How I netted 15% profit in 2 weeks trading options

July 01, 2020

I began paper trading selling options in mid June. By July 1st I’ve made 15% annualized profit. Here is what happened.

Goal: profit from short term market volatility from COVID

I limited my stock selection to stocks hardest hit by COVID, whose prices are hovering near 52 week lows. I want to own these stocks long term, further narrowing the selection. The two stocks with liquid enough options are Simon Property Property group (SPG) the REIT, and Alaska Airlines (ALK). I’m long term bullish on malls, especially for tourist destinations, and I enjoyed myself so much on Alaska Airlines that I almost didn’t make it off of the plane once.

Options strategy

For both stocks I’m long-term bullish, short-term bearish. Since I’m predicting the stocks to go sideways or drop slightly, I decided to sell puts. I sold puts with the lowest strike prices that return a 30+% annualized profit. I checked the positions daily and chronicled every trade in Google docs, along with the rationale, for future learning and reference.

Key events

June 15th, 2020: I bought naked puts on SPG and ALK for the JUNE weekly, with the strike price of $65 while SPG was around $70, and $30 strike price for ALK with the stock price around $37. I bought weekly because I wanted to see the options expire worthless and fast. Profitability was not a concern here, and no buy back orders were placed since the options were meant to expire.

June 19th, 2020: the SPG puts were in the money and converted to shares. I was ok with that; $65 minus premiums felt low compared to SPG’s historical price. I put a limit loss on it at $62; very tight in hindsight, but the market can turn turn sharply. The ALK put expired and I kept the premium. I purchased July monthlies for both stocks, this time with $55 strike price for SPG.

June 26th 2020: both stocks dropped due to a reported increase in COVID cases. SPG tumbled to slightly below $62, triggering the STOP order. Both July puts lost value as the underlying stock prices dropped.

June 28, 2020 Sunday: I placed the orders to roll the July puts to August, getting more credit upfront and buying time. On Monday the orders were executed, I added the LIMIT orders to buy back those puts at 50% gain.

July 1, 2020 Limit orders to buy back SPG and ALK were executed. Pocketed 15% profit, since th sell orders were placed at 30% expected profit and were closed at half of that.

Lessons learned

Focusing on a few positions is key; with just two stocks and a few positions to monitor, I only needed to check the portfolio once a day. Position sizing is also important: I was tempted to go with a bigger position size since that means collecting more premiums up front, but that can lead to large losses if the market turns against the prediction (and it did). I only ordered contracts for how many stocks I would be comfortable owning, which was a dozen for SPG and ten for ALK.

Overall it was a great experience dipping my feet into options. It felt good making money while the market went sideways, which I didn’t do as a buy and hold investor. I’m now sitting in paper cash and looking at whether to continue with SPG and ALK, or go into other battered stocks.