First of all, I will tell you that options trading by itself is not a scam.
It is in fact a very powerful tool to complement value investing and stock investment which Warren Buffett also uses to a large extent. Let’s also remove the myth that options is a risky instrument, however, please ensure you are properly educated on it before you do anything with it.
Second, if you come across the term Binary Options, and something which promises high returns and auto-trades for you, please take flight and run away quickly. Always remember: if it is too good to be true, it is probably not true.
If you are new to options, it is a type of derivative security and is intrinsically linked to the price of something else, like an options to purchase for properties. Here, we focus on options on stocks as traded on the stock markets. There are only 2 types of options, Call and Put options.
I extract some definitions from Investopedia about options:
The right to buy (stocks) is called a call option and the right to sell (stocks) is a put option.
A call option might be thought of as a deposit for a future purpose. So for example Apple is trading at about $145 now, instead of paying $145 per share outright to buy, I may pay say $20 as a deposit to purchase it at a fixed price (called the strike price) by a future date (expiration date). In options terms, the deposit is called the options premium.
A put option, on the other hand, might be thought of as an insurance policy, An analogy will be like car insurance. The insurance company collects the insurance premium from you by selling you an insurance policy. As the car owner, you pay the premium but you are protected against any damages to the car.
Let’s relate back to the stock market again. Say you own Apple shares and you are already in profit as you bought it at $100. You think Apple stock price will go up further with the release of iPhone 8 but you want to lock in the profit. What you can do is to buy a put option at strike price of say $150 but you must pay a premium for it.
You can be seller and buyer of Call and Put options. Buyers pay the premium and sellers collect the premium.
Watch this video as a re-cap.
If at this juncture, you are still confused, don’t worry about it. The concepts become clear after a few practices and it will be easy like ABC.
Stock Options To Generate Income
I have had the fortune to learn options and I am now making monthly income off a capital I set aside (a monthly return of 2% is possible).
I will simplify (perhaps over-simplified) and share how this works.
Say for example (this is only for illustration only), after applying the stock investment framework, you determine that the entry price for Apple is $140 which is currently trading for $145. What you can do is sell a put with Strike Price of $140. This is saying you are promising to buy Apple share at $140 from someone who holds the stock right now, who may be protecting himself if share price drops below $140.
By doing so, you collect a premium of say $1.60 (1.14%). 2 scenarios may happen at expiration time. (1) Apple price remains above $140, you keep your premium of $1.60, yes you put inside your pocket. (2) Apple price drops below $140 and you have the obligation to buy it at that price, but it is okay as you actually want to buy it at that price!
As I mentioned, there is over-simplication here but the gist is there. Leveraging on this technique and other options strategies, you are collecting monthly premiums month after month.
Cashflow Mastery Program
Today, I consistently make a monthly income from an investment capital which I allocate for options trading while I practise other stock investment strategies and manage an overall portfolio.
Depending on the capital you set aside, say $50K, with 2% per month, it is a nice $1,000 additional source of income on average every month.
We teach proven options strategies as part of our Cashflow Mastery Program.
For those of you who are interested to know more, please contact us.