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FIRE'd Up - Year One



The Prologue

The location: Rome, Italy. It's January 27, 2020. I'm standing alone looking at the Alter of the Fatherland. The sunrise lights up the monument with a golden hue. My body freezes to admire its beauty. A strong, free-wheeling surge of emotions runs through my veins. I'm celebrating my 35th birthday devoid of stress and responsbilities. There is a calm in my mind that becomes addictive. I have travelled almost every year for my birthday for a decade, but this moment inspires me differently. There is a new addiction I seek called living and I need more.

Ten days later, my vacation would end and I would head back home to Edmonton, Canada where I worked six days a week, feeling tired and trapped. While I was in Rome, the coronavirus was spreading, and the first cases hit northern Italy. I would arrive in Canada thinking this virus was minor, but four weeks later, Canada closed its borders. The world shut down. By April, both my part-time jobs decided to close up, and for the first time in over a decade, I had no work. Fortunately, I qualified for CERB, Canada's stimulus program as part of their traditional unemployment insurance. I saved every dollar from CERB knowing I might not have work for a while. I also used the time to think about my future and what actions to take going forward. I reminisced about gazing at the Alter of the Fatherland and the positive emotions that accompanied that memory; I firmly decided to 'alter' the trajectory of my life.

The location: Edmonton, Canada. It's June 29, 2020. I love travelling, seeing the world, and experiencing culture, and having that capability at 45 opens more doors than at 65. I needed to re-route my life so that I could expand how often I travelled and how I would come up with those funds, to reduce my work hours so that I could continue actually living. The generation of people before me retired in their 60's; I did not want that. I wanted to retire at 43, which happens to be my lucky number. I knew of an investment strategy that was low maintenance, generated passive income, and can be monitored from anywhere in the world. It was a strategy that I had done for years, but without the urgency nor commitment. I was allured by more risky, aggressive strategies that could be more lucrative. Nah, it didn't work. I had to do it the relatively slow and steady way. I had to focus solely on writing options.

December 31, 2020: My portfolio doubled in value through a combination of investment returns and continuous deposits of disposable income from CERB and my part-time job. It seemed like I was on my way to a better life altered by a job loss and a focus on generating income through other means. I don't often tell people, but 2020 was a major blessing for me, but how do I show excitement and pride when people around you are suffering through job loss and mental illness? You don't. You can't. It is insensitive. I truck along and wait for them to be in a better position, cheering for them on the sidelines while I continue to improve my life.

I decided to share how I got to this point through a series of short blogs offering insight into the strategies and summary of results which I aim to post every year on June 29. There will be three parts to each blog: the process, the progress, and the product. The process will include the thought process of what strategy or structures I must execute for the time period. The progress will show some of the primary trades in the account. The product will be a short summary of any growth I obtained during the calendar year. Can I retire at 43?

I must inform readers that I am a former licensed investment representative in Canada, but left the industry in 2009. I continued trading while holding jobs in the hospitality industry. I also came back to one job and qualified for CERB for several months after due to reduced hours and income. This helped me cover my expenses without needing to access my investment capital.



The Process

Developing a concrete plan requires knowledge and experience, but even more importantly, understanding your weaknesses or limitations. In the world of trading, these limitations can include lack of capital, lack of knowledge, lack of confidence, and susceptibility to emotions. Fortunately, I have been trading options for my entire adult life (2004 to present) and have become well-experienced in how they perform and react during all kinds of market conditions, but my primary limitation at this juncture was starting-capital - a mere $10,000 CDN in the trading account (excludes assets held in other accounts).

Looking back at my trading history, I could see that my most constitent, profitable trades were covered calls on blue-chip and medium-risk growth stocks. In fact, in 2016, I wrote covered calls on Netflix for eight consecutive weeks which I used to fund my 10-day trip to Tokyo, Japan. It should have been a clue to continue that strategy, but I was allured by other higher payout trades that did not pan out such as credit spreads and buying options. Now, I've also been writing covered calls in my other accounts for a while with very little progress, and the primary reason was because of the stock choices (non-blue chips) and panic-selling to preserve capital during market corrections instead of just holding for the dividend. Silly me. I knew going forward, covered calls and extracting extrinsic value on blue chips was the best route to take. It was easy and less-time consuming (great for when I travel). And when markets fall, hold through, especially if it's a blue-chip. The saying "Time in the market, not timing the market" is vital here.

When I write a covered call, I always choose the weekly ATM (at-the-money) strike, which generally has a return of 1% per calendar week. This is an acceptable return during low-volatile markets. The downside with covered calls is the capped gains, however, if we think about it mathematically, it makes sense to take an expected 52% return a year versus the 10% average through simple buy-and-hold. I can access more income through a hybrid portfolio using both a buy-and-hold mindset with theta decay on the option.

For those that do not know, a covered call trade has an identical risk-to-reward structure as writing a put with all things being equal (strike price, expiry, no dividends, etc.). The benefit of writing a put is that it has fewer trades up-front, thus less fees. I also planned to leverage the capital and a covered call strategy would require borrowed funds, which charges interest. Writing puts eliminated these expenses, automatically enhancing my returns. Therefore, going forward, it was more beneficial to write puts instead of covered calls.

If I forecast that a 50-delta put option has a 50% chance of expiring OTM (out-of-the-money) and 50% ITM (in-the-money), and then assume 50% of the ITM trades will still be profitable by capturing the extrinsic value, then we can conclude that 75% of the trades would generate a realized profit. The 25% of losing trades could be rolled out to capture additional theta and as long as the stock price is consistently around the same range, I can still access about 0.50% weekly theta extraction. In some instances, I could roll down the strike for a small credit. This allows me to have a lower break-even strike on the new contract which means my back-end closing costs are reduced. Choosing quality companies is important because I want a stock that won't suddenly plummet under normal market conditions. If a stock dramatically falls, the credit for rolling out options on puts becomes smaller and that ties up significant capital.

The next step is finding the right stocks. Most people online will suggest high-beta stocks. These are companies that are more volatile than the index and offer higher premiums when writing options. However, the primary issue I have in that concept is that high-beta stocks perform poorly and do not actually offer enough in premium to justify the volatility. As I mentioned earlier, I have sold covered calls for years on high-volatile stocks without any progress but I've made a lot of money writing calls on blue-chips. These companies include financials like Bank of America, Citigroup, etc, or quality tech like Apple, Microsoft, etc., or retail giants like Costco, Wal-mart, etc. I cannot stress enough how important it was to consider only blue-chip and medium-risk growth stocks.

On June 29, 2020, the equity value of the trading account was approximately $10,800 CDN or $8,000 US. I aggressively leverage the portfolio across multiple sectors for some diversification. Since I am writing puts, I must calculate the estimate market value of the account based on the presumption of assignment. That is, if I actually own the shares with a covered call, what is the market value? I would never exceed triple my equity value, that is, at inception, the maximum market value of my strikes would be $8,000 x 3. This was my risk management portion. I could easily absorb a max loss of $24,000 US (minus $8,000 starting capital means I would owe $16,000 US).

I allocated a maximum of $10,000 US to each company in July, and primarily traded two stocks. I chose Square and one financial stock, often rotating between Citgroup, Morgan Stanley, and JPMorgan, as all three were under $100 a share at the time. The reason for the rotation was because as stocks moved up and down, I wanted to be as close to $10,000 as possible so that I did not have idle capital.

Now, the world just survived a market correction in March 2020, but the US Fed intervened. My experience from the 2008 financial crisis taught me that the government intervention would calm markets, and in a low-interest world, with people seeking returns, the money would continue to flow into the stock market. I felt confident and comfortable with the leverage as well. And for readers, risk management is more important than anything else when trading, even more important than returns and ability. You must be prepared for the unpredictable.

With $24,000 US market value, I should expect $240 in extrinsic value each week. Over one month with 2 trades per week, I should expect 4 trades to expire worthless, 2 trades to be closed for any gain, and 2 trades to be rolled out due to a drawdown. I also open all contracts in the final hour of the day on Monday. This is near the closing price and we can compare it to the closing price for the end of the week. So, how did I do?



The Progress

By the end of the third quarter (September 30), my account value was over $17,700 CDN. This is a combination of gains and depositing disposable income. My equity has grown about 70% quarter-to-quarter. This also allows me to increase the amount of companies I trade, still capping each stock at $10,000 US each. However, shares of Square went from below $110 to $150 in this time, so I decided to maintain Citigroup (primarily) and Square in my account until it grew. My average account allocation starting September is Square ($15,000 US) and Citigroup ($11,000 US).

In early December, I start adding a medium-risk stock, Snapchat, which was around $52 at the time and did 2 contracts. I also add Apple at $123 to the rotation, swapping it with Snapchat if it went too high. I also add Starbucks at $100. My account now is weighted across financials, tech, retail tech, and retail food. By December 31, the account is $23,700 CDN or $19,000 US. This is a gain of 33% quarter-to-quarter. My average account allocation in December is Square ($18,000 US), Citigroup ($11,000 US), Starbucks ($10,000 US), and Apple/Snapchat ($12,000 US) for a total of about $51,000 US. My max leverage is $19,000 x 3 or $57,000, so I am still within my risk management parameters. I would eventually drop Square in January 2021 due to its price.

Below are tables of the progress of Citigroup and Square, which were my two most actively traded. For simplicity, I only included the short strike and net credit on each expiration date. I've also included two different expiring outcomes because when writing puts, our goal is to out perform the stock for that time period, the best outcome being the net credit received was greater than the stock's gain. If I write options that underperform the stock, then we can conclude it is better to buy the stock on margin for that time period and hold until the end of the week. I also assume I have no temptation to take gains early.

Those on mobile may need to rotate their phone to landscape, due to a table error that appears in portrait mode. I apologize for this inconvenience.

Results Table Legend
Expired 1 - Option expired worthless; option outperformed stock - optimal outcome
Expired 2 - Option expired worthless; option underperformed stock
Gain or Loss - Option expired ITM; closed for a net gain
Rolled Out - Option expired ITM; closed for a net loss, included credit for rolling
Assigned - Shares were bought



Citigroup (C) - 2 contracts - July 20 to Aug 7
Expiration |Strike| Credit| Entry Prc| Closing Prc Result
JUL 24, 2020 |50.00 P$0.80$50.14$51.67Expired 2
JUL 31, 2020 |51.00 P$0.70$51.29$50.01Rolled out - Closed for $1.31
AUG 07, 2020 |51.00 P$1.78$52.12$50.01Expired 2

From July 20 to August 7, Citigroup shares gain $1.98 and paid $0.51 dividends; total option premiums received in $1.97. Therefore, during this time period, assuming no early sale of the shares, it was better to own the stock, excluding possible interest charges.

Citigroup (C) - 2 contracts - Aug 17 to Nov 27 - includes short strangles and put assignment
Expiration |Strike| Credit| Entry Prc| Closing Prc Result
AUG 28, 2020 |51.00 P$0.83$51.42$52.28Expired 2
SEP 04, 2020 |52.00 C$0.46$51.12$52.52Rolled Out - Closed for $0.72
SEP 04, 2020 |51.00 P$0.56$51.12$52.52Expired 2
SEP 11, 2020 |51.00 P$0.80$51.04$51.00Gain - Closed for $0.06
SEP 18, 2020 |52.00 C$0.58$48.15$44.86Expired 1
SEP 18, 2020 |51.00 P$1.00$48.15$44.86Assigned
SEP 25, 2020 |44.00 C$0.55$42.02Expired 1
OCT 02, 2020 |42.00 C$0.78$43.70Rolled Out - Closed for $1.70
OCT 16, 2020 |43.00 C$1.97$43.24Rolled Out - Closed for $0.24
OCT 23, 2020 |43.50 C$0.58$43.70Rolled Out - Closed for $0.49
OCT 30, 2020 |44.00 C$0.75$41.42Expired 1
NOV 06, 2020 |43.00 C$0.75$42.71Closed for $0.02
NOV 13, 2020 |46.00 C$2.20$48.66Closed for $3.00
NOV 20, 2020 |49.00 C$1.12$51.65Closed for $2.55
NOV 27, 2020 |51.00 C$1.13$56.67Assignment

From August 24 to November 27, I opened up short strangles because the shares were sideways. On Monday September 14, the banking sector fell on news, which triggered an assignment at $51.00. In that time period, Citigroup shares gained $5.25. The total premium recieved opening the strangle and covered call was $5.28. I also wrote covered calls below my book value in exchange for theta. In the end, owning the shares was almost equal to writing options during this phase assuming shares were held to the same date and prices.

Citigroup (C) - 2 contracts - Dec 8 to Dec 31
Expiration |Strike| Credit| Entry Prc| Closing Prc Result
DEC 11, 2020 |57.00 P$0.28$58.13$58.93Expired 2
DEC 18, 2020 |59.00 P$0.78$58.74$59.06Expired 1
DEC 24, 2020 |61.50 P$0.76$61.23$60.57Rolled Out - Closed at $1.35
DEC 31, 2020 |61.50 P$1.57$61.66$61.66Expired 1

From Dec 8 to Dec 31, Citigroup shares rose $3.53; total option premiums were $2.04. Therefore, it was better to own the stock over writing OTM options. However, if we remove the first trade in this subset of trades, expired 1 was the most common outcome in the final three weeks.

Square (SQ) - 1 contract - June 29 to November 27
Expiration |Strike| Credit| Entry Prc| Closing Prc Result
JUL 02, 2020 |101.00 P$1.65$103.68$113.39Expired 2
AUG 21, 2020 |147.00 P$1.25$152.48$155.10Expired 2
AUG 28, 2020 |147.00 P$1.50$151.79$155.93Expired 2
SEP 04, 2020 |157.50 P$2.68$159.56$146.39Closed Loss $11.22
Bought shares at net cost $143.80 (manually took assignemnt to capture extra theta)
SEP 18, 2020 |157.50 C$3.90$145.01Expired 1
SEP 25, 2020 |147.00 C$2.07$147.20Rolled up; buy at $10.85
SEP 25, 2020 |157.50 C$5.60$157.72Closed at $0.70
OCT 02, 2020 |160.00 C$6.50$169.61Closed at $9.10
OCT 09, 2020 |160.00 C$10.95$183.50Assigned
OCT 09, 2020 |177.50 P$1.65$180.18$187.28Expired 2
OCT 16, 2020 |185.00 P$1.56$190.47$186.35Expired 1
OCT 23, 2020 |182.50 P$2.70$186.96$176.77Assigned
OCT 30, 2020 |182.50 C$2.30$154.58Expired 1
NOV 06, 2020 |175.00 C$1.15$198.08Rolled up; buy at $6.00
NOV 13, 2020 |182.50 C$5.50$177.19Expired 1
NOV 20, 2020 |182.50 C$2.42$195.97Assigned
NOV 27, 2020 |200.00 P$2.35$207.78$212.52Expired 2
DEC 04, 2020 |200.00 P$3.65$210.96$208.15Expired 1
DEC 11, 2020 |200.00 P$3.65$210.96$208.15Expired 1

During this time, Square shares grew from $103.68 to $208.15. The shares actually doubled. The option premiums received by writing OTM puts never came close to the stock's performance. As you can see, expired 2 is the most common outcome when writing the puts, and buying to close/rolling was the most common outcome when writing calls . Therefore, Square in this period outperformed the theta strategy.



The Product

The first six months of a strictly theta-collecting strategy has shown positive results. Due to a declining USD/CDN rate from 1.34 to 1.21, the US dollar gains had a smaller positive impact on my net worth/equity. I also own shares of BCE strictly for dividends (which pay off my cell phone bill) which also has a minor impact on net worth.

Month End |Equity (CDN)| Return (USD)
June$10,800
July $10,126$892
August $10,472$907
September$17,749-$1,358
October $17,030$2,763
November$19,841$2,571
December$23,773$1,224


The Epilogue

FIRE (Financial Independence, Retire Early) is a movement by millennials because we value experiences over a lot of other things in life. And in aiming for these goals, we learn a lot about ourselves as individuals. My focus on financial independence has made me more confident, healthier, and mentally stronger. But aside from personal growth, we are also shaped by major events.

The summer of 2020 became one of the best summers in my life. I explored my home province at a new level. I went to Jasper in the Rocky Mountains, headed south to Waterton National Park, visited Drumheller, discovered random waterfalls and lakes including Abraham Lake, and realized how important time is to me.

However, I lost a close friend from covid; he departed our circle in November. This moment weighed heavily as I entered the new year. My goals to retire early and experience the world became more concrete because I realized I could go at any time. I'm an atheist, which means I don't believe in an after life, therefore, the moments between birth and death have to be positive and worthwhile. I knew I could not be idle for too long. As the calendar flipped, I entered with a new sense of pride and energy to keep moving forward with one less comrad on my path, who now journeys with me in my heart.

I hope to post a new blog next year at the same time to show it can be done. If it motivates you to find yourself or seek a new goal or spend more time with those you love, it will be worth it for me to share my story.


 
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