Generating income while waiting for share price to move

[bdsjp]

Hello L&G

I would like to share a trade that I took this week. The setups are as per listed in the kindle book (Turning The Wheel) but I choose a speculative stock instead of a fundamentally strong company. This is a stock that I don’t mind owing for speculative purposes.

The stock is SKLZ, a technology company that provides monetization services to game developers, which is listed in the NYSE.

The company recently released its earnings, which is worse than expected, and the share price dropped from $14+ and seem to find support around $10. The stock is trading at $11.10 when I entered the trade and is moving upward toward $12, which may act as a strong support if the price move above it.

With the setups and intentions defined, I have sold a cash secured put (1 contract) on SKLZ at strike $10 (9% discount to current price), expire on 1st Oct’21 (market closed) and collected a premium of $68.

By expiration date (1 Oct’21),

- If share price stays above $10, I will not be assigned the shares but will keep the $68.

- If share price drops below $10, I will get to buy 100 shares at $10 and at the same time, keep the premium of $68. Which effectively reduce my purchase cost to $9.32 per share, which is a 16% discount to current stock price. (1 options contract is 100 shares)

As this trade is intended to be a cash secured put, I have set aside $1,000/-in the trading a/c, in case I get assigned the shares.

   

Wish everyone making money on whatever you are trading!


PS. The above post is not to promote speculating in options trading but just to show that there are other possibilities other than the traditional straight buy, hold and sell to trade a stock.

[Wildreamz]

If expired worthless, you will yield 6.8% for your 37 days holding period (or ~90% annualized if my calculations are correct).

Not bad (extraordinary in fact). But if it's a good company, your absolute returns will be capped at 6.8%. You will not be able to capture more value as it double or triple right?

If it's not a good company. Then even if you gotten in at 16% discount. It may not save your investment.

And once share price moved significantly, you cannot repeat the same trade, and have to hunt for another target (ie strategy may not be repeatable).

I have looked at Skillz a while back. In my opinion, it has a CEO with decent track record of creating successful startups. But the fundamental business of Skillz is questionable to me (akin to gambling; ie not good for stakeholders, and potential regulatory risks). MAUs are stagnating, operating loses are widening, while revenue growth is slowing, and valuations remain high.

I will abstain from it.

Edit: Still could be an attractive M&A target for gambling companies like Draftkings.

(NOT investment advise)

[weijian]

Dear bdsjp,

- In recent times, there were some intense discussion on short term trading at the Dutech due to the Mgt take over. After review, it was deemed to be a well thought out arbitrage opportunity (heads I win, tails I dont lose). As such, the Moderator allowed the discussion to proliferate.

- Unfortunately, I am not able to see traces of "thoughtful arbitrage" from your posting as I interpret them to be mainly chart reading. I would encourage you to post more insightful thoughts than chart reading, on fundamentals than speculation.

Moderator

[Wildreamz]

Sometimes, ideas are only found to be "bad"/"speculative" upon further discussions.

The potential "value-investing" angle here is: can "Theta" (https://www.investopedia.com/terms/t/theta.asp) be potentially consistently overvalued and sold short for consistent gain?

Perhaps in certain special cases (https://www.re-thinkwealth.com/warren-bu...t-options/).

But definitely, NOT in speculative/bad companies to begin with (as with the example cited). For great companies/ideas (which are rare to begin with), why settle for a capped upside of a couple %?

Peace.

[weijian]

Reading this blog reminds of this "wheel strategy" (earning an income selling options) discussed on VB.com more than a year back.

Granted, the below blogger lost most of his capital in wrong bets (and probably sized wrongly) via buying call options but "investing" via buying/selling options is part of his grand strategy and comes as a package.

While I applaud his candor to reveal his massive capital losses in public, but unfortunately, I have to say that he may not have learnt the right lessons....

6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading

Last year (2021), when I was earning more than 200k, it was like a dream come true, as I would no longer need to continue my day job, and face all the stress and boring work, if I were to earn this crazy amount of money each year.

https://learninginvestmentwithjasoncai.c...g-trading/

[Wildreamz]

If expired worthless, you will yield 6.8% for your 37 days holding period (or ~90% annualized if my calculations are correct).

Not bad (extraordinary in fact). But if it's a good company, your absolute returns will be capped at 6.8%. You will not be able to capture more value as it double or triple right?

If it's not a good company. Then even if you gotten in at 16% discount. It may not save your investment.

And once share price moved significantly, you cannot repeat the same trade, and have to hunt for another target (ie strategy may not be repeatable).

I have looked at Skillz a while back. In my opinion, it has a CEO with decent track record of creating successful startups. But the fundamental business of Skillz is questionable to me (akin to gambling; ie not good for stakeholders, and potential regulatory risks). MAUs are stagnating, operating loses are widening, while revenue growth is slowing, and valuations remain high.

I will abstain from it.

Edit: Still could be an attractive M&A target for gambling companies like Draftkings.

(NOT investment advise)

Let's review what has happened of Skillz. It's currently trading <$0.50 or a 95% lost on capital.

Case in point.

[weijian]

In this thread, we talked about "income" from selling options - either put or call.

Selling put is well-known as history is littered with dead bodies that did that (which was then popularized by Nassim Taleb).

Now, someone at Morningstar talks about Option-income funds. They basically get their "income" from selling calls.

The last 1/3/10 year return/volatility comparisons of selling covered call strategy vs balanced/equity fund have been published. When we look at the 10 year return/volatility chart, there is really no free lunch and VB Wildreamz is spot on here. Investors are probably better off in the long run if they can accept uncertainty and volatility.

Are Option-Income Funds Here to Stay?

Let’s examine how option-income funds have performed. Morningstar calls these funds “derivative income” to address the fact that some of them simulate options-writing strategies by using other forms of derivatives, so I will use that term in describing the funds. But they are the same funds that Jason discusses.

https://www.morningstar.com/articles/113...re-to-stay