I’m getting great questions from everyone about the markets.
When can we expect the next round of stimulus?
How high will outbreak totals reach in the months ahead?
When will we know who won the election?
What is my favorite stock pick for the months ahead?
I love questions about the future.
But I’ll be honest. If we watch the mainstream media, it’s starting to feel like the movie Groundhog Day…
I’m expecting that old Ned Ryerson will pop up from behind a bush, try to sell me insurance, and then “needle” me into a chat about when a pullback might finally come. BING!
There are many similarities between late February 2020 and today.
Rather than wait for a pullback, I’m going to show you two strategies to help you generate income and help set yourself up for success.
Every day I’m looking for a new opportunity to make money.
But profiting every day can be hard if you’re only a Buy and Hold investor.
Yes. There’s an upward bias to the market over the long term.
But if you’re simply buying and holding – you face occasional downturns with a more passive strategy.
I encourage you to be as active as possible in these markets.
The easiest way to be active and generate income in the process is by using options.
Now, I know there’s an initial fear factor when it comes to trading options for some investors.
And I understand if someone has told you that options trading has heavy risks or is only dedicated to speculators.
The reality is that – by definitions – options are actually a form of insurance.
On one side you have “put contracts.”
A put option offers the buyer a right to sell an asset at a predetermined price on a predetermined date.
Let me show you how this acts as a form of insurance.
Imagine if you owned a $300,000 house.
And because you’d be worried about a market that might knock your home price down to $250,000 in the next two months.
If you could buy an insurance contract that would allow you to sell your house at $290,000 in the middle of a major market sell-off, would you do it?
Of course, I would.
I’d protect myself from the downside of a major shift in price valuation.
Well – those contracts don’t exist in the housing market.
But they do in the stock market.
So, let’s say you own 100 shares of XYZ stock at $100 each.
Now, let’s say you’re worried that XYZ could fall below $95 during its upcoming earnings announcement.
You can purchase a put contract at a specific price called “a premium” that would give you the right to sell 100 shares of the stock at $95 if it falls to or below that level.
If your premium was $1 per share, your breakeven level would be $94 or ($95-$1).
If the stock falls under $94 or even down to $85, you still have the right to sell at $95. You’d be protecting your investment… and the counterparty who sold you the contract would have to buy the stock even if it calls down to $50.
Again, it’s a form of insurance.
Now, on the other side is the “call option.” This gives a person the right to purchase a stock at a specific price.
If you think that shares of that same $100 stock are going to rise above $105 in three months, you can purchase a call at that price for a premium.
If the shares rise to $110, the buyer of the call gets to purchase it at the strike price. The buyer would be able to pocket the difference between the total contract and the premium and the current market price.
But this all brings me around to one question.
Why would someone be willing to sell these put and call options to other buyers?
Why not just buy them and speculate on the price swings?
Well, this is where I unveil my favorite two options strategies.
The truth is… I am not looking to BUY calls and puts.
I want to sell them for two reasons:
And both are part of my Family Portfolio strategy that I’ll unveil today.
Options Strategy No. 1
The first strategy of selling options is simple.
It’s called using a Cash Secured Put.
This strategy is in many ways safer than buying an actual stock at today’s market price.
Why? Because you can sell a put option on a stock and fully secure it with the cash in your market account.
So, let’s say that you want to buy 100 shares of stock at $25.
The maximum loss possible for that position is $2,500.
But if you sell an option on that contract for $25 and collect a $3 premium, your maximum loss is now $2,200.
($25-$3) X 100.
You simply need to have $2,200 in buying power in your account to cover the purchase of the stock if it falls to that strike price.
The other thing that I really love about Cash-Secured Puts is that it creates a Win-Win strategy for me to enter a position.
Let’s say I’m looking at XYZ stock at $30 per share.
But I think that it’s worth a little too much today. Instead, I would want to purchase the stock at $27.00.
So, I can sell a put option with a strike price of $27.00 set for three months from now. Perhaps I will receive a $2 premium for my time.
That means I collect $200 (100 shares per contract).
My breakeven price is now $25. So, if shares do fall below $25, I’ll need to still buy it at that price. But since that is the price I want to pay to start a long-term position, I’m happy with it.
Again, I’m doing this on stocks I want to own and I’m making sure that I have enough cash to secure the position in the event that the contract is triggered.
But here’s the best part. If the stock never falls below that price by the date of the contract’s expiration, I will get to keep the premium.
Or, if the stock goes higher, the value of the contract might fall, and I can take some gains off the table and by purchasing those same puts back at a lower price.
Then, I can do it all over again. It’s a Win-Win.
Options Strategy No. 2
There’s another strategy that I love to use that is conservative and gives me the terrific potential to squeeze every penny out of the stocks that I currently own.
This one is called a Covered Call.
In this situation, I am selling a Call option for every 100 shares that I currently own.
So, let’s say that I have 100 shares of a stock trading at $100.
I can sell an option to someone who wants the right to buy the stock from me at $105. In this scenario, imagine that the call premium is $3.00 with a strike price 90 days out.
This means that my breakeven price on the contract for me would be $108. Now, look at those numbers.
My maximum upside in three months is 8%. If the stock goes above $105, I will have to sell it. But adding on that premium, I’m juicing that return.
Meanwhile, if the stock stays under $105 during those three months, I don’t have to sell my shares. Instead, I can generate that additional $3.00 premium (or $300) and pocket it.
Or, again, I can buy back the contract if the price of the stock goes lower or the premium decays over time.
These are two great strategies that help investors make money while staying active in the market. You don’t have to just Buy and Hold forever. You can take advantage of speculation.
You can eye other indicators like the RSI to determine if now is the right time to sell calls or sell puts.
And best of all – you can take any new capital to build bigger stock positions and juice your returns on these new shares with the same strategy…
Over and over.
There is one more option strategy that I want to outline tomorrow that can help boost your income and give you more leverage to generate higher returns. I’ll dig into it more on Sunday.
So, be sure to check your inbox tomorrow afternoon.
Enjoy the weekend,