Thanks for signing up! Here's an options primer.
Hello and thank you for signing up for my options newsletter! I started this newsletter for two reasons:
First, to share more about my strategy with options to a very specific audience.
I started mentioning options very offhandedly on my Instagram account - but people kept wanting to find out more. I mean, who doesn’t want to learn how to generate cashflow right?
So let’s talk about the strategy. If you’re familiar with options terminology, I sell options to try to get assigned stocks at a lower price than they’re currently trading at.
If nothing in that sentence made sense to you, the non-jargon way of explaining it is I commit to buying someone’s stocks at a lower price than it’s trading at, and they pay me a small amount of money to take this risk.
Why would anyone pay me to buy their stock? Imagine a situation where someone (let’s call them Bob) bought XYZ stock for $80 and the stock price has slowly risen to $100.
Coincidentally I like XYZ, but I don’t necessarily want to pay $100 for it.
For whatever reason Bob is feeling nervous about XYZ’s stock price dropping. So he’s willing to pay me $2 in exchange for a promise that I will buy his XYZ stock at $95. This $2 works like an insurance policy. If I enter into this trade with Bob, even if XYZ drops to $50, I have to pay $95 for it, and he still locks in his profit over $80. So he gives up a small $2 potential upside, but he locks in a definite profit on his overall trade.
If I’ve done my research and believe that XYZ is a stock worth owning for the long term, then I’m happy to own the stock at $95 (or even lower), which is at a discount to its current price of $100.
The key here is whether or not the buying of the stock (or assignment) happens. Since I started tracking my trades closely in 2018, I’ve gotten assigned about 2% of the time. Yes, the market has largely been trending upwards over that period, but it also covers the (short) bear market in 2020 when covid hit, and the current period in 2022.
That means the other 98% of the time, I take Bob’s $2 and repeat it month after month and generate cashflow without even owning stock.
This newsletter will follow the trades within my own portfolio - I’ll share the trades I make and everything that happens to them from the time they’re put on until they’re taken off, hopefully at a profit.
Second, options have historically gotten a bit of a bad rap and after 9 years of trading, I’d like to try to dispel this myth.
People like to equate them go gambling or throwing around words like “unlimited loss”. The truth is if you use options responsibly, your risk is no more than someone who buy stocks outright - yes, even ETFs.
Even if you only believe in buying VTI or VOO, you can still use options to purchase them at a discount. I’m doing this with VOO right now.
In fact, because you’re getting paid cash before you ever even buy the stock, your absolute dollar risk is actually less than someone who buys stocks without using options first.
Using the earlier example with Bob, if you bought the stock at $100, the max you could lose is $100 if XYZ goes to $0.
However if you bought it at $95 after using options, you only pay $93 because you received $2 from Bob beforehand. So your max loss is actually your real cost basis of $93.
I know that might sound too good to be true, which is why I’m showing the trades to my own portfolio transparently and you can see whether I make money, or blow up my account.
Once again, thank you for signing up and I’ll see you in the next issue.
If you're interested in an even longer FAQ - here it is.