OPTIONS are one of the most versatile investment products ever created by Wall Street. It's no wonder, then, that so many professional money managers employ them regularly as part of a diversified portfolio strategy.
If used correctly and responsibly, options can greatly enhance an investor's return on capital. If used incorrectly, however, they can cause quite a bit of damage to one's portfolio.
Options should be viewed as "investment tools" rather than "get-rich-quick" tools. Do not expect to get rich with options. Treat them as part of a long-term investment strategy.
With options, you can:
- generate new monthly income (by selling put options)
- have the opportunity to buy a stock or ETF at a lower price (by selling put options)
- generate additional income on dividend-paying stocks or ETFs which you already own (by selling covered calls)
- hedge against the downside (by buying put options)
- make money whether the stock or ETF goes up, down slightly or sideways ... three ways to make money! (by selling ratio put spreads)
Options investing/trading appears complicated, but it really isn't. All you need to do is:
- learn the terminology
- learn the rules of the "game"
- place a lot of "practice" trades while learning
To learn about PUT OPTIONS, click HERE.
To learn about CALL OPTIONS, click HERE.
SOME GENERAL TRADING "RULES"
Options trading is relatively simple as long as you don't over-analyze things.
I am a SELLER of options (primarily puts). ALL of my trades are net CREDIT trades which means that I GET PAID up front.
When you SELL (to open) options, you have a much higher probability of success due to "time decay" (theta). All out-of-the-money (OTM) options will lose value (i.e., their premiums/prices will drop) over time as they approach expiration.
When you SELL (to open) an option, you are taking advantage of theta "time decay":
In times of uncertainty, the "implied volatility" of an option rises. This leads to a RISE in option premiums. This is the reason experienced options traders like to SELL put options when there's a temporary dip in the stock/ETF price. When the "implied volatility" is high, we get paid more $$$ for those OTM puts!
When everyone calms down again, the "implied volatility" drops and the put premiums also drop. Now you simply buy back your "short" puts, close your position and take your profits.
As you can see, as options traders, we are always SELLING HIGH first and then buying back later (at a lower price). The difference between the two premiums is your profit.
Here are some GENERAL "rules" to help you get started:
Selling call options is a semi-bearish strategy! This can be quite dangerous in a strong bull market.
CLICK HERE to watch my FREE YouTube videos on options trading.
Options trading is risky and may not be suitable for everyone. You may lose money. Past performance does not guarantee future results. Please consult with your tax adviser first before you start trading options.