In this video you are going to learn an option strategy that will consistently make you more money in your trading portfolio. There are
proven techniques that consistently produce profits. We are going to look at them so that you can have a bag of tools that you can use in your journey to grow your stock options trading account.
In this post I’m going to show you:
- Option strategies that have been proven over time to increase profits and reduce risk
- How To place an Option Trade to take advantage of the smartest strategy (Showing a real example on the option trading platform)
- At the end we will provide you with a bonus simple formula for winning in the stock market using options
So be sure and watch to the end.
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Be sure to download the FREE options Workshop in the link below.
It talks about the two main benefits of trading options over buying stocks.
DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.
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There are proven methods that make money in the stock market. For the most part there is risk when we are placing trades. So in a way we are placing bets with our money hoping that the stock prices move our way. However, betting and hope are not good long term strategies!
So let’s go through a few of the strategies that have been proven over time to consistently be successful. And look at how we can use options to increase our profits.
The first thing that we need to do when trading options is to
Place Trades with a High Probability of Profit
High Volume Liquid Stocks
Now when it comes to stocks and picking the companies that we want to trade we only want to deal with companies that are proven and well known that have a high market cap and lot of trading volume. So companies like Google, Amazon, and Coke as opposed to penny stocks that only a few people trade. That has been proven to be much more successful over time.
Sell Versus Buy Options
When trading options we want to focus on selling options rather than buying options. The secret to making money with options is to be on the winning side. And that side is no doubt the selling option side. Not the side where you are continually buying Call options and hoping that the stock price moves up in your direction. Continually losing money!
Options are basically a zero sum game. An option can either expire out of the money when the strike price is not reached. Or in the money when the strike price is reached. There are Buyers and Sellers in the market and the supply and demand is what determines the strike prices.
When buying options we want the strike price to be reached and exceeded to make money. When selling options we do not want the strike price to be reached.
And when looking at OTM Out of the money options it is more likely for an option to expire OTM Out of the money (because that is where it is starting). As in the strike price is not reached.
And therefore as a seller of the contract, we will be on the winning side of that trade. This is because there is a 50% chance that the stock price will move up or down in the very near short term. Due to market pricing!
So it is all based on the numbers and the probabilities and the strike price that you choose. Depending on how far you are out of the money you choose to sell you can actually choose your win rate.
By far the majority of the OTM options expire worthless. So we will use this knowledge in our trades so that we will have the highest probability of making money.
Let’s look at an example right now. Go to your Tastytrade account or whichever platform you are using. By the way Tastytrade is one of the best and most intuitive for trading options. I’ll put a link down below. Right now you can get up to $2000 when you fund an account.
We punch in your favorite store to shop at Walmart (kinda kidding) in the upper left and pull up the option chain by clicking on the trade tab.
Now we will open the chain that is closest to 45 DTE Days to Expiration. This is the sweet spot where you can collect the most amount of premium and not be too far out where things move too slow and you don’t collect much more in premium. Or in the closer weekly options where you don’t collect enough in premium.
Now the stock price is $150. If we think the stock price will move up we can look to sell a put option. Puts are on the right side. We can look to sell the $145 PUT.
Under the Bid you can see that we will collect $2.27 in premium for selling this put. Remember when we sell we collect premium and when we buy we pay premium. The Delta is .29 so this means that there is a about a 71% (1-.29) chance that the stock price will not drop and breach this $145 short Put strike price and the trade will be a winner.
Now on the other hand the buyer of this option only has a 29% chance that this $145 strike will be reached. So the buyer is betting it will move down below the $145 and the seller is betting it will stay where it is or move up.
Now as we move down in price to the $140 Strike we see we collect $134 and have a (1-.18) 82% chance of winning. Makes sense right! We take less risk and therefore collect less in premium but have a higher chance that we will win since we are further out of the money and the stock price has much further to move to end up in the money. The further out you go you will continue to collect less in premium since there is less chance of being assigned.
Here is another view. It’s the curve mode on the Tastytrade platform. You can see the current stock price is $150 and we collect the $227 for selling the $145 Put option and we then have a 73% POP Probability of Profit.
The breakeven is the $145 Strike – the $2.27 in premium collected so it is $142.73. As long as the stock stays above that price we make money.
It would take a 5% move down from the current $150 price in the next 42 days before we would start to lose any money.
Now if we flip it and buy the the option we pay $232 and have just a 27% POP Probability of Profit. The stock price would need to move down to that $142.73 price before we even started to make a penny.
So do you want to be the option buyer and have a 27% chance of winning? Or the Seller and have an 73% chance of winning. No brainer right? We want to be the seller.
Long term Investing Versus Short Term Trading
The next thing that we need to consider is the fact that it has been proven that long-term investing makes more money than short-term trading. Trying to time the market and constantly being in and out of investments is difficult if not impossible to do well at and make money consistently over time.
However, we know being long in the market is a good thing.
So you are probably thinking then what are you trading short term options Darren?
And you are right, I am. However I’m doing it with a longer term perspective and just as a way of enhancing longer-term positions.
So instead of just buying and holding long stock we want to use options in a smart way to have a better way to enter and exit positions.
We do this by selling options. When we sell puts we are obligated to buy stock when the strike price is reached. Now in wanting to collect premium we don’t want the short put strike to be reached so that we can collect the premium.
However, if we are bullish and want to buy the stock anyway, we can sell that Put option. We sell the OTM Out of the money PUT below the current market price. By doing this, we collect a premium. If the stock price does drop down and we get assigned, we end up buying the stock at a discount to the current price. We may get in at a 5-10% discount. And we keep the premium collected regardless of whether we are assigned the stock or not.
So there you go extra money!
The third proven step is:
Reinvesting And Compounding To Grow Your Wealth
Most people after buying a stock just forget about it and go on with their lives. Sometimes that works, however companies have management changes and different earnings results over time. There are good companies and bad companies and sometimes things change.
So we don’t want to just buy a stock and then go watch a movie.
The key to growing your wealth is to actively add to your positions in various ways. Dollar cost averaging is a good way to automatically add to your investment account. So maybe you have a certain amount set up to be automatically transferred into your investment/trading account every month. This way it is automatic and you just live with it and you don’t even know it is being transferred. It just appears automatically like magic!
We then use that money to buy more of our positions.
Another way is through dividends. If we have stocks that we own that pay a dividend that’s great. We take that quarterly dividend that companies that pay dividends like Coke (KO) or Chevron (CVX) pay and we reinvest that back into buying more of the stock.
So we are constantly growing our positions and this will compound over time and create a snowball effect growing our account larger and larger.
Selling CALLs Against Stocks We Own
Another strategy that we like to use for monthly income is to sell Calls against stocks we own. This is exactly the opposite from selling PUT options. When we sell a Call, we collect a premium for selling the right to sell the underlying stock at the strike price should that strike price be reached prior the expiration date of the option contract.
So what we are doing is we are selling when the stock has moved up significantly enough to reach that OTM Out of the money short Call strike price. So we are selling at high once we have already made money by the stock moving up. We are buying low and selling high. Many traders to the opposite they buy high and then panic and sell low if there is a dip in the market. I’ve never done that have you?
Our goal when selling calls is really to not reach the strike price since we are holding only stocks that we are bullish on and sometimes we want to continue to hold them. So we are using our portfolio to generate more money through dividends, selling calls and depositing more money. And we are compounding this over time.
Let’s look at selling a call in Target (TGT). We are long and own the stock so we think the price will go up. So we punch in TGT on the Tastytrade platform.
Let’s pick the June 2023 option chain since it is closest to 45 DTE days to expiration which is the sweet spot.
We pick the 170 strike since currently the stock is trading at $156. So it would take a $14 move up in order to reach that strike price and trigger us to sell our 100 shares. That would be an 8% move up in 42 days which is pretty big.
We switch to the curve mode. Now our goal is not to exit the position. Instead it is to just collect the premium and retain the 100 shares of stock. So we are saying that by June 16 Target will not hit the 170 short strike price and we have a 78% chance of being right.
Keep in mind if you were a buyer of the 170 call you would only have a 22% chance of being right. Now we already own 100 shares of the stock. This graph just shows the profit zone in green on the call by itself.
So most likely selling the option contract will be the winner and buying it will be the loser.
Here is the Curve mode graph and profit zone for the overall covered call position. This shows the 100 shares we own and the call that we just sold against 100 shares of stock that we are putting up as collateral.
You can see the buying power effect of $7580. This is the amount of money that we need to place this trade and its what our account is utilizing. Since we are collecting $247 in premium that is about a 3.25% return on our investment in just 42 days. That equates to an annualized return of 28%. Not too bad for just collecting extra income on stock we already own. So we add that to the increase in value of the stock as well.
Eventually we just take the premium collected and reinvest it and we grow our empire!
To take these concepts and put them into one simple formula it will look like this:
Stock Option Wealth Formula
Sell High POP options in stocks we want to own
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Reinvest income, premiums and dividends
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Let Compound over time (take advantage of compounding)
= Winning with options in the stock market
Stock Option Strategy Summary
Now to take that formula and break it down in a little more detail.
- Save enough money to buy 100 shares of a stock that you are bullish on and think will go up in price.
- Use this money to sell a OTM Out of the Money PUT in the stock that you selected with about a 75% POP. So around the 25 delta strike. The goal is to buy the stock at a cheaper price than the current market while collecting option premium. If the short strike is not reached you rinse and repeat and sell another put in the following month and collect more premium.
- Once you are assigned, we use the cash we have in the account to buy the shares of the company. Congratulations you just got a great deal on your favorite company’s stock.
- Then we sell a Call against the stock at about the 1 standard deviation or 16 delta point. The shares of the stock that we own are used as collateral. Selling the CALL will allow us to collect a premium and likely retain the stock. Selling the 16 Delta CALL gives us about an 84% POP or Probability of Profit.
- If the stock price does breach our short Call strike we can roll up and out to the next monthly option cycle and likely collect more premium. If for some reason our opinion on the stock has changed and we are no longer bullish we can just let the stock get called away and be done with it.
- We take the premiums that we collect and then reinvest back in the market using these same strategies.
- If you collect dividends on any of your stocks you take those dividends and reinvest in stocks as well.
Our ultimate goal is for our portfolio to generate income for us and use that income to continually grow our portfolio through reinvestment.
When we do want to sell our shares and move onto another stock for whatever reason we don’t just sell our shares. Instead we sell a CALL that is closer to ATM at the money which is the actual current price of the stock. This way we collect a large premium upfront and if the stock moves up a little we are out with that premium collected.
Now isn’t that much better than just buying and holding stocks like the majority of people do?
This strategy works great in a retirement account since you likely don’t have to be too concerned about paying short term capital gains to the tax man.
In a non-retirement or brokerage account you may want to consider rolling your CALLs up and out at least a couple weeks prior to expiration to avoid selling your shares and having to pay those taxes to Uncle Sam Who obviously knows how to spend the money better than us. Yeah Right.
One last tip. Right now most brokerages have up to about $250K in FDIC insurance coverage per borrower. What this means is if something happens and the brokerage or bank closes you are covered up to that amount by the government.
So if you have more than that amount I recommend having multiple accounts at different brokerages. There is a link to Tastytrade down below if you don’t have an account with them set up just yet. Right now you can get up to $2000 when opening an account.
So check them out. They are a great brokerage. However, I’m happy if you just hit the like button now.
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Now if you haven’t seen any of my other videos check them out.
I’ve put a link down below for the FREE Options Workshop. Be sure to grab that.
Remember to hit like and subscribe and please please leave a comment below and let me know what strategies are working for you right now. I need comments guys!
Thanks for watching please share this video with a friend and see you in the next one!