As we wind down 2018 and look forward to 2019, I’ve completely enjoyed writing for The Rich Investor.
But my goal will stay the same in the New Year: to get you to become a bona fide options trader!
I’ve been trading options contracts for 27 years now, and it has brought me tons of success, both personally and professionally.
I’d love to teach you to do the same.
Reflecting back over those 27 years, I’ve come to the conclusion that only a handful of option strategies are necessary, and suitable, for the investing public.
I’ve even written a book about it, which you can find here on Amazon.
To really boil it down, I’m going to show you the four best ways to use options. Three of them are selling-oriented, while the fourth is buying-oriented.
Options can be sold just as easily as they can be bought, and the sale can come before the purchase. My motto is “sell first, buy second.”
If you’ve been reading any of my installments in The Rich Investor, you will know that I’m a big proponent of option selling.
Why is that?
Option trading is all about probability. When someone buys an option (a “call” or a “put”), they’re speculating on the future direction of a stock price.
This is no different than buying or shorting a stock outright. But, by using options, buyers gain leverage on the trade in that they only need to put up a fraction of the full cost of the stock. It’s sort of like a “lay-away” plan.
In order to make a profit, the option buyer still needs the stock to move in the right direction.
But it’s not just about the stock moving in the right direction. The stock actually has to reach a certain threshold in order for the option buyer to win.
And, not only that, the stock has to make that proper move all by the expiration date (if held until expiration, which most buyers do).
Are you starting to see how hard that can be?
Basically, the option buyer needs to quite literally have a crystal ball to know where and when a stock is going to move. It’s just way too hard to do.
I’ve given statistics in a previous article that were compiled by the Chicago Mercantile Exchange (CME) that have shown the horrible odds that option buyers have, specifically put-option buyers.
The study showed that upwards of 95% of put-option contracts that were bought to speculate on the downward direction of the S&P 500 Index and the Nasdaq 100 had expired worthless, leaving the buyer with 100% investment losses. That’s not a good statistic.
On the other side of that equation is the fact that the put option sellers are the ones walking away with wins 95% of the time, and it validates my own reasoning that selling put option contracts is an extremely high-probability way to win.
To break it down even further, option buyers, just like stock traders, are always trying to figure out where a stock will go. They need the stock to go somewhere.
Option sellers have it easier, as they only need to know where a stock won’t go. Big difference.
When selling the correct options – specifically put options – the sellers can profit if a stock moves higher, moves sideways, or even moves lower. That’s a win in practically all directions.
The option buyers can only win in one scenario: The stock has to move in the right direction. No ifs, ands, or buts. If it doesn’t, they lose.
Option sellers have a 3-to-1 directional advantage over option buyers. It’s a no-brainer for me.
So, in conclusion, concentrating on the selling side of options (specifically put options) has been my go-to strategy.
Just last week, I gave an example of the odds of Apple (Nasdaq: AAPL) dropping to $50 per share by January 2020. My “secret weapon tool” predicted the chance of that happening at practically nil and explained how an investor could take advantage of that scenario.
So, stick around for the next few weeks, as I’ll go in depth into each of the four best strategies to put you on the path of high probability profits.