended time value.
  • Provides a larger immediate income but over a longer period.
• Less Frequent Management:
  • Requires less active management since options expire less frequently.
  • Suitable if you prefer a more hands-off approach.
• Slower Time Decay:
  • Time decay is slower, meaning the option retains value longer, which may not be as advantageous for the seller.

Balancing Risk and Reward with Expiration Length:

• Market Volatility Consideration:
  • In volatile markets, shorter-term options can be preferable to adjust positions quickly.
  • In stable markets, longer-term options can lock in higher premiums.
• Administrative Effort:
  • Short-term options require more frequent monitoring and transaction costs.
  • Longer-term options reduce the administrative burden.

3. Impact on Risk and Profit Ratio

Adjusting Strike Price and Expiration Length Together:

• Conservative Strategy:
  • High Strike Price + Short-Term Expiration:
    • Lower immediate income but reduced risk of assignment.
    • Retains more upside potential if the stock price rises.
    • Benefits from rapid time decay.
• Aggressive Income Strategy:
  • Low Strike Price + Long-Term Expiration:
    • Higher immediate income due to larger premiums.
    • Increased risk of having to sell the stock if the price exceeds the strike price.
    • Less flexibility to adjust positions in response to market changes.

Customized Risk Management:

• Moderate Approach:
  • Moderate Strike Price + Mid-Term Expiration:
    • Balances income generation with the risk of assignment.
    • Provides a middle ground between flexibility and management effort.
• Dynamic Adjustments:
  • Continuously monitor market conditions to adjust strike prices and expirations.
  • Roll options up (higher strike price) or out (later expiration) to adapt to bullish or bearish trends.

4. Factors to Consider When Adjusting

Market Outlook:

• Bullish Market:
  • Favor higher strike prices to capitalize on stock appreciation.
  • Possibly extend expiration dates to lock in premiums during favorable conditions.
• Bearish or Neutral Market:
  • Lower strike prices can enhance premium income to offset potential stock depreciation.
  • Shorter expirations allow for quicker adjustments if the market declines.

Stock Volatility:

• High Volatility:
  • Options premiums increase, providing an opportunity for higher income.
  • Adjust strike prices cautiously, as stock prices can swing widely.
• Low Volatility:
  • Premiums are lower; may need to balance between acceptable income and risk levels.

Personal Investment Goals:

• Income Generation:
  • Prioritize higher premiums with lower strike prices and longer expirations.
  • Accept the possibility of selling the stock if assigned.
• Capital Appreciation:
  • Set higher strike prices to retain the potential for stock gains.
  • Use shorter expirations to stay agile.

Tax Considerations:

• Short-Term vs. Long-Term Gains:
  • Short-term options can result in short-term capital gains taxed at higher rates.
  • Longer-term options may qualify for long-term capital gains treatment.
• Qualified Covered Calls:
  • Certain combinations of strike prices and expirations may affect eligibility for qualified dividends on the underlying stock.

5. Strategy Optimization

Regular Monitoring and Adjustments:

• Stay informed about market trends and news affecting your stocks.
• Be prepared to roll options to new strike prices or expiration dates as needed.

Risk Mitigation Techniques:

• Diversification:
  • Apply the RCC strategy across different stocks and sectors to spread risk.
• Protective Puts:
  • Consider buying put options to hedge against significant declines in the stock price.

Cost Management:

• Be mindful of transaction costs associated with frequent trading.
• Use brokerage platforms that offer competitive fees for options trading.

Conclusion

By carefully adjusting the strike price and expiration length of call options in your Rolling Covered Call strategy, you can tailor the balance between risk and potential profit to align with your investment objectives and market expectations. This flexibility allows you to:

• Maximize Income: Through higher premiums from lower strike prices or longer expirations.
• Control Risk: By setting strike prices and expirations that reduce the likelihood of assignment or limit exposure to market volatility.
• Enhance Returns: By optimizing the trade-off between option income and capital gains on the underlying stock.

Implementing these adjustments requires a thoughtful analysis of market conditions, a clear understanding of your financial goals, and diligent monitoring of your positions. With strategic planning, the RCC strategy can be a valuable tool for generating consistent income while managing risk effectively.

The Rolling Covered Call (RCC) strategy is an options-based approach where an investor sells call options on stocks they already own to generate income. In this strategy, the investor holds the underlying stock and sells call options against it, agreeing to sell the stock at a specific “strike price” if the option is exercised. The “rolling” aspect involves continuously selling new call options as the old ones expire, thereby maintaining a steady income stream. This strategy allows investors to capitalize on premium income from options, ideally in stocks with stable or mildly bullish trends, while potentially reducing downside risk.

1. Income Generation and Consistent Cash Flow:
   RCC is a strategy designed to generate steady income by selling call options on stocks you already own. This approach can create a consistent cash flow since you receive premiums for each call option sold. By rolling the calls—continuously writing new ones as they expire—you can keep generating income as long as the underlying stock remains stable or slightly bullish.
2. Risk Mitigation and Downside Protection:
   Although RCC generates regular income, which helps offset potential losses, it does not eliminate downside risk. If the stock’s price falls significantly, the income from the covered calls may not fully cover capital losses on the underlying shares. Therefore, the strategy works best with stocks that you believe have long-term value or stable price behavior.
3. Opportunity Cost in Bull Markets:
   In a strong bull market, the upside potential of the underlying stock may be limited, as you are obligated to sell the stock if the call option is exercised (usually at a predetermined strike price). Rolling the covered call allows you to adjust the strike price, but in fast-moving markets, your returns might still lag compared to simply holding the stock.
4. Tax Implications:
   Regularly selling and rolling covered calls can have tax implications, as short-term capital gains taxes may apply. The timing and frequency of rolling the options should be carefully managed to optimize tax efficiency, especially if this strategy is used in a taxable account.
5. Execution and Timing Flexibility:
   Rolling covered calls provide flexibility in strike price selection and expiration dates, allowing you to adjust the strategy based on market conditions. This flexibility is a significant advantage, as it allows for adjustments if the stock price moves sharply in either direction.
6. Enhanced Returns in Range-Bound Markets:
   RCC is particularly effective in range-bound or mildly bullish markets, where stock prices fluctuate within a specific range. Here, the income from the premiums can enhance returns, as the likelihood of assignment remains low, allowing for repeated income generation.

In summary, the RCC strategy can be highly effective for generating consistent income with moderate risk. It’s best suited for stocks with stable or mildly bullish outlooks and requires careful management to maximize gains and mitigate risks. Combining RCC with disciplined stock selection and adjusting based on market trends can make it a valuable tool for achieving steady income.

The naked LCID calls I sold Monday last week expired. I made ~$4000 again in 4 days. Out of curiosity, today, I reviewed my LCID trading history.  From LCID price chart (1-yr, LCID), one can see that after a 4-month price spike, LCID price is returning back to a trading range.  Here is what I found: I started trading LCID from 9/20/2021. I still own 8000 shares of LCID and I sold 100 contracts of LCID (out of money).  My profit as of now is $21,427.63. Then I looked further into my trading history and found 18 of all the calls I sold expired worthless. The total expired value is $74250.7.  This data supports that most of stock options (calls, in my case) do expire and my trading profit is mostly from selling calls.

One of the positions I have is: long BIDU and short BIDU 428/17, strike 175 options. BIDU reported earnings last night and the stock price went down a bit. I bought back my 175 calls, and sold the same strike ($175), expiring on 7/21/17, for a credit spread of $5.5/share (credit spread: sale price – purchase price > 0).
For each share of bidu, I sold for $5.5. The margin requirement for each share (i.e., the cash required) is ~$50. The duration of the options contract is 84 days.
ROI (Return On Investment) analysis : (5.5/50) * 100%=11% (i.e., 11% return in 84 days). To convert to one year’s ROI: (11/84) * 365 = 47.8%.

The breakeven point of this trade is 175 (stirke price) – 5.5 (profit from options sale) = $169.5.  In other words, even if BIDU drops from 180 to 169.5 (5.8%) 0n 7/21/17, I break even.  Or the downside protection is 5.8%.

BIDU chart: BIDU broke out of  resisnce around 175.  It’s 200 MA (moving average) is 180. So I chose 175 to be on the more conservative side (since this is a joint account with other investors in the group).  If it were only my personal account, I might even push for a strike at 180, which will give a higher potential return and also, of couse, lower downside protection.

Note: the above calculation is a brief one without considering the transaction fees and margin interest, all of which become very nominal when the total trading value is relatively high.