What Options Trading Means to Emma: #InvestingTruths

When our colleague Emma¹ moved to Canada more than a decade ago, she already spoke the language, but many local finance terms were a mystery to her. "I started hearing about RRSPs and TFSAs and I thought, I'd better look into that," says the 35 year old. "Plus, Canada's tax system is based on annual self-assessment; where I come from, it's a bit more hands-off." There was a lot to learn, and Emma was up to the challenge. Her journey to familiarize herself with personal finance – Canada edition – brought her to self-directed investing.

"When I become interested in something, I can get a little overzealous," says Emma. (Case in point: When she decided to run her first race, Emma went right for a marathon.) She started with the Wealthy Barber and other investing-related "big hits" like The Intelligent Investor and A Random Walk Down Wall Street, and kept reading from there. She soon opened a practice account to put her new know-how to the test, and before long she dove in and placed her first real trade. “My investing education just progressed more and more, until I was comfortable doing more advanced strategies, like options, and eventually working in the industry," says Emma.

We asked Emma about her investing journey in general and options trading in particular. Here's some of what she had to say.

“I'm pretty risk averse and I find options can help manage risk when used in certain ways."

Q: How would you describe your investing style?

A: I'm a bit of a hybrid investor. I tend to keep a large chunk of my portfolio in ETFs, but then I have a portion that I will trade more actively in stocks and options. I think a lot of people have this duality in their portfolio. But overall I'm pretty risk averse and I find options can help manage risk when used in certain ways. I use them strategically to mitigate my risk and reduce costs in some cases.

Q: Can you please elaborate on that?

A: One of the strategies I like to use is selling covered calls. I use it when I think a quality stock has good long-term prospects but it isn't going to rise significantly in the short term, for whatever reason. While I wait for that long-term increase, in the short term, I sell to someone else the option to buy some of my shares, at a higher strike price, for a premium.

If my hypothesis is correct, I collect the premium received from the option sale and continue to hold the underlying for the long term, but with a slightly reduced cost basis. If the short call becomes in-the-money, I've still benefitted from the price increase of the underlying shares that I own, but this profit will be limited by the strike price of the short call. There is some room for maneuvering. If I see that the call is nearing the expiry and the delta has increased significantly, I may be able to roll the option date to a later expiry and select a higher strike price. Or, I can also buy to close the position in order to avoid assignment. (If any of these terms are unfamiliar, check out our options glossary.)

Q: Are there any other options strategies you like to use?

Another one I like to use is called a wheel. I have a watchlist of stocks that I like and I will occasionally sell a put against them at a price that I would be willing to buy the stock for. If the price of the underlying drops, then I will take possession of the stock and then sell a covered call against it. If the price of the underlying rises, then I will keep the options premium on expiry and then consider selling another put. It's important that this strategy is only applied to stocks that you actually want to own and can afford to cover, which means my universe of candidates here is pretty small. Of course, if the put is exercised on the other end, I must buy the stock in the downward falling market.

“I like to think of my watchlist as the 'bench.' If I see something that's changed significantly in any of the prices, that's when I might pull that 'player' into my holdings."

Q: Let's look beyond your options trading for a moment. How do you decide which stocks or ETFs to buy?

I love screeners. I use them heavily, like almost daily. I'll screen for a certain thesis or trend that's caught my attention, and then I'll narrow that list down. Once I've found a few securities that I like from the screener, I don't necessarily buy them right away. I'll generally add them to a watchlist for a little while – I like to think of my watchlist as the "bench." If I see something that's changed significantly in any of the prices, that's when I might pull that "player" into my holdings.

Q: Do you do a lot of research? What types of things do you consider before you hit buy?

A: I try not to get drawn into hype or FOMO stocks, but it seems this past year has really challenged that dogma. So while I do read a lot of investment news, I try as much as possible to drown out the noise, and be as impartial as I can with a more systematic approach. I pay attention to valuation. I look at metrics like market cap, price-to-book, price-to-earnings and price-to-free cash flow. And if it's something that's going inside a registered account, then I prefer dividend growth stocks. But I don't set hard rules, I approach it more like a checklist.

“Investing is something I enjoy doing; it's not something I want to keep me up at night worrying about my portfolio. So I try to define my risk as much as I can."

Q: Do emotions ever play into your investing decisions? How do you mitigate them?

A: Investing is something I enjoy doing; it's not something I want to keep me up at night worrying about my portfolio. So I try to define my risk as much as I can, and in some cases I'm almost limiting my upside to be able to do that. When I first started investing, I was probably trying to chase gains and would get jumpy when there were "large" drops. Now I'm much more aware of risk and how adding something new can impact the diversification of my portfolio overall. I try to avoid being over-concentrated and I'm also a lot more relaxed about down days, reframing them as "sale days" instead.

Q: Why do you invest? Are you working toward any goals?

A: Like many, my overarching investing goal is to make sure I have enough money during retirement. And for options specifically, there's a level of mastery that I'm trying to accomplish. So while that is a smaller account, it's not necessarily tied to my retirement goal. I view that as a bonus.

“I feel empowered that I'm able to make those big money decisions for myself – especially as a young woman."

Q: What is your favourite thing about investing?

A: I love that I'm continuously learning and challenging myself. In investing, you just never know what's around the corner – when you think you know it all, something unexpected or unusual happens. Whatever comes, I think it's just a matter of knowing what to do about it, what steps to take next. I feel empowered that I'm able to make those big money decisions myself – especially as a young woman.

Q: Is there anything you've learned so far on your investing journey that you'd like to share with our readers?

A: I think it's important to talk to others who are also on that journey. I think it's good to be challenged on some of your ideas and hypotheses, and not analyze in a vacuum. Always do your own due diligence. It would be great to see more people from all backgrounds talking about finance and investing, and talking about money matters more openly with friends and family at an early age.

PLEASE NOTE: LIKE ANY INVESTMENT, THERE ARE RISKS THAT COME WITH TRADING OPTIONS. THEY'RE ALSO GENERALLY CONSIDERED A MORE COMPLEX, ADVANCED INVESTING STRATEGY. FIND OUT MORE IN THE OPTIONS TRADING GUIDE.