Last Month's Income Report: August 2nd, 2021
The S&P 500 advanced 2.3% for the month of July, closing less than 1% from its all-time high. While the rally that’s been underway for months continued to chug along, its pace slowed as investor sentiment clouded a bit.
As we head into August, concerns about rising coronavirus cases due to the Delta variant and China’s tech crackdown will be weighed against economic expansion and corporate earnings growth.
At Options Income Blueprint, we closed eight trades last month, booking seven winners and one small loser. Those who sold just one contract of each earned $480 in cash.
Below is a quick rundown of July’s closed trades:
The S&P 500 closed the week down 1%. One sector that was hit particularly hard was clean energy.
The iShares Global Clean Energy ETF (ICLN) dropped nearly 5% last week. This was due to a number of factors, including a general sell-off in growth stocks and falling fossil fuel prices.
Despite this, Options Income Blueprint members booked their second profitable trade in home solar system provider Sunrun (RUN). Traders who sold just one contract earned $75 in income.
That brings our total income so far in July to $238. Here’s a quick rundown of July’s winners:
This brings our year-to-date cash total to $5,317.
While July wasn’t one of our biggest months in terms of income generated, we did see some of our highest returning trades of the year on a percentage basis.
This included the put we sold on homebuilder D.R. Horton (DHI). We closed the trade early, booking a profit of $119 per contract. That translated into a return of 1.3% over the capital we put up for the trade. And since we earned that in just two days, our annualized rate of return was a whopping 241%.
But DHI wasn’t our only 200%-plus winner in July. The 40 strike put we sold on Sunrun (RUN) yielded an annualized return of 237% after we closed it for a profit of $52 per contract in two days.
The most recent trade we closed on Twitter (TWTR) also generated a triple-digit annualized return, clocking in at 120%.
For those who are unfamiliar with our cash-secured put selling strategy, you might be wondering how we got those numbers. So, I want to discuss how put sellers (that’s us) calculate rates of return. I’ll use our latest TWTR trade as an example.
On July 27, I recommended members sell the TWTR Jul Week Five (7/30) 66 Put for $0.69, or $69 per contract.
When you sell a cash-secured put, you must have enough money in your brokerage account to cover the cost of being assigned 100 shares at the strike price you sold. So, for this trade, we had to put up $6,600 (66 strike x 100 shares).
Had the option expired worthless on July 30, we would have pocketed the full $69 in cash, earning a 1.045% return ($69 in premium/$6,600 in cash allocated to trade x 100 to get the percentage).
To calculate the annualized rate of return, you take the number of days in the trade (four in this case) and then multiply that by the number of days in a year (365)
So, at the time we put on the trade, the calculation for the potential rate of return looked like this:
($69 in premium/$6,600 in cash allocated to trade) x 100= 1.045% absolute return
1.045% absolute return/4 days in trade = 0.261% per day
0.261% x 365 = 95% potential annualized rate of return
Now, we didn’t end up staying in this trade through expiration. By July 29, TWTR shares had shot up past $70, and the put we sold was trading for just $0.04. I recommended members book a terrific profit rather than risk staying in the trade another day in order to earn a few more pennies.
Since we spent $0.04 to buy back the put we sold, we ended up with a profit of $0.65, or $65 per contract. However, our annualized rate of return was much high than originally projected.
Here’s how the math looked for the actual trade:
($65 profit/$6,600 in cash allocated to trade) x 100 = 0.985% absolute return
0.985% absolute return/3 days in trade = 0.328% per day
0.328% x 365 = 120% annualized rate of return
As you can see, our annualized rate of return jumped from a projected 95% to 120% due to the fact that we were only in the trade for three days instead of four.
Knowing how to calculate your rate of returns is helpful when selling put options for two main reasons.
First, it allows you to compare trade opportunities.
For example, if you collect $0.45 in premium for selling a 47.50 strike put that expires in four days, you could potentially earn 0.9%, or 86% on an annualized basis.
Now, let’s say you collect $1.75 for selling a 90 strike put that expires in 11 days. That is a lot more in cash, but the rate of return for this trade is actually lower. If the put was to expire worthless, you could make 1.9% in those 11 days, or 64.5% annualized.
That’s not to say the second trade isn’t worth making. But being able to calculate rates of return helps you to make a comparison as you decide how to allocate your capital.
Second, calculating rates of return helps you with goal setting. For example, when I recommend a put to Options Income Blueprint members, I typically target a return on capital of at least 0.6% in a week, which would translate to a 32% annualized return per trade.
Will we hit this goal every time? Of course not. But setting goals and sticking to them is how we consistently generate above-average profits. Plus, as you saw above, there are times we blow this target out of the water.