Alternatives Income - Option Trading

I have read and heard about older Singaporeans being retrenched and could not get a decent jobs for months/years...also people who suffered permanent disabilities suddenly due to accident or sickness and trying very hard to make a living. Fortunately with modern technology such as computer and internet, this group of people is able to generate some kind of $$ (at least) to survive. Can you imagine people who are handicapped in the past...if they don't resort to begging (as in many developing countries) how are they going to make a living?

The plight of this group of people makes me think! What happens if I be becomes one of them? Therefore I must create an alternative income source - a stream of income not from employment. If this is possible, I will not be worried about whether I'm performing well in my job or retrenchment!!

I have been exploring the web for an alternative income stream for a long time but I failed to find anything decent. Finally, I started to explore option trading. I know many are very skeptical about option trading and some may have paid thousands of dollars in seminars but did not receive the goodies as promised.

What I'm doing now is not option trading but option writing. To write option, you need capital. I'm able to generate about $2000 monthly with $60000 investment - about 40% return annually.

To illustrate, go to yahoo finance and look up stock code such as TM and MT. The put option for July for these 2 stocks will give you at least 2 to 3.5% return per month. If I sell a put for MT expiring on 20th July 2007 at US$60 strike price...I will pocket US$220 per lot. If I were to write a put option for 6 lots (cost = US$36000)...I will earn US$220 x 6 = US$1320 (exchange rate $1.5 = US$1) will be $1980 by 20th July. Of course there are chances that you will lose...if MT drops below US$57.8.

I have been doing this for 2 years now and the return has been good. I do not just write option for any stocks. I will do detail FA and TA before I start. So if you are interested...pls acquire intensive understanding about option writing before you start.


Seems like many people feel that option trading is very risky. I agree that’s why I became an option writer.

I have been trading Singapore stocks for at least 10 years. In order to get the stocks I want at a good price…I need to wait for months for a correction or when the CEO dies. When I wait, my money in the bank earns me 0.025% annually. When the time is ripe to enter the market…who knows maybe Bull Run is over or what!

With option, all I do is sell a put at my desired strike price and wait. If I don’t get the stock at the price I want, I just pocket the premium and do the whole exercise again for next month. In this way, I’m paid while queuing for my stocks.

To illustrate, if I’m interested to buy 500 shares of Anadarko Petroleum (code: APC) at US$50 by 20th July 2007 (current mkt price is US$50.24), I will get paid a premium of US$1.60 X 500 = US$800 (equivalent to $1200).

To buy this amount of stock, I will need US$25000. This US$25000 will stay in my US brokerage account earning 4.8% interest per annum while waiting for deployment. So I will get US$800 and 4.8% interest pa while waiting for the stock I want at my desired price.

Many of you may question the risk involved…what happen if the stock drop to $10 or worst bankrupt? The answer is you die!! There is always risk involved but you need to know how to manage it.

To reduce such risk…you need to pick the right stock (this is the most difficult aspect). What I do is to perform a detail understanding of the stock and the industry. Some rules I used to pick stocks are:

1) It must be at least a 10 billion dollar company.
2) It must be trading at a stock price of not < US$15.
3) The price to book value must be below 3.
4) The price to sales must be below 2.
5) The PE must be below 15.
6) The forward PE must be lower than the trailing PE.
7) The PEG ratio must be below 2.
The Return on Equity must be at least 15%
9) Total Debt/Equity ratio must not be more than 1.
10) Must have increasing revenue or profit margin.
11) Must be profitable (never trade in a company that’s in the red).
12) The industry must be growing or at least the company is a leader in a stagnant industry.

Once I selected the company. I will establish the price I want. This will be looking at chart (MA, MACD, Parabolic, MFI, William%, RSI, Slow Stochastic, candle stick, etc) and the range between the 52 week high and low.

If I have decided on the stock I want and the price I want. Option writing is no longer a risk to me. This is because I’m going to buy this stock anyway. Even if it go below the strike price, I’m not afraid…my strike price usually is close to valuation or 52 week low.

If I made a mistake, there is always exit strategy. I can always close my position by buying put or if the market is so bearish…if you want to speculate buy a double put. The first put is to close your position and the second put to short the market.


Which reasons why option writers are the most logical thing to do. And only those who’re greedy enough will find themselves in a rut with no actual hedge. I suggest we read what the writer wants to share before making comments; there are valuable lessons to be learnt here.

How many of you who have traded options before found yourself being eaten up upon expiry? Till today I still see lots who punt on super out of money options just so that they can make 'big bucks'. If you lucky well if not...u lose all. SO who’s the gambler? The writer or the buyer...most of the time writers did the logical thing...trend up write put options so that you can buy back at cheaper price...vise versa.


My objective of starting this discussion about option writing is to get a general feel of option writing sentiment in Singapore. I hope to meet other option writers and also to share my experience with others (hopefully they can benefit from it). Seems like most people here are stock traders or investors. Nevertheless, I will still share for those who want to find out more.

To do this, you should have a good understanding of option trading. There are tons of materials you can read up on option trading (no need to attend any course). I started by reading the option tutorial in Chicago Board of Exchange website (CBOE). I went on to read a few books on option trading at Borders and library. After reading all these stuffs, I realized that I will benefit more if I become an option writer instead of a trader. The theory of limited gains with unlimited losses frightened me at first. But I decided to think of ways to manage such risk. After a long process of evaluation, I realized it is still very attractive but I must manage the downside risk. There is no short cut to this. You must do your homework (both FA and TA). Invest in multi-billion dollars company (don’t think Citibank or Toyota to close down soon). If you are really afraid, you can write option for ETFs (won’t crash to US$0 dollar) – but premium is low because of low risk.

After you have gained insight into option writing. You need to open a US brokerage account. There are many…but I choose interactivebrokers.com because they are very cheap (about US$1 per contract). However, they will charge you US$10 per month if your brokerage fees are below US$30 per month. I always kana charged US$10. As an option writer, you will not trade often. Once you have opened your position, you just basically wait till all your contracts expire. The US$10 monthly fees don’t bothers me because the interest paid to my brokerage account is more than sufficient to offset this charges.

To start trading with interactivebrokers.com, you need to deposit money into your account. You can do a TT or send a US$ bank draft. I usually choose the latter because it is much cheaper. You can get a US$ bank draft from POSB for $10. However, this is slow as compared to TT. This process will take about 3 weeks before your account is credited with the $$. For your information, interactivebrokers.com pays interest to your account only if you have at least US$10,000 credited. I started with US$20,000 to try out option writing. When it produces results, I send another US$20,000. Now I’m investing my initial capital plus profit. I have not withdraw any profit because the more capital I have, the greater the profit (can write more option).












I do write covered calls but I always start with put first. This is because I'm a value investor. I search for good value stock to buy. This is how I operates: 1) Find good value stocks. 2) Write put options for my desired stocks at a price that is below market price. Sometmes I will write above the market price because I think the stock will go up in the short run. I do not just write put for one or two counters. I make sure that my funds are well diversified (to reduce risk). I usually write puts for about 5 to 8 counters. 3) If any of my options are exercised, I will keep the stocks until it reaches the price I want and then sell a call. For example, sell put for Citibank at strike price of US$50. If my option is exercised, I will keep the stock till it reaches or close to US$55 and sell a covered call expiring one month or two month later at a strike price of US$55. This way you can earn more (your gain = call premium + selling price (US$55) - buying price at US$50 + put premium). However, I may also write a covered call once my option is exercised when I feel that the stock may stagnant for a while. There is no right or wrong method. The objective is to achieve at least 25% annual return on investment. I see myself like an insurance company. I will insure the stock if it is of good health so that I will have a high chance of getting regular premium.