Chapter Two // Options

Recently I’ve looked more into options, to be fair I had to do it for my job as I’m looking to learn more about financial products so I can make a little promotion. After long hours of trying to get my head around option trading, I think I finally got it and I immediatly put my new knowledge to work. Why are options interesting and worth your attention? Well let me explain.

 

Basicly option contracts exist of rights, and duties, you can buy a right to buy a stock at a certain price (call option), or you buy the right to sell a stock at a certain price (put option). On the other side of these rights there are the duties, which means the holder of this contract could be forced buy or sell the underlying asset for the price agreed upon.

The owner of the right has to pay a premium to the owner of the duty and this is exactly why options are very interesting and a loved product. If you have a buy order for a specific stock in place, why not write a put option so you could buy the stock at your desired price and you collect some premium along the way. And vice versa if you’re looking to sell a stock, why not write a call option for your position.

How I put the theory into practice.

I decided to write put options on Royal Dutch Shell as I’m looking to start a position anyway. I got some premium and now I could be forced to buy shares at €25, this duty will most likely only be executed if the share price is below €25 at the expiration date of the contract. I can only win in this case, I used to have a buy order for Shell at €25, so I would have bought the stock anyway, now I don’t necessarily have to, but I can still collect my premium.

Of course there are hundreds of variations possible and a lot of different premiums according to the expiration date, the underlying stock it’s volatility and more variables. I’m also looking at writing a put option on Unilever as I’d love to pull the trigger when they reach €40 or lower. Why not collect a premium of €100+ for waiting for this moment to happen, free money am I right?

I’m certainly happy with my new findings and I’ll be looking for new ways to earn a little extra cash without increasing the risk of my portfolio all too much.

Before you use options make sure you understand them as they can be a tricky financial product with a lot of risks, especially if you have no idea about how they work.

 

If you have used options together with your dividend growth investing portfolio, make sure to let me know about your experience down below!

Happy investing!

 

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2 Comments

  1. To fully avoid risk with options, set aside the amount of your duty. That would befor example 2,500€ for each put contract sold in Shell.
    This is specially important in your first trades, while you keep learning how this product works.
    It is very temptative (and easy) to leverage and sell a lot of options to get a lot of “free” money. This is the risky part of the options.

    • DutchIndependence

      I couldn’t agree more, you have to be prepared when your shares get assigned! I have the cash as I was waiting to buy into Shell anyway, and so that’s why I decided to sell some puts. Not much risk in that currently! Thank you for your comment.

      DI

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