“Should you use a trading log?” The answer might surprise you.

Do you know what actually makes a notebook incredibly useful? I do. It’s when it helps you learn a skill, task, or lesson which becomes a permanent part of your knowledge base. And that’s the story I want to share with you now.

When I first started Incredibly Useful Notebooks, I wanted to solve my own journaling needs, and then maybe build out other offerings from there. So for me, these essentially simple products — a music theory notebook, a musician’s practice log, and eventually a stock and options trading log — helped increase my productivity.

As an individual trader or investor, I’ve found that keeping a log is useful in these ways:

• helps me see patterns in the trading choices I’m making
• gives me a stronger grasp of the concepts and strategies I’m using
• makes me pause and evaluate my risk tolerances on a trade
• forcing me over time to develop a consistent trading plan
• and makes it easier to learn from my mistakes

No matter what trading platform you use (my fave is this one: Tastyworks) and whatever reports they offer, I still believe it’s powerful to record your trades with pen and paper, whether you trade stocks, ETFs (exchange trade funds), options, futures, forex, or crypto, either long-term or short term as a swing, scalp, or day trader.

LEARNING OPTIONS TRADING

It’s this process and using one of our $12 notebooks — less than lunch at my favorite café — which helped cement my understanding of options trading. I also use my notebook to teach those same option premium selling strategies to my wife which she often uses in her rollover IRA account from a previous employer. (Let’s be honest, we’re all aiming to build generational wealth aren’t we? Aren’t these the financial literacy skills we both need to teach our daughter?)

If you’re curious, below I’ll share some options trading lessons I’ve learned in a case study around a single trade…

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A QUICK OPTIONS TRADING CASE STUDY: Nucor (NUE)

Imagine that you’re interested in the stock of Nucor Corporation [ticker symbol: NUE], a steel company based in North Carolina.

What we’ll look at here is a short “defined risk” options trade that earned $21.73 after four days, or $24 minus some fees, risking less than $300. (Once you understand this trade strategy, you can scale it 10X or whatever fits your risk metrics. I’m not a financial advisor, so this post is just for informational purposes. Consult a professional first! Although this trade at $21.73 is a small return, you’ll see below why this is one of my favorite strategies.

Why Not Just Buy the Stock?

1. I could simply buy NUE if I’m optimistic (“bullish”) about the short, medium, or long-term upside prospects of the company’s stock. One share of NUE stock costs $116.42 as of the close on Friday 8/20/21. When I started looking at this trade Monday (8/16/21) the stock was around $121, so it dropped over 6% during the week. Buying a block of 100 shares at Friday’s closing price would cost $11,642 plus transaction costs. If this is your investment strategy – buying shares in companies you like — you make money two ways: a. the stock goes higher and you sell it for a profit. (Not this week obviously!) b. Or you can hold the stock and collect your share of their quarterly dividends (1.39% yield), essentially profit sharing, while you wait for the stock to go higher.
2. If you understand basic options, there’s another way to earn money from your holdings. You can buy 100 shares of NUE and sell a CALL option against that purchase which expires at a future date, essentially renting out your shares to see if it goes higher. If you paid $116 a share, you could obligate yourself to sell to the holder of the option anytime in the next month or two, for example, if it goes above $120. Why would you do this? For a few reasons, but mainly because it lowers your cost basis (what you paid) because the option premium is yours to keep, regardless of the outcome. It has a time limit, so if you think it will go higher but might take a long time, selling short-dated options is a way to make a return while you wait. And the options premium and the dividends together will pay you while you hold the stock. This strategy is called a COVERED CALL or a BUY-WRITE.

So here are the other two main options strategies I use and are among my favorites. Because options expire, I love to sell them and not buy them. (When you buy options, if you’re right on the move of the underlying stock, but wrong on the timing, you can still lose with time decay.)

1. If I want to buy stock, I usually sell a PUT to enter a position, meaning I will OBLIGATE myself to buy 100 shares of the stock, up until a certain date, but only if it meets my (strike) price. So in a real-life situation with NUE at $121, I could sell a PUT option at the $115 strike for a certain period of time and get paid to wait. I like this strategy because you might not buy any shares for a while — waiting for your “perfect” price — but you get to earn options premium all along.
2. The other trade I regularly use to protect myself is called a credit spread, or bull put spread, where I’ve sold the same $115 PUT but I also buy the $112 PUT to protect myself. This way if it drops too much, I have an “insurance” plan where someone else must buy the stock from me at $112 or below. This limits my risk to the difference between the strikes [$3 x 100 share contracts] or $300, minus the credit received, which in this case was the $21.73.

Above is what I actually traded: Because I received $52 for the $115 PUT I sold, but spent $28 for the protective $112 put, I received a total of $21.73 after fees. And at the end of the week, I never had to buy NUE stock because it closed at $116.42, above my $115 put.

But let’s compare this premium income to a NUE shareholder’s rights to dividend payments:

1. The company annually pay $1.62 for each share of stock you own, or $0.405 quarterly, a 1.39% yield on the price of the stock.
2. Their dividend schedule is March, June, September, and December, so we’d need to be owners of the stock to qualify, and on the date prior to “ex-dividend.”
3. To earn from NUE dividends the amount I made this week $21.73 for essentially NOT BUYING THE STOCK, but obligating myself for a few days, I would need to own almost 54 shares of stock, which at $116.42 would cost $6,246. ($1.64 per share annually is $0.405 per share quarterly.)
4. Instead of spending over $6K, I had a total risk of $278.27 ($3 wide spread x 100 share contracts minus credit received), plus of course the obligation to buy the stock below $115, or roll the trade forward in time.
5. Even though I was wrong on the direction of the stock — it clearly continued going down — I still made the full options premium received because the contract expired and it never breached my short put ($115).

And finally, what did my trader log entries help me understand that the screenshots from my favorite options trading platform didn’t tell me? When I entered the trade Monday morning, the market [using SPY the S&P 500 etf as a proxy] was down a bit at $443.03 and days later ended the week at $443.36. What does that mean? It was a sideways week for the general market, with little to no movement, so selling an expiring asset for income made sense.

And the lesson for next time? Make sure I always mark down the exact percentage of ‘downside protection’ that my strike price has below the stock price. In this case, with NUE at $121.26 at the time of my trade and the prospect of selling a put option at $115, I was giving myself a buffer of -5.16% move over five trading days before it would test my option.