I previously wrote an article walking through the anatomy of an options trade and the mechanics behind long-term successful options trading to generate high probability win rates for consistent premium income. In this article, I will provide empirical data over my first 100 options trades as a supplemental follow-up to this article above. These data are particularly noteworthy for a variety of reasons, most notably due to the market wide sell-off during this period where the Dow and S&P 500 erased all of its gains while turning negative for 2018. Furthermore, a week in December marked the worst percentage drop since the 2008 financial crisis while the Dow and S&P 500 posted their worse December since the Great Depression in 1931. This negative market backdrop provided a true test to the high probability trading and durability of this options trading method. Albeit my portfolio over this timeframe still produced a negative return these returns outperformed the S&P 500 by a wide margin (-8.8% versus -17.2%)
Options trading can mitigate risk; provide consistent income, the lower cost basis of underlying stock positions and hedge against market movements while maintaining liquidity. Risk mitigation is particularly important given the market wide sell-off throughout October-December of 2018. Maintaining liquidity via maintaining cash on hand to engage in covered put option selling is a great way to collect monthly income via premium selling. Heeding critical variables such as implied volatility, implied volatility percentile and probability, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. I’ll demonstrate via empirical data how these critical elements translate from theory to reality. In the end, options are a bet on where the stock won’t go, not where it will go and collecting premium income throughout the process. These empirical data demonstrate that the probabilities play out given enough occurrences over time. Despite a small sample size (100 trades) in a period where the market erased all of its gains for the year and posted the worst quarter since 1931, an 80% win rate was achieved while outperforming the broader market by a wide margin. Continue reading "My First 100 Options Trades"
Options can be a great strategy under any market condition as a standalone method or in conjunction with a long-term portfolio to augment long-term positions. Options trading can mitigate risk; provide consistent income, lower cost basis of underlying stock positions and hedge against market movements while maintaining liquidity. Risk mitigation is particularly important given the market wide sell-off throughout October and into November. Maintaining liquidity via maintaining cash on hand to engage in covered put option selling is a great way to collect monthly income via premium selling. Put option selling can also serve as a means to initiate a position via being assigned shares strategically. Heeding critical variables such as historic and implied volatility, implied volatility as it relates to historic volatility along with probability and liquidity, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. I’ll discuss these critical elements and how they translate into high probability options trading to maximize option outcomes regardless of directionality, effectively maintaining a market neutral position. In the end, options are a bet on where the stock won’t go, not where it will go and collecting premium income throughout the process.
Put Options Overview
Covered puts can be implemented as a means to leverage cash on hand to sell options contracts and collect premium income in the process. Contractually, this type of option selling gives the option buyer the right to sell you (the seller) shares at an agreed upon price by an agreed upon date in exchange for a premium (cash payment). An account cash reserve can be utilized for selling covered puts thus not purchasing the underlying security with the end goal of never being assigned shares and netting premium income in the process. It’s important to bear in mind that covered puts shouldn’t be sold unless one wouldn’t mind being assigned shares in the underlying equity if the underlying moves opposite the option directionality and breaks through the option strike price. Additionally, restricting covered put contacts to high quality, large-cap, dividend-paying companies with high implied volatility, high implied volatility percentile and high probability of success (i.e., one standard deviation out of the money) will mitigate risk and decrease the likelihood of assignment to maintain liquidity and add to cash on hand. The end goal is to capture premium income and maintain liquidity which is accomplished before the expiration of the contract via buy-to-close to accelerate the closure of the contract and capture realized gains. Continue reading "Selling Put Options For Consistent Premium Income"
When do you think is the best time to buy a home security system?
Would it be after someone breaks into your house or before?
Of course, it would be before you are burglarized. After the fact doesn’t help you prevent a loss.
When looking at a market crash, the same rule applies.
The best way to prepare for a market crash is beforehand.
I've just added my Bear Market Blueprint training to MarketClub Options - my full and comprehensive options training course.
The Bear Market Blueprint covers…
- 7 methods I use to protect my money during a market crash.
- How to make money when the market crumbles.
- The buy and hold strategy we used to triple our 401K account.
- And much more…
In my training, I'll walk you through this blueprint and show you the plan that MarketClub Options will put in place when the market shifts.
Learn More About MarketClub Options
Options can provide an alternative approach to the traditional buy and hold strategy. Buying call options can add value to one’s portfolio via leveraging a small amount of cash while defining risk with unlimited upside potential. Simply put, buying a call option is bullish in nature as the buyer is positioning the trade with the thesis that the underlying shares will increase in value. When one buys a call option, she is buying the right to purchase shares at a specific price on a specific date in the future for a nominal price. In this scenario, the buyer thinks the shares are undervalued hence why she is willing to buy the option now to secure the right to purchase shares in the future at a higher price. If the shares approach the specific price or rise above the specific price before the expiration date, then the underlying option becomes more valuable. This more valuable option can now be sold higher than when she purchased the contact to realize gains. Regarding percent, call options can be very profitable and scaled as needed. The risk in buying call options is capped based on the amount of the option itself thus downside risk is defined, and upside potential is great. Here, I’ll discuss buying call options along with my approach, strategy and real-world outcomes.
Anatomy of Buying Calls
I rarely buy call options however in opportunistic scenarios the risk-reward is very favorable given a decent time horizon. Nominal amounts of cash can be deployed in opportunistic scenarios to capitalize on sell-offs in high-quality stocks. Buying calls can be implemented as a means to leverage cash on hand without committing to purchasing the underlying shares of the company with the end goal of capitalizing on share appreciation via the option contract. The option price is determined by two variables, time and intrinsic value. The amount of time until expiration of the contract determines the time value, the longer the contract will translate into more time value in the contract (Figure 1). Generally speaking, if the underlying stock falls in value (moving away from the strike price), then the option will decrease as a function of time value. Alternatively, if the underlying stock appreciates (moving towards the strike price), then the option will increase in value as a function of time value. As the stock moves away or towards the strike price, the underlying stock is less likely (decrease in option value) and more likely (increase in option value) to reach the strike price, respectively hence the change in option value.
Intrinsic value isn’t applicable here until the underlying security breaks through the agreed upon price (strike price) before expiration. Every penny that the stock appreciates beyond the strike price is a penny of intrinsic value that increases the value of the contract. Any increase in the stock price will result in an increase in the option value regardless. Continue reading "Buying Call Options - Defining Risk, Optimizing Time Value and Realizing Gains"
If you were able to attend our live MarketClub Options Webinar that I hosted in March, you are probably curious what happened to the three 10-minute trades that we placed on AMAT, INTC, and NEE.
Watch the webinar recording below (no registration needed) to see how and why we placed those three trades.
Now here's your update: as of 4-26-18, all 3 trades show a small loss of $125.
Am I embarrassed that the live trades I placed are losing money? Nope!
Because losing money is normal.
A few losing trades here and there are no big deal. In fact, I teach (and follow) a money management formula that allows up to 25 losing trades in a row before it starts to hurt your account.
It is important to me to show how losses like this are par for the course. Ultimately, losses are overshadowed by your gains when you use a time-tested strategy like the MarketClub Options Blueprint.
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