OptionThink is designed to give you current information about ways to generate immediate, conservative income using the options market. In my experience, the best results come from keeping things relatively simple. I’ve found my best success using two specific, very conservative trading strategies: covered calls and cash-secured put selling.
Covered calls are a great way to take advantage of options, no matter which way a stock’s trend is going. If the trend is up, a covered call will usually result in being called out, which means you’ll sell the stock back to the market at the strike price of the call you sold. This is one of the reasons I sell out-of-the-money covered calls: I like to factor in a little capital appreciation along with the immediate income from selling the call in the event the stock develops a good upward trend. If the trend is flat, or even down, the call option will expire worthless and leave me with the stock, which means I can keep sell another call and bring in more income. Even in the case of a long, extended downward trend, the income from the covered calls will usually offset enough of the price decline to provide a way to exit the trade at a profit once the trend reverses.
Put sells work best when the stock is in a good upward trend, but I also like to work with these strategies when I see a stock begin to move sideways following a long downward trend. As long as the stock price is above the price of the put I’ve sold, the option expires worthless, and I can sell another put. If the stock is below the put option’s strike price, I’ll be assigned the stock, but as long as the stock’s fundamentals are strong, I don’t mind buying the stock at my put option’s strike price. The likelihood is that the stock will start a new upward trend at some point, so the put sell gives me a gateway to using the stock for covered calls if I do get assigned, or a way to generate income as long as upward momentum holds strong.
I do not, as a rule, write about directional trading, such as you would do with long call or long put options. I am familiar with these strategies, of course, and can elaborate on those strategies, the conditions that fit them best, and how to manage those trades; however, in my experience the winning percentages in those strategies for even the most experienced traders is less than 30%. My focus on income-producing trades with covered calls and put selling pushes those percentages much higher – in access of 70%.
My focus is on conservative options selling strategies that yield above-average short-term returns. That means that you won’t see me write about “home run” trades where I might have doubled my investment in just a few days – even the best traders find those trades are few and far between. I prefer a consistent, sustainable approach that can yield between 1.5% to 3% each and every month. That typically puts me on pace to make anywhere from 18% to 36% on an annualized basis, which is far ahead of what I would expect to make by using other “conservative” strategies like index or mutual fund investing, where fund managers are content to keep pace with a stock market that has averaged around 10% per year for the last 25 years.
I first began publishing articles in this blog on May 28, 2014. As for my market and trading experience, I’ve traded options since 2002, and my experience in the stock market goes back more than 20 years. I also taught technical and fundamental investing techniques to thousands of investors across the United States and Canada in multiple educational settings for more than a decade.
I typically post two articles each week – one on Tuesday and another on Thursday. Of those, my Tuesday post usually lists the best new trading opportunities, while the Thursday article is usually a look at broad market conditions or a discussion of trading systems and strategies from a conceptual and informational standpoint. I may also choose to post new trading opportunities at any time no matter what day of the week, or to publish articles on other subjects on other days as I feel is appropriate with the current state of the market.
When I write about new trade setups, I typically provide a look at two stocks for covered calls, and two more for put selling. I’ll outline the reasons, fundamental, technical and otherwise, that I think the stock fits the strategy I’m suggesting, along with specific strike prices and expirations to consider using. Price information that I list for the stock and its options, along with yields, is based on current market prices at the time of writing. Keep in mind that the prices you see in most cases will be different from those published.
No. I typically highlight anywhere from 16 to 20 new trades every month. While you’ll see many of those will be in stocks that I’ve discussed in the past, I make an effort to find new stocks that fit my system’s requirements every week, and that I hadn’t looked at before. With new trades coming every week, and most of my actual option trades running between 2 to 5 weeks in time, it really isn’t possible to be in every stock I write about. That said, I <i>do not</i> write about any stock that does not fit my system’s requirements. That means that while I may not place an actual trade in a stock I’m writing about, it will always be a trade I would be more than happy to make.
I will periodically go back to previous trading highlights and review their status through my blog. Since I don’t actually trade every stock I highlight, I will also occasionally provide a list of my historical trades and their actual results from my own trading account as one of my twice-weekly articles. You can see an example of how I like to do this here.
When I review historical highlights or my actual trades, I will usually also include an analysis of the stock’s current situation and how that would impact or has impacted my portfolio. In those cases, I’ll add what my next steps would be. That said, you won’t see this kind of analysis on every stock I highlight. That is because my system for covered calls and put sells is relatively straightforward.
Once I place a covered call or put sell trade, I let it run to expiration (even though I check my trades every day so I know how they are doing in the context of overall market conditions). After expiration, my next steps depend on what happened:
I love getting email from my subscribers, especially if you’d like to share a good success story or have questions about trades I’ve highlighted in the blog. I do ask that you limit your questions to trade setups I’ve already discussed, the site itself, or to feedback specific to the site that you may have. Considering the number of subscribers we have, I simply don’t have the time to accommodate requests for a detailed analysis of stocks from your personal watchlist or other informational services and keep up with my own trades, all while making sure I’m giving you consistent, solid, and strong trading opportunities in my blog.
Whether or not a stock or its options can be traded on margin is usually a question for your broker. I screen the stocks I analyze for potential trades on the basis of current stock pattern and trend, fundamental strength, and net yield for the option trade. That’s about it.
As for margin calculations and trade management techniques to avoid a margin call, I keep things pretty simple. Put sells are very conservative trades, with a very limited downside, as long as you make sure that you keep enough cash or margin in reserve in your account to cover the potential obligation of a trading assignment and don’t mind owning the stock in the event of a stock assignment. That means, for example that if I sell one put contract with a strike price of $30, I have to make sure I keep $3,000 in available cash or margin to pay for the stock if it drops below $30 at expiration. That $3,000 becomes untouchable money to me until the end of that trade, which means that I won’t place a trade if a stock assignment creates an obligation I can’t pay for.
Over the course of two decades in the markets, I’ve worked with practically every trading strategy there is in the options market, including spread trades. I know a lot of people like to use spreads, and there are good reasons for them. The main reason they are not a primary part of my system boils to simplicity. My best results have come by having fewer moving pieces in my trades, not more. That said, I have written in the past about spread trades as I have felt market conditions were better suited to them, and I may do so again in the future. These are exceptions to the rule, however.
Fundamental analysis is a major part of my trading system. I will not use a stock for covered calls or put sells that I do not believe has the fundamental strength I need. My approach to fundamental analysis is also simple. I want to see improvements in four major fundamental areas:
In the last several months, I have also put an increasing emphasis on dividend-paying companies as well as stocks that have already been beat down in the marketplace and are trading at relatively low multiples of their earnings and/or book values. This gives me a way to manage downside risk a little more effectively and also improves the stock’s long-term forecast. As long as a stock’s fundamentals are strong and yields from covered calls or put selling are attractive, I will continue to use it for one of my primary two types of trades.
Start by working with the materials we’ve provided in the Homestudy Kit area of the site. There, you have access to my eBook, A Trade for All Seasons, that provides a lot of detail about how I’ve built my trading system along with some terrific information to start learning with. We’ve also provided about thirty online training videos, each of which run between 10 and 15 minutes, that cover everything from basic technical and fundamental analysis to money management and several options strategies, including covered calls and selling puts.
As you’re learning, I would also recommend that you don’t trade your account; leave your money in cash and be patient. Most brokers today provide a practice trading account or access to a virtual trading interface that will help you not only place trades with play money but also get used to the mechanics of placing an order and managing a trade from beginning to end. Use the trades my blog to get plenty of practice before you start trading your real, hard-earned cash.
To be honest, this is a pretty fluid question. With an ever-increasing number of subscribers, I get a lot of emails, and so while I make an effort to respond as quickly as I am able, I can’t make any guarantees about how quickly I will get back to you. I do read every email I get, however, and I do respond to each one. As a general rule, if you haven’t heard from me after a week, there’s a good chance I never got your email. I don’t mind getting follow up emails from you in that case, either.
I have from time to time gotten emails from subscribers asking for my opinion about specific stocks or option trades they are in from one of my previous trading highlights. I don’t mind answering these kinds of questions at all, but if your question is time sensitive, please understand that I can not guarantee I will be able to respond right away, even though I will do what I can.
Please don’t hesitate to email me! Many of the emails I’ve gotten have helped me make adjustments to the way I manage this blog and present the information I give in it, so your feedback is critical! My email address is firstname.lastname@example.org.