How Options Can Generate High-Probability Outcomes
As an investor, one of your most important objectives is generating income, and let's face it, interest rates have been low for more than a decade now.
As an investor, one of your most important objectives is generating income, and let's face it, interest rates have been low for more than a decade now. Which unfortunately means that depositing funds into your bank account or buying bonds will not be viable ways to generate revenue.
So, what can you do? Well, you need another revenue stream, and right now, it's looking like stock options might just be your best bet.
Many people have a misconception about trading stock options. People think that it's too risky, or they are skeptical of all the get-rich-quick types out there claiming to get grandiose over-the-top returns with low investment and no risk. After all, if it sounds too good to be true, then it probably is, right?
This is the thing, though, when done correctly and with the proper checks-and-balances in place, options trading can be a great way to generate income. And there are those who manage to consistently see excellent ROIs trading options while subjecting themselves to relatively low risk, (but never zero-risk like some claim).
Selling options on the stocks in your portfolio, or stocks that you would like to add to your holdings, is a time-tested strategy for increasing your profits and decreasing risk.
The fundamentals of options trading revolve around Puts and Calls. With a put, you have the right to sell stock at a particular time for a specific price. On the other hand, a call gives you the right to buy the stock at a particular price at a specific time.
You need to sell them!
Most people buy stocks hoping the value will increase. Investors, however, will buy puts to reduce the risk of their stock positions declining. Remember, when stock prices drop, put prices go up and vice-versa, so constant demand for puts often creates a fear premium.
That said, call prices don't usually trade at the same high premiums as bearish puts. Now, that's not to say that call prices are bad; in fact, they are generally quite decent. Really, it's just like with stocks. People buy calls hoping that stock prices will go up. For some reason, there are fewer investors that choose to sell puts, but that's probably because there is more risk involved with selling puts.
So, you have a chance to buy stocks you like at lower prices if you sell puts whereas by selling calls, you can collect premium while waiting for your stocks to rise in value. Both of these trades can generate income for you while reducing your risk.
The jargon involved with options trading may seem confusing, but once you get used to it, it's easy.
Selling a call against a stock is what's known as a buy-write, or sometimes it's known as a covered call or an over-write; they all mean more or less the same thing, which is selling a call on a stock. With a buy-write, you are buying stock while at the same time selling a call. Whereas, for an over-write or covered call, you are selling an option against stock that you already hold.
Selling puts against a stock position is known as a cash-secured put. Likewise, a naked put is when you sell a put on a stock that you don't already own.
Let's look at one well-known revenue generation strategy when trading options.
So, in this example, consider the over-write strategy. With an over-write, you can set a sale price when you first buy a stock. So, let's say that you buy a stock for $100, you could then immediately set the sale price at, say, $250. So, in essence, you would effectively be selling $250 in strike calls against that stock to boost your revenue. That is to say that you can generate income even if the stock stays flat at $100.
Options trading may not be for everyone, but it also isn't as scary or complicated as most people think. Trading options can be a great way to make a decent amount of revenue while at the same time decreasing your risk on the stock positions that you hold already or would like to.