Don’t Buy Options… Sell Them
During the market crash of 2008 and 2009, I had an epiphany…
I had been trading options for years – decades, actually. And while I used covered calls extensively, I always thought that buying options was the cool thing to do. The gains were always bigger, and the bragging rights that came with them were great too.
When I looked back on my own track record of buying options, there were a lot of losses littered among the gains….
Yet when I sold options, the opposite was true. The losses were few and far between.
The problem is that selling options takes a little work, and it’s boring. That’s the truth.
There’s nothing sexy about selling options… except the steady returns. And honestly, I’m in a business where sexy returns sell subscriptions and make more money.
So I am something of a heretic in the business. I am getting older and hopefully wiser. And boring is a lot more appealing to me today.
Hence, I am a full-fledged options seller and enjoying every minute of it.
It started in earnest during the crash.
Prices were ridiculous and so was the volatility. That mix created huge opportunities.
For example, investors could buy companies like Morgan Stanley (NYSE: MS) for $2, Bank of America (NYSE: BAC) for less than $5 and General Electric (NYSE: GE) for less than $5.
I did all these trades and made a nice chunk of cash while the panic ensued.
Yet when I hear people today talk about selling options, they seem fearful. And it’s really puzzling to me…
Everyone wants a bargain, but when it comes to stocks, it seems that NOBODY wants a bargain. They’d much rather pay up.
I have a great solution.
I sell options on strong blue chip companies and own their stocks for 20% to 50% below where they are trading now or get paid hundreds, if not thousands, of dollars just for trying.
It rarely happens that I get to own the shares because the probabilities are so low – usually less than 20%. But there is a chance. And I love that I could be owning these companies at well below what everyone else paid. To me, it seems like a win-win situation.
Now, when I tell people this, they all love it. What’s not to love?! But when they actually do the trade, they suddenly have a huge personality shift…
They go from logical investors to people who suddenly want something for nothing.
There’s always going to be risk. But in this case, the risk is weighted completely in your favor. End of story.
Still, it does take some work to be on the “casino owner’s side” of the equation.
Selling options usually results in a win rate of more than 70%. That’s because 76% of options expire worthless.
If you’re the seller, that’s what you want to happen.
If you sell an option for $1 and it goes to zero, that $1 is yours, free and clear. If you paid $1 for the same option and it went to zero, you’d probably be canceling your subscription and muttering mean things about me under your breath. (I know which side I want to be on!)
But there are obligations when you sell options. That is the difference. Nobody just gives money away… although this is pretty darn close!
That obligation requires you to follow through on either buying the stock if it trades at the price at which you agreed to buy the shares or to buy back the option that you sold and maybe take a loss. Or it obligates you to sell the shares if it was a covered call trade.
I’ll get into all of these scenarios in detail over the next few issues.
The first stop will be put selling, my favorite strategy. I will give you the unvarnished truth. It’s certainly not for everybody.
But when done correctly, I would not hesitate recommending the strategy to a novice investor like my mom. The key is to get the facts straight and to know your obligation and goal going in.