Options Mailbag: Your Comments Addressed
After my last article on setting the stage for selling puts, I noticed several comments. I’d like to address one because it’s one of the most common concerns I hear…
And it goes to the heart of the strategy.
Also, please know there are no bad comments or questions, and I welcome them all. The goal here is to dispel some of the myths, mystery and rumors surrounding options. (If you have any more questions or comments about trading options, please email me at email@example.com.)
After all, why in the world would I put my 25-plus-year reputation in the industry on the line for something I don’t believe in or something I don’t expect you to believe in?
So my next article on options will further delve into the rationale behind this particular strategy.
The comment I want to address is the most critical one of the bunch:
Very, very risky for the average investor! – S.A.
I agree! How’s that for an unexpected answer?
Put selling is very risky for any investor if they don’t know what they’re doing. That’s the rub.
For the investors who do know what they’re doing, it is one of the safest strategies – if not the safest options strategy – out there.
If all you care about is chasing premiums, if you want to sell puts on speculative stocks or high-volatility plays, or if you don’t understand that stocks move up and down, then please, DO NOT SELL PUTS!
But if you are someone who wants a conservative system for buying the best stocks in the world or collecting a healthy check if you don’t, then put selling is for you.
When I make an options recommendation, my readers know that there are several parameters that have to be met before the pick goes out. There are NO exceptions.
These parameters, which are proprietary, include the discount we are willing to accept, the probabilities we are willing to accept, the types of companies we are willing to sell puts on and our exit strategy.
So if you had the chance to buy a stock you WANT to buy at the current price or at a price 20% to 50% below where it is trading, or get paid a nice, fat double-digit return just for trying – would you do it?
Compare this with a strategy where you buy the shares today outright and they fall 20% to 50%. With the right put-selling strategy, a drop in price by 20% to 50% (depending on the play), would put you just above breakeven. Which strategy is riskier?
As I said in the previous article, put selling requires you to make two decisions, not one. It’s not just about collecting the money free and clear upfront. That money is yours whether you get put or not.
It’s about collecting the money and knowing that if you use the strategy properly, you will have to buy the shares occasionally. What is risky is pretending that you can collect the cash and have no future obligation.
You have to be ecstatic when you get the chance to buy the shares, not disappointed.
Earlier this year, I made three recommendations to my Automatic Trading Millionaire subscribers – Wells Fargo (NYSE: WFC), Southwest Airlines (NYSE: LUV) and Phillips 66 (NYSE: PSX). I promised that if they made the plays, they would take in enough money to cover the cost of the service.
Here are some of my readers’ responses:
Sold 10 puts for each of the three. Collected $3,680, minus $31 in trading costs. – Bob
I got $1,520 for Wells Fargo, $800 for Southwest Airlines and $290 for Phillips 66 (as I did only two contracts on that one). So the total was $2,320. – Penny
Karim, my husband and I entered all three positions with 10 contracts each and received a total of approximately $4,458. Lots of fun if this is typical! Keep ’em coming! – Dineen
We closed out each position early, and I delivered on my promise. And since then, we have yet to close out a position at a loss.
Oh, and if we had gotten put on those three picks, we would now own them at prices substantially lower than what the world’s greatest investor, Warren Buffett, paid for the same shares.
I’m not saying that we won’t have a loss here and there. No strategy is perfect.
But if you build in the right parameters, understand what you are doing and have goals that are grounded in reality and not fantasy, put selling is the best options strategy to build a great portfolio or get paid to just try.
You can still get in on three new trades I have put out with the same types of payouts. To learn more, click here now.