Options: Free Your Mind and the Cash Will Follow
My old-school Webster’s Universal Unabridged Dictionary (copyright 1936) tells me that, from a layman’s – or non-investor’s – perspective, “option” means “the power or liberty of choosing; the right or power of deciding on any course of action; as, to leave it in one’s option to do something.”
For our purposes, “an option is a contract to buy or sell a specific financial product known as the option’s underlying instrument or underlying interest.”
It gives the buyer – also known as the “owner” or the “holder” – the right but not the obligation to buy or sell the underlying instrument or underlying interest at a specified strike price on or before a specified date.
An option seller – also known as the “writer” – is obligated to sell or buy the underlying instrument at that specified strike price on or before the expiration date if the buyer wishes to exercise the option.
The variables depend on the form of the option.
“The power or liberty of choosing” is another way of saying “freedom.” It’s part of the foundation of Western civilization.
So, yeah, “options” are pretty cool.
And knowing how to use them in the financial context can also be pretty profitable.
In fact, this knowledge can help make you rich.
Just ask Wall Street Daily’s Chief Options Expert Lee Lowell.
You Have the Power
The first – and most important – choice when it comes to financial options is deciding between the “buy side” and the “sell side.”
As Lee emphasizes in the preface to the second edition of his book Get Rich with Options, “You need to be on the sell side of options trading.”
That’s how you get rich.
In this weekend’s Saturday Spotlight, Lee illustrates how you can achieve “immediate income generation through safer speculation and hedging techniques.”
He expands via visual aids on a strategy he outlined last Monday in the weekly Memo to Wall Street Daily’s President’s Club Platinum Members.
A Fruit of Good
The example is based on owning 100 shares of Apple Inc. (AAPL) purchased right around where it’s trading now, about $120 per share.
You’d like to lock in a profit by selling it at a higher price. But you’re also up to buy more shares on steep correction.
Now, you can use limit orders to lock in your short-term upside objective (a “sell” some percentage above your purchase price) and to add to your position should your chosen stock decline to an attractive price point (a “buy” some percentage below your purchase price).
One problem is that you don’t know whether your stock will ever get to your “upside” sell price or to your “downside” buy price.
Another factor is opportunity cost.
Lee’s solution is compelling in its simplicity and irresistible for its cash-generation ability.
Rather than set a sell limit order at your upside objective, sell a call option that will obligate you to sell your shares at a price of your choosing. You can lock in a gain on your original purchase price.
And even if your stock never gets to that upside objective, you’ve generated instant cash from the sale of the call option.
You want to set your option expiration date far enough out in the future to create enough premium value to make the sale of the call a winning proposition.
And instead of simply setting a downside buy price, sell a put option to someone who’s willing to convey those shares to you at that bargain level. Again, you see instant cash.
In other words, you get paid to wait for your stock to do something that you wanted it to do – either run up to a point where you’ve locked in a significant profit or decline so much that you want to add shares to your existing position.
Lee uses Apple, one of the most well-known and widely held stocks in the world, to illustrate this options strategy. But it’s applicable to any stock in your portfolio.
The bottom line is this. Selling options generates cash up front, and you’re basically getting paid to put in limit orders.
Straddling the market by selling call and put options on your long positions is, as Lee notes, “a great strategy.”
Casual and In Command
Lee’s presentation today is certainly in stride with an easy-going Weekend Edition/Saturday Spotlight vibe.
Make no mistake, though: The guy knows his material.
Here’s a track record for you.
In November, after more than seven years and 139 trades, Lee finally had to close a position due to the underlying stock hitting its stop-loss level.
It was the first losing position established in Instant Money Trader in two years.
Lee’s premium service offers a rules-based method to generate instant cash while providing opportunities to buy high-quality stocks at value-based prices in the process.
Feel free to choose access to more money-making strategies via Instant Money Trader.
Speaking of easy income, that description certainly applied to master limited partnerships (MLPs) during the commodities boom of the first decade-plus of the 21st century.
But now, with crude oil trading near multi-year lows, units of even midstream MLPs supposedly immune to commodity-price shocks because of take-or-pay contracts supporting their infrastructure assets are collapsing.
We’ve seen multiple distribution cuts in the upstream space. As Chief Income Strategist Alan Gula notes, we could be on the verge of payout reductions for previously impervious pipeline and storage companies as well.
(Indeed, after Alan identified it in his “Dividend Death Watch Update,” Kinder Morgan Inc. (KMI), no longer organized as an MLP but still a midstream bellwether, announced a 75% dividend cut.)
Senior Analyst Jonathan Rodriguez wraps up his insightful deep-dive into hedge funds’ Securities and Exchange Commission filings with a look at how outperformers achieved their successes in 2015.
Two sectors stand out: consumer discretionary and consumer staples.
Fans of the Rolling Stones will dig (and maybe sing along with) the headline. But once you dig into Senior Correspondent Shelley Goldberg’s latest look at options, you’ll have even more context for these useful instruments.
“Theta” – “far more than just the eighth letter of the Greek alphabet” – is the dollar amount an option will lose each day as time passes. It’s a key concept for options buyers and sellers.
China’s economic maturation continues apace, as the International Monetary Fund’s (IMF) decision to include the renminbi among the currencies included in the calculation of its Special Drawing Rights unit illustrates.
A weighting of nearly 11% in the calculation is further indication of the Middle Kingdom’s growing global might. The IMF’s move is also validation of China as a destination for investor capital, as Chief Global Analyst Martin Hutchinson details.
Finally, Martin trains his eye on the ever-fascinating Vladimir Putin, who continues to push and pull Russia back into the centuries-old “Great Game” among world powers.
His efforts may be short-circuited, however, by the impact of weak crude oil prices on the Russian economy.
Thank you for spending part of your weekend with Wall Street Daily.