This is my fourth options trading update. As a reminder, I categorize options trading to include only trades that have a short duration (i.e. less than three months). I also trade longer dated options (i.e. LEAPS), but I count profits and losses from these longer-term options as part of my investment returns and not part of my options trading statistics.
The first options trading update encompassed my 2020 options trading since I began systematically tracking options trading in April 2020. Starting in 2021 and going forward, I intend to post my options trading results quarterly. Below are links to my previous updates:
2021-Q2 Options Trading Results
2021-Q1 Options Trading Results
2020 Stock Options Trading Results
OPTIONS TRADING RESULTS: Q1-Q3 2021
| Start date | 1/1/2021 |
| Total trades opened + 2020 carryover | 682 |
| Closed trades | 676 |
| Open trades (remaining) | 6 |
| Winning trades | 425 |
| Losing trades | 251 |
| Adjusted avg win | 1.000 |
| Adjusted avg loss | -1.071 |
| Net win | 425 – 268.9 = 156.1 |
(Win# times Adj avg win) – (Loss# times Adj avg loss)
| Trade Type | # of Trades* |
|---|---|
| Long call | 74 |
| Short call | 209 |
| Long put | 3 |
| Short put | 396 |
The above tables show the high level statistics for my options trading during the first three quarters of 2021. Let’s crunch some numbers to arrive at some more meaningful conclusions.
Win-Loss Percentage and Average Win Per Trade
In Q1 2021, the percentage of winning trades was 58.0%. This compares to a 2020 winning percentage of 61.2%. In H1 2021, the percentage of winning trades had improved to 60.4%, and the percentage of winning trades in Q2 2021 was 63.2% (163/258). After three quarters the win rate had improved to 62.9%. Of the 120 trades closed during Q3 2021, 74.2% (89/120) were wins.
The average loss in Q1 2021 was 23.4% higher than the average winning trade. In 2020, the average loss was only 7.6% higher than the average winning trade. For H1 2021, the average losing trade was 18.4% higher than the average winning trade. Though the first nine months of 2021, the average loss per trade was 7.1% higher than the average winning trade.
Thus, Q3 2021 was a very good quarter as the win rate increased and the average win per trade also improved.
Realized Gains
Though the first nine months of 2021, the net realized gains were the result of the 676 trades that were closed out. Of these 298 trades were closed out in Q1, 258 were closed out in Q2, and 120 were closed out in Q3. As a percentage of the 2021 starting value of GauchoRico Portfolio, the realized gains from options trading during Q1-Q3 2021 amounted to a 11.1% return on the entire portfolio’s 2021 starting value. After Q1, the realized gains only represented 1% of the portfolio’s 2021 starting value. After Q2, the realized gains represented 4.2% of the portfolio’s 2021 starting value. In percentage terms, the realized gains from the 2021 YTD options trading comprised 15.0% of the total portfolio gains (both realized and unrealized gains on the total portfolio gains) while investing comprised 85.0% of the portfolio’s total returns. Thus, the portfolio’s YTD return was boosted to +74.7% and would have been only +63.0% YTD without any options trading.
Unrealized Gains
At the end of Q3 2021, there were six open trades, and there is a very small unrealized loss on these trades. This loss is negligible. These six trades were all opened during the last two days of September; the underlying stock was LSPD for all six trades.
Trade Types
The majority of my options trades are short as I prefer to collect premiums and harvest the time value decay over paying premiums. Selling options also eliminates the requirement to be right on the timing and the direction because short options can usually be rolled forward (in time) for a net credit.
The vast majority of my options trades involve selling the ATM straddle together with a deep ITM put. I’ve described this technique in detail here, and I’ve posted a real, multi-week example trade here. These two posts should be very helpful in understanding the technique and implementing it.
Most of the long calls were directional bets on an earnings stock price run-up or an earnings result. I was not very successful with these trades in the first earnings cycle of 2021. Getting caught in a large market selloff certainly didn’t help. In the second earnings cycle of 2021, I was a bit gun-shy on the directional long call bets so I didn’t do many of them. During the third earnings cycle of 2021 (and during calendar Q3 2021), I made a killing on directional bets with the majority of the profits coming from UPST call options trades that I placed prior to the Q2 FY2021 earnings announcement. I also made nice profits by placing directional bets on DDOG, CRWD and AFRM.
Underlying Stocks and Results
The table below shows the underlying stocks on which I traded options during 2021. The “Other” category includes stocks which I did not own in my portfolio, so these were speculative trades. The three columns following the stock ticker column detail how many options trades I closed during each quarter for each stock during 2021. The next column shows the percentage of the total Q3 net profit (from options trading) that was earned from each stock. The last row in the table shows the distribution of options trading profits for the first three quarters of 2021; the majority (62.5%) of the 2021 YTD options trading profits were earned during Q3. And finally, the last column shows how the YTD (Q1-Q3) options trading net profits were distributed among the stocks.
| Q1 Closed Trades | Q2 Closed Trades | Q3 Closed Trades | % Profit of Total (Q3) | Q1-Q3 Closed Trades | % Profit of Total (Q1-Q3) | |
|---|---|---|---|---|---|---|
| AFRM | 0 | 0 | 2 | 7.3% | 2 | 4.6% |
| CRWD | 69 | 86 | 8 | 8.9% | 163 | 16.9% |
| DDOG | 7 | 51 | 18 | 15.5% | 76 | 13.1% |
| DOCU | 23 | 1 | 5 | 2.1% | 29 | 2.9% |
| GOLD | 33 | 3 | 0 | — | 36 | -3.1% |
| LSPD | 6 | 2 | 0 | — | 8 | 19.0% |
| NEM | 48 | 43 | 0 | — | 91 | 2.3% |
| NET | 6 | 0 | 1 | 0.3% | 7 | 0.9% |
| PTON | 2 | 0 | 0 | — | 2 | 0.1% |
| SNOW | 32 | 4 | 0 | — | 36 | -1.6% |
| UPST | 0 | 39 | 77 | 65.2% | 116 | 45.2% |
| ZM | 63 | 29 | 1 | 0.0% | 93 | -1.4% |
| Other* | 9 | 0 | 8 | 0.8% | 17 | 1.1% |
| TOTAL | 298 | 256 | 120 | 676 | 100% | |
| % of Net Profits | 9.0% | 28.5% | 62.5% |
I want to highlight some things in the above table:
- Q3 reduced trading frequency: Q3 was relatively light with respect to the number of closed trades. During the quarter, I only had 120 closed trades compared to 298 in Q1 and 256 in Q2. As the portfolio continued to surge after the 13May bottom, I deleveraged and curtailed my use of short put options. Since the short straddle with short deep in-the-money put is my most utilized options trade, my reluctance to employ leverage was the main factor in the reduced trading during Q3. In fact, after 9Sep I only opened seven new options trades and of these six were open on LSPD during the last two days of the quarter.
- Strong net profits during Q3: Q3 was my most profitable quarter of 2021 for options trading. Q3’s net profits represented 62.5% of the 2021 YTD’s total; this result was in spite of a sharply reduced number of trades compared to Q1 and Q2.
- Directional bets dominated profits during Q3: Directional bets on UPST, DDOG, and AFRM earnings releases contributed the lion’s share of the net profits during Q3. These bets were all directional to the upside as I thought that earning reports would have a very good chance of providing a positive catalyst for these stocks. The bets paid off as can be seen by the very large share of the total net Q3 profits from UPST, DDOG, and AFRM (88%).
- Options trading on UPST provided big profits: UPST options trading deserves additional explanation. The trading profits from UPST were derived from three trade types: a) weekly short straddles with weekly short deep ITM puts, b) long call options (1-2 weeks until expiration), and c) weekly naked short puts. The short straddles with short deep ITM puts were used extensively in Q2 and Q3 until the Q2 earnings release result. After the Q2 earnings result, UPST shares rose sharply; I continued to utilize the short straddles with short deep ITM puts even after the Q2 earnings, but I reduced the number of contracts as the stock rose. The volatility of UPST stock was high so the premiums collected from selling options were also high. Premiums for selling ATM straddles with one week until expiration got as high as 13% (of the share price) during Q2 when the short interest was high. Leading into the Q2 earnings, the premiums were still 8-9% of the share price. After the Q2 earnings, the premiums were 5-6% of the share price. As the premium percentage declined and the stock price rose, I reduced the number of options contracts that I was willing to sell. I completely ceased selling straddles when the stock price exceeded $210/share. However, above $210/share, I continued to sell small amounts of naked put options. I have not sold puts since the stock price exceeded $300/share. I purchased long call options prior to the Q2 earnings release; the expiration dates were either the Friday immediately after the earnings result or the following Friday. As the last column of the preceding table shows, these 116 UPST options trades provided 45.2% of my entire options trading profits (of 2021).
OPTIONS TRADING PROGRESS
In April 2020, I increased my options trading and began diligently tracking the trades. It was initially an experiment to determine whether I could consistently make money from options trading. This journey also included experimentation with some new methods. It’s now been a little more than 17 months since I started, and the experiment has been a success in several regards. First, it’s been a financial success. I’ve earned more pre-tax net profits in options trading in those 17 months than my entire net worth was at the start of 2017. Second, I’ve learned some new techniques and refined them further through trial and error. Last, I continue to confirm my belief that my success with options trading is and must be a derivative of a very deep understanding of the underlying stocks, the same stocks that I research and invest in. Without an understanding of the company’s fundamentals, their markets, and even their stock price movements in the context of all that information and more, I think I would be like a rudderless ship in a rough sea. I think that investing needs to come first and foremost, and then with investing success in a small number of the best growth companies, returns can be augmented by also trading options. I plan to continue this journey of options trading as long as it proves successful for me.
WHAT I’M DOING NOW
As I have have written in my past few portfolio updates, I’ve deleveraged my portfolio as the stock prices of my positions soared since 13May. As part of this deleveraging, I greatly reduced my overall short put exposure. However, I will always be opportunistic when I see good risk-reward opportunities. My option trades on UPST (even into early September 2021 when the GauchoRico portfolio continued to post all-time highs) is an example of my willingness to take shots when I see opportunities. Now that UPST has reached prices in excess of $330/share, I’m not willing to push the envelope especially considering that I continue to hold around a 30% allocation in UPST stock. So for me options trading is not something that’s always on. There are times when I’m willing to sit back and do nothing or almost nothing.
The opinions, thoughts, analyses, stock selections, portfolio allocations, and other content is freely shared by GauchoRico. This information should not be taken as recommendations or advice. GauchoRico does not make recommendations and does not offer financial advice. Each person/investor is responsible for making and owning their own decisions, financial and otherwise.