Making Friends with the Goose
Disclaimer: I am not a financial professional nor formally trained in any way. The information in this post is designed to inspire, not direct you. I highly recommend working with a financial advisor, like my amazing one, Josh Collier, when dealing with your family's investments.
 |
| Image credit: Gemini and me |
There was once a Countryman who possessed the most wonderful Goose you can imagine, for every day when he visited the nest, the Goose had laid a beautiful, glittering, golden egg.
The Countryman took the eggs to market and soon began to get rich. But it was not long before he grew impatient with the Goose because she gave him only a single golden egg a day. He was not getting rich fast enough.
Then one day, after he had finished counting his money, the idea came to him that he could get all the golden eggs at once by killing the Goose and cutting it open. But when the deed was done, not a single golden egg did he find, and his precious Goose was dead. (The Goose With The Golden Eggs - Fables of Aesop)
Last time, I shared with you some friendly advice about making sure to cover your butt with options, but today I want to delve into why they are an option worth considering. You see, stock is a funny thing. It's not actually worth anything to you unless you sell it. You can't go buy groceries and show them your stock certificate as payment, you need cold, hard cash. That said, once you sell it, it cannot produce any more profit for you, much like the Goose that laid golden eggs. So, what's a wise investor to do? Well, what I've decided (wise or not remains to be seen I guess) is sell call options on my stocks. This gives me the opportunity to realize income today while still preserving my investment for the future.
The stock market is a fickle thing. Sometimes stock goes up, sometimes it goes down, and sometimes it seems to stay flat forever. The cool thing is that regardless of the direction of the market, you can still have your investment payoff with options. If you look at the infographic above, you can see that over the last few weeks both of my stocks (Microsoft:MSFT and Norwegian Cruise Line:NCLH) went down in stock price, but through options I was still able to make them profitable, even more than they went down in fact! And I was able to do this without killing the proverbial goose that laid golden eggs.
How did I do this without my stock getting assigned? By learning Greek of course! No, for real. In the stock market they have these crazy looking numbers called Greeks: Delta, Gamma, Rho, Theta and Vega. No, you don't actually have to learn Greek, but getting an idea of what they mean can be really helpful when dealing with the options market. These numbers can give you an idea of what a stock is likely to do over a period of time. The Delta, for example, is probably the most important Greek when considering selling covered calls. It tells you, "How much the price of an option can be expected to move for every $1 change in the price of the underlying security or index. For example, a delta of 0.40 means the price of the option will theoretically move $0.40 if the price of the underlying stock or index changes $1. As you might guess, this means the higher the delta, the bigger the price change." (Charles Schwabb). When I'm choosing a strike price, the price at which I'd be required to sell my stock if it got assigned, I look at the Delta. This tells me the likelihood of assignment, but remember nothing is guaranteed. After much research and discussion, I've settled on staying with a Delta under 0.20. Yes, this means I give up much higher premiums, but I'm also not sitting on the edge of my seat watching the stock price and praying it doesn't get me in trouble. On that note...
I am an emotional creature, and I am subject to more than a little FOMO. I know that if I did options trading by looking at the list and selling at the strike price that called to me, I could find myself without any stock left very soon. I also know my limits. I am not a market guru, nor do I ever intend to be one. I'm not going to pick the next Nvidia. I don't have the slightest clue if any particular stock will go up or down this week, and I'm not going to risk our family's investments on trying to. So how do I open an option chain (the page where you look at all the options you can sell) and not feel like I've walked into the slot machine room of a casino? Because I walk in with a plan. I prayerfully, with much discussion and research, developed a list of rules for myself when it comes to options. These involve things like staying under a certain delta, making sure the risk of moving up from one premium to the next is worth it (my 40% rule), watching for liquidity so that I can roll if I need to, etc. How do I keep track of all this? With a spreadsheet of course! I've been an Excel addict ever since I learned it existed when I was in my early teens. To be honest, I actually have seven spreadsheets in one workbook that all work together to keep me in a healthy state of mind. I probably put 80-100 hours into their setup, but now I have a tool that will help me stay mentally and emotionally healthy while interacting with a volatile, wild commodity. All I need to do is paste the current data in each morning (about 5 minutes) and it outputs recommendations for what I should sell, hold, and roll. No emotion. No stress. I have a plan for what I will do if and when stock gets assigned, and I'm ok with it. I set alerts so that I can take advantage of market dip opportunities, but for the most part it's 10-20 minutes in the morning and then I go about my day.
Here's the Thing: My husband worked a long time to earn the Microsoft stock that we own and I am honored that he trusted me to invest with it. I want to Grow What God Gave Me, emulating the Proverbs 31 wife, but I also want to stay healthy mentally and emotionally along the way. This is how I have made friends with the Goose, instead of prematurely ending its existence.
Comments
Post a Comment