This is my fifth 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. usually 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-Q3 Options Trading Results
2021-Q2 Options Trading Results
2021-Q1 Options Trading Results
2020 Stock Options Trading Results
OPTIONS TRADING RESULTS: Q1-Q4 2021
| Start date | 1/1/2021 |
| Total trades opened + 2020 carryover | 799 |
| Closed trades | 790 |
| Open trades (remaining after 2021) | 9 |
| Winning trades | 477 |
| Losing trades | 313 |
| Adjusted avg win | 1.000 |
| Adjusted avg loss | -1.344 |
| Net win | 477 – 420.8 = 56.2 |
(Win# times Adj avg win) – (Loss# times Adj avg loss)
| Trade Type | # of Trades* |
|---|---|
| Long call | 82 |
| Short call | 244 |
| Long put | 3 |
| Short put | 470 |
The above tables show the high level statistics for my options trading during 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. Finally, the Q4 2021 winning percentage was 45.6% (more losing tradings than winning trades. Overall for 2021, 60.4% of the options trades had a positive outcome.
The average loss in Q4 2021 was 34.4% higher than the average winning trade. This large average loss per losing trade coupled with net average losing trade for the quarter pulled down the overall trading profits for the year. However, strong results for Q1-Q3 2021 were enough to keep overall 2021 options trading in the black.
Thus, Q4 2021 was a terrible quarter as the win rate decreased and the average win per trade also declined. Looking over the entire 20-month options trading period, which includes more than 1500 closed trades, the winning trade percentage is slightly more than 60%.
Realized Gains
For 2021, the net realized gains were the result of the 790 trades that were closed out. Of these 298 trades were closed out in Q1, 258 were closed out in Q2, 120 were closed out in Q3, and 114 were closed out in Q4. As a percentage of the 2021 starting value of GauchoRico Portfolio, the realized gains from options trading during 2021 amounted to a 4.1% 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. After Q3, the realized gains were 11.1% of the portfolio’s 2021 starting value. In percentage terms, the realized gains from the 2021 YTD options trading comprised 9.8% of the total portfolio gains (both realized and unrealized gains on the total portfolio gains) while investing comprised the other 91.2% of the portfolio’s total returns. Thus, the portfolio’s YTD return was boosted to +27.7% and would have been only +22.5% YTD without any options trading.
Unrealized Gains
At the end of Q4 2021, there were nine open trades, and there is a very small unrealized gain on these trades. This gain is negligible (rounding error). The underlying stocks were UPST and MNDY for these trades. These trades will be closed out during Q1 2022 and become part of that period’s profits/losses.
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. During the fourth earnings cycle (30Sep and 31Oct fiscal quarter ends), my trading activities sustained very large losses primarily on UPST and LSPD earnings bets.
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 four 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 Q4 net profit or loss (from options trading) that was earned from each stock. The last row in the table shows the distribution of options trading profits for 2021; the majority (168%) of the 2021 YTD options trading profits were earned during Q3 while an almost equal amount was lost during Q4. And finally, the last column shows how the YTD (Q1-Q4) options trading net profits were distributed among the underlying stocks.
| Q1 Closed Trades | Q2 Closed Trades | Q3 Closed Trades | Q4 Closed Trades | % Gain of Total (Q4) | Q1-Q4 Closed Trades | % Profit of Total (Q1-Q4) | |
|---|---|---|---|---|---|---|---|
| AFRM | 0 | 0 | 2 | 0 | — | 2 | 12.26% |
| CRWD | 69 | 86 | 8 | 0 | — | 163 | 45.54% |
| DDOG | 7 | 51 | 18 | 0 | — | 76 | 35.17% |
| DOCU | 23 | 1 | 5 | 0 | — | 29 | 7.72% |
| GOLD | 33 | 3 | 0 | 0 | — | 36 | -8.26% |
| LSPD | 6 | 2 | 0 | 9 | -10.2% | 17 | 33.92% |
| NEM | 48 | 43 | 0 | 0 | — | 91 | 6.31% |
| NET | 6 | 0 | 1 | 6 | -6.2% | 13 | -7.97% |
| PTON | 2 | 0 | 0 | 0 | — | 2 | 0.31% |
| SNOW | 32 | 4 | 0 | 3 | 2.4% | 39 | -0.39% |
| UPST | 0 | 39 | 77 | 81 | -94.5% | 197 | -38.12% |
| ZM | 63 | 29 | 1 | 0 | — | 93 | -3.86% |
| ZS | 1 | 0 | 0 | 15 | 8.5% | 16 | 13.93% |
| Other* | 8 | 0 | 8 | 0 | — | 16 | 3.46% |
| TOTAL | 298 | 256 | 120 | 114 | -100% | 790 | 100% |
| % of Net Profits | 24.3% | 76.6% | 168.0% | -168.9% |
I want to highlight some things in the above table:
- Q4 erased gains from Q3: The trading losses during Q4 almost exactly equaled the trading gains during Q3.
- UPST and LSPD bets: Directional bets on UPST and LSPD on their 30Sep earnings results produced the vast majority of trading losses during Q4.
- NET losses: The NET losses during Q4 were losses from selling covered calls. This was my way of liquidating a large portion of my NET shares, and, as NET shares continued to rise, the covered calls produced losses when the shares were called away from me.
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 20 months since I started, and the experiment has been a success in several regards. First, it’s been a financial success. 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 companies’ 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 must 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.
Q4 2021 (RE)LEARNING
The Q4 options trading results were a disappointment. However, they were also within the realm of expected outcomes given the relatively large bets that I made on UPST and LSPD. As I’ve mentioned above, the Q4 results were essentially the mirror image of the very strong Q3 options trading result. Much of the profits earned during calendar Q3 where on the back of UPST. Similarly, during Q4, most of the losses were from UPST. When I examine the UPST options trading losses from Q4, I can see that about 3/4 of the losses were from naked, short puts that I held going into earnings and continued to roll forward on a weekly basis. Holding these naked, short puts into earnings and beyond provided only limited upside and a lot of downside. And when UPST shares fell from about $370 per share to below $150 per share the losses from these short, naked puts piled up quickly. Normally, I tend to greatly reduce or eliminate naked, short put exposure going into a catalyst event such as an earnings result. In the future, I’ll likely be more disciplined about sticking to this practice.
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.