Investors in the stock market are looking for one thing: profits.
Profits of course come from anything you make over and above an initial investment.
Couple that with lowering your exposure to risk and you have a recipe for endless income that can help with things like retirement, family vacations, a new car or, in my case, a boat.
Every investor is looking for something different from the stock market.
In the good old days, we got excited when we opened that bank statement and saw the interest our savings had given us.
But today, that interest just isn’t enough — not even close in most cases.
Investors want more.
Investors need more.
And there’s one way you can find those gains to provide you that endless income. It’s as simple as options.
Trading put options, to be more specific.
According to the FDIC, the average savings account at a U.S. bank pays .09% interest on your money, a paltry sum that’s not even worth your time.
But there is a strategy out there that can yield 10% income in just a quarter — which of course comes out to 40% over a year.
What Are Options?
I covered this in a previous piece called “How to Trade Options: A Complete Guide,” so let’s quickly go over the high points.
Let’s say you buy a put option for XYZ Co. for $1 ($0.01 per share for a 100-share contract) with a strike price of $10 per share.
You can sell the shares at $10 before the end of the option period.
If the share price of XYZ Co. drops to $8, you can buy the shares on the open market and sell the put option at $10 per share.
If you take into account the option contract price of $0.01 per share, you will earn a profit of $1.99 per share.
You essentially made money on the stock actually going down.
Trading Put Options to Make 40% a Year
A put option is a contract that gives you the right to sell 100 shares of an equity at a particular price by a particular time called the expiration date, or expiry.
Remember, it’s the possibility to sell the stock. This makes it less risky than outright buying it. It’s actually more like buying insurance on a stock by limiting the downside risk.
By doing this, you get paid upfront because you may have to purchase the stock at some point.
When you sell a put option, you have two potential outcomes:
- You keep the income.
- You keep the income and you own the stock.
The Starting Point to Trading Put Options
But to start in options, there is a key point that Banyan Hill Publishing Chartered Market Technician Chad Shoop, an options trading expert, said is vital.
“Because this is where investors mess up when they sell put options,” said Shoop, the Editor of Automatic Profits Alert. “They pick risky stocks that they don’t care for, just to try to collect a huge amount of income.”
In essence, you want to find the companies you actually want to own. The worst thing that can happen is you own shares of a company at a loss, but it’s a company you have an interest in.
You basically get paid to buy a stock today that you would want to own in the future.
The next step in earning 40% income with trading put options is seeking out the companies you believe will make an impact in the future, not today.
“These stocks won’t be blue-chip companies. While I love implementing this strategy on blue-chips, those returns are around 3% per three months,” Shoop said. “If you want 10% in three months, we have to focus on the companies of the future.”
These are companies that innovate at “breakneck speed,” Shoop said.
“You want to add exposure to those companies in your portfolio today because they are creating the future,” he added.
Basically, you can collect income on stocks you love, not ones you think may do something. It seems pretty simple, right?
Now, there is more to it than that, but this gives you a solid foundation to not only trade options but to do so in a way that you are trading stocks you want, not ones you feel you need because they’re the hottest thing going.
It makes collecting money on those trades that much sweeter.
Editor’s note: If you want to learn more about trading options, be sure and check out our full guide.
Additionally, Chief Investment Strategist Adam O’Dell‘s Cycle 9 Alert service is launching soon right here on Money & Markets. Stay tuned for more information in the coming days and weeks, and get ready to make big money trading options with the best.
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