Every once in a while, you feel like you’re in the zone. Like things are finally going your way, and the world is your oyster. Well, I’m not quite on that level, but after some much-needed personal time, I hope you enjoy this belated June edition of I-Dog Capital Monthly! Things were slow to get going, but after solving banking issues, we finally got to making money in June. I’m doing some different trades than just single options, which we’ll get into later on. June was a very good month for the fund, and I can’t wait to get into it with you.

My positions

For months now, I have been building a position in the short-term treasury fund, $BIL. That is still happening. I didn’t end June with any other active positions, though I have traded some other stocks along the way. True to its nature, even while long-term treasury yields drifted lower in June and July, $BIL has held its value and its yield. Short term interest rates are mostly unaffected by expectation-based Fed moves. They mostly respond to changes in the Federal Funds Rate.

I also executed trades in Intel and Verizon positions this month.

The fund’s current holdings are as follows:
– $367.28 in 4 shares of $BIL
– $1,736.96 in Cash

The fund’s total value is $2,104.24

My Performance

The fund’s performance in June was 4.28%. The fund’s performance year-to-date is 6.92%. Since inception, the fund has returned -3.00%.

By contrast, the S&P 500 is up 15.1% year-to-date. We’re still far behind, but starting to catch up, and there’s plenty of year remaining.

My Activity

As you can see, we’ve finally started making money in June. Here are my transactions for the month:

– First, as usual, I purchased 1 share of $BIL at $91.45. That brought my $BIL position up to 4 shares, currently yielding 5.23%.

– I received a dividend from my existing $BIL position of $1.22.

– Then, I received interest on my cash balance of $0.01.

– On June 21, I sold a $40 Verizon Put option expiring June 28th, and received a credit of $37.

– I bought the put back a few days later for -$8 after Verizon rose in price and the option was worth less. This resulted in a net gain for the trade of $29.

– On June 25, I sold a Straddle on Intel at $31. This entailed selling both a Call and a Put option at the $31 strike, both expiring the following week. I received $26 for the call side and $50 for the put side, for a total credit of $76.

– On June 28, I bought back the Straddle, buying back the Call side for -$12 and the Put side for -$8, totaling -$20 paid. This resulted in a net gain for the trade of $56.

– Finally, I paid commissions & fees on the monthly trades totaling -$3.84.

The Fund’s total P/L in April 2024 was $82.39. Significantly higher than previous months, and the first month of making riskier trades.

BIL currently trades at $91.78, and our cost basis per share is $91.46. This gives our 4 shares an unrealized gain of $1.28. We have received dividends totaling $2.40 in 2024.

Insights

So we made a bit of money. Considering how limited a trader with only $2,000 is, even with margin, I think over 4% in a month is pretty good. I target 0.75% a week selling options, and it’s a bit higher than the target. And I had a three-for week, too. Two types of options trades, and dividends, bringing in the income. It is my goal that I-Dog Capital target income strategies primarily, and see how fast it can grow. And as our dividend stream grows, I look forward to expanding on it. But it’s the two types of options trades that I want to talk about today. I sold a put, and I sold a straddle. I also sold a strangle, in July, but before I wrote the June issue. What are these trades? How does options even work? Here’s your explainer.

When I sell an option, I am selling a contract to someone else. That contract allows that person to sell, to me, 100 shares of an underlying stock, at a certain price, by a certain time. These derivatives contracts have a price, which I call a Premium. The premium is calculated using several factors.

Some of these factors are expressed in greek letters. The Greeks are comprised of Delta, Gamma, Theta, Vega, and Rho. The first four are major factors, and the latter is minor.

– Delta represents the difference between the change in the option and the underlying’s price. Delta is a number between 0 and 1. The closer Delta is to 1, then for every $1 change in the underlying, the closer to a $1 change in the option. a Delta of 0.3 means that if the underlying increases by $1, the option would increase by $0.30.

– Gamma represents the rate of change in Delta. If the underlying’s risk changes, if the chances of it rising or falling $1 increase, then Gamma will change. Gamma is highest when trading at-the-money, meaning selling an option for the same price as the underlying. Gamma is also expressed between 0 and 1.

– Theta represents the time premium built into the option contract. All options are derivatives contracts, designed to expire at a certain date expressed in the contract. The option’s Net Asset Value will decrease by a specific amount per day, amortized over the life of the contract. Theta is expressed as a number starting from zero, matching the amount the option decreases in value per day. For example, an option worth $100 expiring in 30 days, would have a Theta of 3.33, meaning the option would decrease in value by $3.33 per day without market fluctuations, daily, until it expires zero.

– Vega measures the option’s susceptibility to changes in the volatility of the underlying stock. Long options, options that are bought, have a positive Vega, and options that are sold, what I do, have a negative Vega. A stock’s Implied Volatility, the market’s estimate of how much it can go up or down, is shown by Vega. Longer-dated options have higher Vega, because there’s more time for them to move. I mainly trade weekly options, so Vega doesn’t really concern me, but it is important.

When I sold a Put option on Verizon for $40, I gave someone else the right to sell me 100 Verizon shares at $40, in a week. For that contract, they paid me $37, which was 0.93% of the underlying, above my target. I received $37, and I was on the hook for $4,000 if the stock crossed below $40. Thankfully, Verizon increased in price that week, and by the end of the week, the option was only trading for $8. So I decided to close the position, cut the risk to zero, and take most of the premium. Selling put options is a consistent way to take a position in a stock for income-focused traders. I agree to buy the stock at a certain price, from someone else. And that other person is only going to sell me the stock if they can profit from that sale. So if the stock stays above $40, they’re happy with their gains (or level of losses). But if the stock falls below $40, let’s say it drops to $38, they could have to sell the stock and take a $200 loss! They’d much rather pay $37 now, for the insurance of being able to sell the stock at $40 regardless of how far it falls.

Now you might be thinking, that exposes I-Dog Capital to a lot of risk, doesn’t it? If the stock falls to $37, or even lower, we still have to buy it at $40. And that’s true. I could be locking in losses with these trades, if I’m not careful. This is why I stick with my ground rules and strategy when trading options; only trade on stocks you’re comfortable owning at the price you’re comfortable owning it at. Stick with great businesses and indices, and target 0.75% per weekly trade in premium income, and only sell, no buying. The options market is many times larger than the stock market, and that narrows the it down to only a few hundred choices. It helps a ton. But once a trade has been made, I monitor the position, and stick to my biggest rule; Take Profits, Don’t Chase Profits.

But back to the trading talk. We’ve covered the put sale, what’s a Straddle? A Straddle is a trade where both a Put and a Call are sold at the same strike price. I sold a straddle on Intel at $31, meaning I sold two contracts at that price. They allow the buyers to both buy from me, and sell to me, 100 shares of Intel at $31. The idea is, the share price will only go one way, so you aren’t actually on the hook for both sides, just the side the price lands on when the contract is exercised or expires. So selling both sides of the option juices returns without increasing the risk. And this is true, as long as you own an additional 100 shares. The short call option exposes us to a potentially unlimited amount of risk, because who knows how high the underlying can go in the time allowed? Intel could potentially go to $60. In that case, the put option expires worthless, I keep the $76 I received as premium, and I am on the hook for someone wanting to buy Intel shares from me at $30, locking in a $2,900 gain for himself (100 shares x $29 gain from $31 to $60). In this scenario, I am taking a $2,824 loss ($2,900 – $76) on this trade. It’s a good thing that’s not the actual trade! Phew…

This Straddle trade relies on Intel stock being volatile, and moving one way or the other from $31 to another price. Lucky for me, the stock stayed between $29.01 and $30.99, and I took profits, buying back the spread for $20. Locked in a gain of $50, for a 1.62% gain on the trade. You can see how straddles, while carrying a lot more potential risk, can really juice returns.

And what is a Strangle? It’s a modified Straddle trade, where instead of selling the Put and Call options on the same strike price, in this case $31, the options are sold at different strikes. For example, the trader that wanted to buy Intel at $31 but provide an income return in the interim could sell a Strangle, with the Put side for $30 and the Call side for $32. The trader would bet that Intel stock won’t rise far past $32, and we would be on with it below $30 because we want to own it at $30, but ideally, Intel would stay between the two, and at the end of the week, both sides of the trade expire worthless. We’ll talk more about the Strangle next month.

There are many more kinds of trades than these. And yes, they all have funny sounding names, named by people with more money than you can imagine, who would know for themselves. But options truly is anyone’s game, if you choose to want to play it. You just have to define your risk tolerance, and trade it. I appreciate you sticking around to see mine, I promise you, it gets so much better from here.

Conclusion

The fund really got the ball rolling in June. If you liked these returns, you’re going to like July’s returns as well. The fund is still pretty far behind the S&P 500 year-to-date, but we’ve made serious progress. I want to see if income-based, conservative, derivatives trading can outperform the market indices over the long term. I believe in these strategies, and I’m excited to keep growing the fund. Going forward, I will be depositing additional capital on a set schedule, so as we grow, the growth will be less from capital contributions and more from income return. I hope you stick around to see everything I-Dog Capital can be!

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