How I Make Over 60% Of My Profits

It’s May 2019 and after looking at my investment sheets, I’m noticing that a majority of my profits come from one source. Over 60% is made up from option premiums. It would’ve been more had I not sold some of my profitable stocks to pour the money into ETF’s.

Most of the blogs I follow, even my blog when I started, make most of their profits with dividends. Dividend Growth Investing is a great way to create wealth long term. Buying stable companies with great track records, that keep raising their dividends each year and reinvesting that sweet dividend makes for an awesome investment.

Last year however, I decided to change it up. I decided to invest in ETF’s mostly, along with a few technology stocks as I’m very bullish on that sector for the long term. In addition to these portfolios, I’ve started with options trading. This all started when I got promoted to a broker at my current job, I had two weeks of full-time classes about stocks, markets, derivates and much more. My personal profits have skyrocketed since I learned about options.

When you sell an option, the other party who bought it has a right. Either to buy shares at a certain price, or to sell shares at a certain price. When you sell the option you gain a premium as you gain an obligation and the other party pays this premium and they gain a right.

In five months time I’ve realised about €6.000 in option premiums, not only on my own accounts but also on some accounts I manage for other people. The way I go about options is to always sell them, I get a premium and gain an obligation. For example I take on the bet that I have to buy 100 shares (option contracts are almost always with 100 shares of the underlying) of Coca Cola at $44,00 on the 21st of June 2019.

Currently shares are at $49,20, shares would have to decline 11,82% before I’m at risk of having to buy those 100 shares. The price can go up, it can go sideways, it can go down for 11% and I still have no problem. After all, who would sell their shares at $44,00 if the market offers more, right?

So what happens if the shares of Coca Cola are trading below $44,00 on the 21st of June? Simple, I have two choices: 1) I do nothing and get exercised and I will have 100 shares of Coca Cola in my portfolio at a cost basis of $44,00 (excluding costs). 2) I roll out my option, I buy back my obligation for a loss and I will sell another option which could be exactly the same but this time the option will expire in another few months.

The beautiful part is that when you sell an option, time is in your favour. Every day that passes, makes it less likely that the share price will go below your option price. So when you sell options, the stock price can go up, sideways or (around) 10% down, every day that passes is in your favour and if everything goes wrong you can buy back your obligation for a loss or simply postpone it by rolling out your option. There is also the possibility of buying back your option contract before the end date. If the stock moves higher, the premium on your contract will become less as it’s less likely to be at risk. You could decide to spend a few bucks and buy back your contract for way less premium than you gained when selling the contract. This way you have no more obligation and you (successfully) traded the option contract and made a nice profit.

In five months of options trading I got assigned once, I had to deliver shares of AT&T slightly below the market price. I deliberately chose to get assigned as I had just bought those shares two weeks earlier and took a very nice and quick profit.

For more information about my option trades, you can use this link.

NOTE: Before you start experimenting with derivates make sure you COMPLETELY understand what you are doing. Derivates are too dangerous to simply fool around with! For any questions, leave a comment or contact me on any of my social media channels.

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4 Comments

  1. Wow that’s a nice additional income!
    As a traditional dividend investor, it looks complex to me, but maybe time to take a closer look.

    • DutchIndependence

      Yeah it defenitely helps the income a lot! As a former dividend investor it was tough to get into, but luckily my job helped me with it. I consider it a very valuable skill to have learned, I will apply it for the rest of my life.

      DI

  2. wow nice dutch.

    congrats on your success and also all the gains. This is something i need to school myself in more for sure.

    keep it up
    cheers

    • DutchIndependence

      Thanks Rob! It’s a slightly complicated matter, but once you figured it out I think options can be a great addition to any portfolio. They can be used to speculate with, which is what I do. But you could also use them to hedge your portfolio. Anyway, best of luck to you!

      DI

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