Learning from stock options trade
TL;DR: Been trading stock options since 2014. Some learning worth to note here. It’s purely my personal strategy and works for my personality. At the end of day, we need to find a trading strategy fits our personality so that we don’t misjudge by our emotional reaction.
Personally, I treat stock options as a way to maximize sure bet. If based on my analysis, I feel strong about one company in 2-5 years spectrum, I will size my bet wrt the accetable down turn risk. I’m not using stock option to do any hedgeing or combined strategy.
Contract wise, I tend to buy out-of-the-money options ranging from 1 year ahead or 2 year. That’s the type of assets which people don’t see intrinsic value. Otherwise, it should be in-the-moeny right? More recently, I switched all my option investment to 2 year contracts.
In short, I’m making a prediction for certain company’s performance with time constraint. Eg. Will this company’s valuation grow 50% in next 2 years. Something like that.
- Do enough analysis/investigation before taking action
- Do limit your investment activities. (If you buy/sell too frequently, it basically means you haven’t fully convinced yourself for certain asset.)
- Do more macro reading to avoid missing out the big picture (eg. tightening, easing, industry shift)
- Do enjoy your time with your family saved by #2 so that you have more deep thinking around the asset :)
- Do things fit your value system so that we can hold long enough for market to reveal the intrinsic value.
- Do not make bet on earnings
- Do not make fine-grained timing judgement (eg. X hits specific price point at specific date. That’s the reason these days I’m trying to leave time buffer)
- Do not change your hand unless you feel fundamentally the asset is changed
Had couple lots gave me out-sized return. Take 1 example: SQ200117C60. That’s a SQ call option with strike price at \$60 01/17/2020. I bought this in Nov 2017, the stock price was ~\$40. I followed Square for half year and felt strong in its next 1-2 years outlook and confident that in next 2 years SQ will be above \$60, which is ~50% valuation growth. As of today, it gives me ~+750% return (screenshots attached), which is by far the highest. My most option trades’ return range from -50% to +750% with roughly avg 300% return.
Will definitely liquidate it right away with this level return ;)
At the end of day, stock investment is one way to exercise your value system. Eg. What do you believe will make a good business? What do you believe will make a good company/team to deliver the business value? And then you gather data points (Earnings call, CEO talk, Product launch etc). I feel very rewarded that when my value system get reinforced through strong company performance.