As you know there is volatility with the markets given the ups and downs we are seeing every few months and I started with Options a few years back and for people who follow markets on a regular basis atleast twice weekly options could be a way to play the volatility and also trying out new positions without a huge capex loss or protecting an upside. I will try to summarize hear some of my learnings from last 2 -3 years. Caveat Only use short term options if you are okay to lose money or the stock occasionally because events turn out to be different within the time frames else try LEAPS that give you time and a runway to see your thesis play out. A good example would be buying a OLED option for 2020 for 190 strike for just 2K because if this LOED market goes bigger we should see this stock @ 300+ by 2002 or you can buy 100 shares at 12K . Never allocate more than 20% of your total portfolio in options just like the stock allocation rules because you can still recover with the rest 80%.
For beginners it always good to start small and simple
1.Start just with call options as buy them for stocks which you want to learn or not risk too much capital or have binary events e.g. biotech decision on CLDX later this year could be a huge upside but can also be a total loss. ANET is another example has a June hearing so maybe instead of plonking 28 K buy a option for July/Aug
2.IF a stock has run away without reason you can sell a call option of course do this only if you are okay to hand over the stocks. For e.g if you had sold some options on ANET last month @ 300 you could have made a decent gain and still held on to the stock but if it was beyond April then who knows
3.IF you don’t have money but like a stock like OLED buy a option now could be great since its started to steady on price but you need 12 K for 100 shares
4.Never sell a call option on a stock which is going up for fundamental reasons like a SQ or makes big moves like an ANET. If there is volatility you get good premiums so try selling during volatile times and buy when its down
For others who are into options already
1.Use puts to get into stocks at a lower price or use spreads to catch the upside while getting the put premium for a better entry point
2.Buy a put instead of a shorting a stock if you feel a stock has run up too much too fast and will come down or you believe the copany will fall apart
3.If you have in the money options and you are unsure of an upcoming event roll over the options and lock the profits and get a option further down so you protect your gains and catch the upside with just a 15% insurance hedge loss
4.Try making close decisions for Open calls at least 2 months before expire as you cannot control short term events most of the times. For e.g. I rolled over my March EBIX options 1month before ER since it had run up and I was not sure if the price would come down and locked in 60% of my profits but got into a longer term option at a higher price since it’s a steady riser normally so I get to see 6 more months before the next decision
5.For steady stocks like COSTCO you can keep squeezing returns because it goes up with every earning and you can sell CALL option every 2.5 months down and pocket a decent 2 -3% return which is a yield of 12%+ along with the stock appreciation . Of course you may lose the stock goes up too much post an event in this case but you need to ACCEPT that else don’t play
6.Buy options instead of adding to a heavyweight position if stock falls down without any fundamental changes in the business. I did it with OLED recently when it fell down and keep doing this with ISRG every time it goes down since I already have 10% in this and I get some options and it has given some boost to my upside as I keep rolling it to longer term and lock the upside once the price goes way above the strike.
7.If you buy leaps you can keep selling at higher strike prices every time you feel the stock has run up or buy leads for biotechs or companies that need time to prove the thesis An make sure you follow up since if the thesis does not play out and needs more time take another position. I picked up EXEL a biotech when it was down in the dumps and kept doing it for 2 years in a row
I have a lot of traditional stocks in my portfolio like a COST, ISRG and ORCL (I just dumped ORCL finally last month and picked up MDB after reading Bert and others) and my options have returned almost 70% yoy in the last 2 years though the first 2 years were a learning for me.
Rajesh