First Option Trade :: Rookie Mistake

Rookie Mistake

In a few of my recent updates, I have shared a little bit about the fact that I made my first option trade recently and that I had made what I consider to be a fairly significant rookie mistake.

“The most valuable thing you can make is a mistake – you can’t learn from being perfect.” – Adam Osborne

Through my journey into dividend growth investing, one of my goals has been to be as transparent as possible and share the successes as well as the failures.

By sharing the mistake that I made, my hope is that someone else that is just beginning to learn about options and making their first option trade will be able to avoid repeating my error.

Alright, let’s pull back the curtain and look at what happened.

Making My First Option Trade

After researching options for awhile, I had decided that my option strategy would be fairly basic and focus on selling cash-secured puts and covered calls; with an emphasis on the former.

My rationale for focusing on cash-secured puts is because I am primarily interested in adding positions to my portfolio that I would like to hold indefinitely, potentially passing them on to my children. Therefore, selling covered calls is not quite as appealing to me unless I have a position that I don’t mind trimming in the event that the option is exercised.

To start my foray into options, I decided that I would begin with a cash-secured put and focus on positions that I would like to add to my portfolio if the price was right.

With the cash deposited into my brokerage account, I selected my stock and cautiously made my first transaction (I must have triple or quadruple checked that I was choosing correctly to sell and not buy an option).

Walgreens Cash Secured Put Options Trade

If the above, looks a little foreign to you, allow me to explain.

On March 25th, 2019 I sold to open one put contract in Walgreens Boots Alliance ($WBA) with an expiration date of April 5th, 2019. The strike price on my option was $60.00/share and I was paid a premium of $1.03/share. The transaction fee was $0.05 and that resulted in a break-even price of $58.9705 per share.

Remember that each contract is for 100 shares; therefore I needed to have $6,000 cash in my account to secure this option trade and I received a premium of $102.95 ($103.00 minus my $0.05 transaction fee).

The closing price of $WBA on the day that I opened this option trade was $61.69 per share.

Over the next few days the stock price climbed.

Up over $62.00/share.

$62.50/share came and went, and then $63.00/share as well and closed at $63.49/share on April 1st, 2019.

Only a few days away from expiration and it looked pretty promising that the stock would close well above my strike price and I would keep the premium.

And then it happened…

The Rookie Mistake

On the morning of April 2nd, 2019 Walgreens announced their quarterly earnings and missed EPS by $0.07 while missing revenue forecasts by approximately $90MM.

Boom!

The stock price dropped like a rock, and what had been well above my strike price had now cratered and closed the day at $55.36/share.

In a moment, I went from looking at the prospect of collecting my $103.00 premium for 11 days worth of “work” to having an option that would most certainly be assigned at a loss of a little more than $3.00/share from my break-even price.

That stung a bit, and opened my eyes to an important lesson.

Be sure to understand when a given company is announcing their earnings and factor that into your decisions when investing.

In the euphoria of making my first option trade, I had completely ignored my normal habit of understanding when the next quarterly earnings were due to be released. Through the process of putting into practice what I had been reading and learning about options, I failed to identify this key date that had the potential to swing the price for me or against me.

The Outcome

It should come as no surprise that the option was exercised and I was assigned 100 shares of Walgreens Boots Alliance with a cost basis of $58.97/share.

Option Trade Return CalculationMy calculated return of 56.96% if the option expired disappeared in a flash and I now owned shares that had a loss of roughly 7.0%. Fortunately, I went into this trade with the understanding that the option could be exercised and if so, I was comfortable owning WBA at that price.

I know many across the DGI community have favored CVS over WBA, however the merger with Aetna and the fact that they have frozen their dividend have made me shy away from opening a position in CVS.

While Walgreens has continued to struggle, I am comfortable holding and collecting my dividend and I don’t regret the fact that the option was assigned to me.

On the bright side, I have definitely learned the perils of buying or selling options that span the quarterly earnings announcement. As I mentioned earlier, making a mistake is simply a learning opportunity–as long as you actually learn the lesson and don’t continue to repeat the same mistake.

You can be certain that I will be sure to check upcoming earnings before I make my next option trade.

Have you made any mistakes while trading options?

12 thoughts on “First Option Trade :: Rookie Mistake”

  1. You have a good attitude with respect to the assignment. I think that’s all you can do. At least you end up with shares you were willing to own at the strike price minus the option premium.
    I’m sure you’ll be more aware of the earnings release date moving forward. Another date that can come into play is the ex-dividend date, assuming you are dealing with a dividend stock. If the option you sold is already in the money and the ex-dividend date is upcoming, some option buyers will exercise their right to purchase the shares prior to the expiration date in order to capture the dividend, too. This becomes more likely the higher the yield is, as the dividend will be a decent chunk of cash.
    In any case, hang in there and prepare to dip your toes back in the option waters. ๐Ÿ˜€
    I’m sure future trades will have the results you are primarily looking for.

    1. Thanks ED; I will definitely be paying close attention to those dates moving forward and won’t let this mishap prevent me from continuing to explore option trades. Thanks for mentioning the ex-div date as well.

      I’m still learning the ins and outs of selecting the best strike price and duration, but continue to monitor my positions for appealing option trades.

  2. DivvyDad,

    Mistakes are important in the process and it will help you learn and grow as an investor. Trust me, you will be a better options trader as a result of this experience. With that being said, I liked how you only initiated options in companies you were comfortable holding for the long-term. Look, you are stuck with WBA now. In the long-term, you will love holding this company. As you said, you should be able to pass this holding down to your kids (and grandkids).

    Bert

    1. Thanks Bert, and I am a big proponent of the mindset that if you’re not failing or making mistakes that it means you’re not trying and learning new things. Nobody is perfect at something right out of the gate and you can’t let the fear of failure / mistakes hold you back.

      I just had the first dividend for WBA come in and it definitely made me smile!

  3. Thanks for sharing DivvyDad! I have no experience with options but would like to try it one day. I think it really makes sense the way you are doing it – writing options for shares of companies you wouldn’t mind owning if the option gets assigned.
    Good luck in your future endeavours!
    BI

    1. Wish you all the best when you are ready to try it out! As I am primarily looking to add to existing positions vs. opening new positions, I now regularly check the option chain for positions that I am considering an add–particularly those that I feel are just above my targeted price.

  4. Mistakes happen, what’s more important is learn from your mistakes. You seem to have a good attitude with respect to the option mistake.

    Have read about options but haven’t actually done an option trade myself yet. Not sure if I will or not. ๐Ÿ™‚

    1. Thanks Bob, and as mentioned to Bert above, I really do believe that mistakes are part of the process. While I would certainly like to avoid them, I do embrace them for what they represent and that is the process of learning something new.

      To be honest, I was happy that I didn’t make a mistake in the type of transaction to make as that can be a bit confusing at first (e.g. buy to open / close, sell to open/close).

  5. Ugh, well this is a great post and learning experience. Love your blog too!

    Earnings announcements certainly amplify the premium on options contracts. Whenever selling puts I only focus on companies that I actually want to add to my portfolio. I generally try to avoid short term (less than 30 days) contracts and those around earnings season.

    1. Thanks for the comment and feedback Nate!

      I completely agree on using options only for positions that I will be happy to have in my portfolio. And as I had been watching WBA and wanting to add it, I was even happy with the price at the time. The shorter term contracts were appealing to me as I am not trading on margin and didn’t like the idea of locking up that capital for an extended period of time, at least not right now while I am still learning.

  6. Hey DD,

    There are plenty of lessons to be learned along the way with options. I’ll give you a quick experience of mine which hopefully helps you as well.

    When I sold my first Put on MCD shares, the stock was around $65 per share and my Strike was $60. However, instead of going below the $60 where I wanted to get a position of 100 shares, they rose to +$200. My lesson? Whenever I employ this strategy, I always initiate a position as well so that if the stock goes up indefinitely, I don’t get locked out. In this case, I made around $700 on my Premium, as I recall (it was many years ago… whenever MCD was around that price) but lost out on huge capital appreciation. I wound up eventually buying into MCD in 2014 during the Chinese meat supplier scandal for a price of ~$95.

    Options can be fun, but sometimes simply owning stock outright can be a better option.

    Take care,
    Ryan

    1. Ouch, I am sure that stung a bit but thanks for sharing that experience!

      With my focus now on options for existing positions, at least I would minimize that risk a bit due to the fact that I already own shares. However, I think that is an important lesson to file away and relates to a comment I made earlier about using options in cases where the stock price is above my target range (e.g. currently over-valued). If a stock is at a price where I am happy with right now, it likely makes sense to just buy it outright.

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