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).
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.
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.
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.
My 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?