- What are options anyway?
- The Basics of Call Options
- How put options work.
- Why I started selling options.
- How I let James Altucher pick options to sell for me.
- How I turned profits more quickly with Option Party.
- Will selling put options based on Option Party’s screener be profitable long-term?
- How I learned enough about options to be comfortable trading them.
- How can YOU Make money trading options?
September was a big month for me.
I made more in revenue this month than I have in any other month!
Here’s the breakdown:
Revenue earned selling put options in my IRA: $683
Expense of James Altucher’s secret income: $529 (This will most likely be a one-time expense making my future profitability even better!)
You’re probably wondering how I made this money, and how I did it so quickly.
I did it with options.
What are options anyway?
If you’ve never heard of options, here’s a quick overview.[Many brilliant minds have explained options far better than this. I’m simply including the description that makes sense to me. I encourage you to search the web for other explanations.]
Options are contracts (kind of like insurance policies) that allow the buyer to buy or sell stock at a set price in the future.
Options are fascinating because they are one of the few financial securities I know of that generates income, not just a return.
What I mean is, when you sell an option, YOU the seller are paid a fee.
For almost every other transaction in financial markets, you pay a fee for whatever you want to buy or sell.
I talk more about the difference between income-generation and investment return here.
But suffice it to say that options’ income-generating capacity makes them unique.
The Basics of Call Options
In general, options fall into two categories: calls or puts.
If someone buys a call option on a stock, they believe that stock’s price will increase.
Say Apple’s currently trading at $100 a share and you think it will be trading at $105 by the end of the month.
You could buy a call option that gives you the right to buy stock from the option seller at $101/share by the end of the month.
If you’re right and the stock increases (higher than $101/share) before the end of the month, you can “exercise” the option.
That means that you exercise your right to buy stock from the option seller at $101/share which you can then sell on the open market for $105 per share.
If this happened, your profit wouldn’t just be $4, it would be $400 because each option contract represents 100 shares of stock.
When exercising the option, you would buy 100 shares at $101/share (costing you $10,100) from the call option seller which you could immediately sell for its market price of $105/share (earning you $10,500) netting you a profit of $400… almost.
Your profit wouldn’t quite be $400 because every option contract has a price.
In this case your option contract might have cost you $100 bringing your profit down to $300.
Still, earning $300 on a $100 initial investment is fantastic!
This is one of the reasons why options are so attractive to purchasers – because they allow you to control larger amounts of stock (and likewise larger returns) with smaller cash investments.
How put options work.
Put options operate the same way as call options except buying a put is a bet that the stock will go down in price.
Again, say Apple’s currently trading at $100 a share and you think it will be trading at $95 by the end of the month.
You could buy a put option that gives you the right to sell stock to the option seller at $99/share by the end of the month.
If you’re right and the stock decreases (less than $99/share) before the end of the month, you can “exercise” the option.
That means that you exercise your right to sell Apple stock to the option seller at $99/share.
So you can buy it on the open market for its market price ($95/share) then sell it to the option seller for $99 a share.
Once again, because each option contract represents 100 shares of stock, your profit wouldn’t just be $4, it would be $400.
When exercising the option, you would buy 100 shares of Apple at the market price of $95/share (costing you $9,500) which you would sell to the option seller for $99/share (earning you $9,900) netting you a profit of $400… almost.
Remember, all options have a fee.
So option buyers must always pay the option sellers a premium.
And this is how I made money this month – because I sold put options and collected the premium.
Why I started selling options.
After those examples of buying calls and puts, you might think buying options is where the real money is made.
However, statistically speaking, buying options can be a risky game.
Options buyers have to be right on several accounts.
They must accurately predict:
- the direction of the stock’s price
- the minimum magnitude of the price increase or decrease
- and the time it will take for that price change to occur
If they’re wrong on any of these accounts, then their option contract will expire worthless and they will have lost the premium.
Options purchasers are usually looking to hit a jackpot of earnings and they’re willing to pay the premium for it.
On the other hand, option sellers immediately start their trades in the black.
They collect the premium as soon as the trade is executed.
And no one can take away that premium from the seller.
Now of course options sellers will face unprofitable trades even with their premium.
But in general, selling options is something I’m more comfortable with.
How I let James Altucher pick options to sell for me.
Maybe you’re thinking:
“Selling puts sounds great but how do you decide which puts to sell?”
This is where James Altucher comes into play.
I’ve written about James before here.
But in brief, he’s a finance expert with a truly unique expertise for picking stocks (and options).
As part of his information product that I purchased (the expense listed above), he provides a weekly e-mail with recommendations about what put options to sell.
Though I’ve followed some of Jame’s picks, I discovered another tool that has helped me make shorter-term option trades that better fit my goals.
How I turned profits more quickly with Option Party.
Altucher’s put options have expirations between 1 and 3 months.
This means when you sell the puts he recommends, you won’t know if they are profitable until they expire in the next few months.
While this is a perfectly fine strategy, I wanted to see if I could speed up the turn-around and realize profit more quickly.
After looking around online, I found Option Party.
Option Party is an option screener that allows you to filter available options by their expiration, probability of profit, and more!
The screener is reasonably priced (just $59/month) and includes a free one month trial.
I used this screener to filter options by those that expired in the next one or two weeks with a 70% probability of profit with position sizes <$1,000.
Then I simply invested in all the options that met these criteria.
And of the 8 put options I sold based on the Option Party screener that met these criteria, all 8 were profitable!
This is how I made $683 in only 10 minutes of work!
Because executing the trades based on the Option Party screener was nearly instantaneous!
Will selling put options based on Option Party’s screener be profitable long-term?
When you trade mechanically like I’m doing, it’s hard to say if you have a profitable strategy till you’ve tried out several trades over a long period of time.
Or as expert trader, Rayner Teo, says:
If you want to be profitable every day, you need to make 100 trades a day.
If you want to be profitable every week, you need to make 100 trades a week.
If you want to be profitable every month, you need to make 100 trades a month.
Why do you need to make several trades to discover if your strategy is profitable?
It’s the same concept as predicting the result of a coin flip.
You have no idea whether a single coin toss will result in heads or tails.
But you can almost guarantee that you will get heads ~50% of the time and tails ~50% of the time if you flip it one hundred times.
And the more you toss the coin, the closer the heads/tails ratio will be to 50/50.
I’m making trades based on Option Party’s probability of profit.
So it’s hard for me to know if my strategy will be profitable (if Option Party’s probabilities of profit are accurate) until I’ve made 100+ trades.
And even if the strategy is profitable after 100+ trades, I don’t know if it will necessarily be profitable in a bear or sideways market.
Only time will tell.
But I’m looking forward to making 100+ trades and reporting the results here on the blog!
How I learned enough about options to be comfortable trading them.
James Altucher’s Instant Income product comes with some great educational resources on options.
I read through and watched all the materials he provided.
I also watched the entire Step Up to Options Series created by Dough, Inc.
And I read various online articles about options.
Once I felt comfortable with them, I started trading the lowest-risk option type there is (in my opinion) – cash secured puts.
I haven’t considered more complex options positions because I don’t understand them well enough yet (if ever).
How can YOU Make money trading options?
First and foremost, I’m not a financial adviser and cannot give you any investing advice.
Only YOU can do the homework to determine if selling put options is right for your financial situation.
IF you do your homework and decide it’s right for you, you might try selling puts in your IRA if you have one.
I’ve made all my option trades in my Vanguard Roth IRA because I already had the funds there to trade.
All I had to do was fill out a form saying I understood the risks associated with options.
However, since this is a retirement account, I won’t have access to the $683 I made till I retire!
Also, Vanguard has astronomical fees for options trading.
(I could have saved over $70 on fees if I had used a different platform to trade.)
So it’s not great if you want to trade options frequently.
But it is a great platform for buying low cost indices.
To avoid Vanguard’s high trading fees I’ve opened an account with TastyTrades.*
They have low fees for options trading and a sophisticated trading platform.
But I’m glad I validated my capacity to trade options in my IRA before I put the time and effort into opening another account.
Unlike most money-making opportunities, trading options can actually LOSE your money.
So please, be cautious with this opportunity.
And only invest in options you understand.
Do you invest in options?
I’d love to hear about it in the comments!