Investment Goal #8 - Limiting Margin to Max 80% from Stock Portfolio for Options Trades

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Options trading has been my latest discovery in the wonderful world of finances. It took me about 6 months to get started.

Right now I trade put sells on stocks I wouldn't mind to have or make calls on stocks I already have.

Investment Goal #7 - Selling Puts to Own / Generate Income

So far I have managed to make the most 0.9% in a month in options trade from the value of the total portfolio.

As my portfolio consists of many positions (not only stocks), I would say 0.9% is a decent number. The actual rate for stock portfolio only would be more than 2% month. That sound like 24% annually. Holly smokes!

My broker allows me to make naked puts, using my existing stocks as collateral if things go South. It's called a margin trading. I believe the max amount I can borrow now is 100% the value of my portfolio. 

Anyway, options trading is still risky, and I wouldn't start selling puts or calls on stocks I can't afford to have in my portfolio, for example, Teslas, Amazon or Facebook. I try to keep a low profile, not to blow up my account.

That's why I decided I won't spend more than 80% of my total capital in stocks for options trades. And actually, I'm looking to gradually decrease this number down to 50%.

Let's say at the end of April, my stock portfolio was worth $10,041.56, for options trades (selling puts which require to lock capital) max I will allocate is 80% or $8,033.25. That means that I can sell 1 put contract for an $80 worth of stock this month. On the other hand, I won't risk with just one trade, instead, I will make more, but smaller trades. There are a couple of stocks trading under 6$ to generate options income. I will stick with them.

Also, I will reduce my margin trading amount by 2% each month. So for example in April it's 80%, in May 78%, June 76%... December 64%. I hope to gradually reduce the margin to 50% by July 2020. 

Now, while I'm looking to decrease margin limit, I'm also looking to grow the total stock portfolio value by collecting premiums, dividends and injecting fresh capital. I'm looking on average on 600-800$/mo to increase for the portfolio for the next 15 months.

Let's see how does it turn out now:

Say in May I will have a portfolio worth $10,600 and margin for options trading 78% = $8,268.00. The total sum I can put on options trades has actually increased, despite the limit has been lowered by 2%.

  • June $11,200 / margin 76% = $8,512.00
  • July $11,800 / margin 74% = $8,732.00
  • August $12,400 / margin 72% = $8,928.00
  • ...
  • July 2020 $19,000 / margin 50% = $9,500.00

As you can see the total amount I can risk for option trades still will increase by about $1,500 from April 2019 to July 2020. 

How much can we generate in options income by selling puts with locked $8,000 now or locked $9,500 in 2020. It depends. It depends on days to expiration and premium collected, also it depends on assigned or expired options.

I will try to average it out and let's say $8,000 is locked for a 3 month period generating 5%. Or about 1.66% monthly. 

I would make ~ $133/mo now or ~ $158/mo in 2020.

Now, these are just rough estimates which should be taken with a grain of salt.

On the other hand, this April I have already made $214 in options income, with options expiring in May, July, and even October. 

Currently, I have locked away already $6,700.00, making a room for new options trades in May just for $1,333.25. 

There is one option expiring in May, unlocking $1,500 + additionally I will deposit $800 for new stock buys. 

Following month now looks like this:

78% from $10,800 = $8,424.00

Margin for options trades = $8,424.00 - $6,700 + $1,500 = $3,224

$3,324 is the capital I can risk for option trades in May 2019.

Netting ~ 1.6% yield/mo I'm looking now on $53 options income following month.