Here's How To Make Money Year Round...
Ever think about all the money you pay to insurance companies each year?
I mean, there's car insurance, home insurance, renter's insurance, life insurance, medical insurance, etc, etc.
I'm pretty sure that in your lifetime, you will never make a substantial claim from your insurance company.
Most likely you won't get into a major car accident, or most likely your house won't burn down, and most likely your life insurance policy will run out before ever needing to use it.
Sure, you might get into a little fender bender that costs a few thousand dollars to fix, or you might have a leak in your roof that costs a few thousand dollars to fix it. And if that happens, it's almost a guarantee that your premiums will go up. So now you'll be paying even more to your insurance company each year.
So what happens to all of that money you paid over the years for things that you never make a claim on?
It goes right into the insurance company's pockets as pure profit for them and their shareholders. If you aren't are a shareholder, then you get squat!
All that money down the drain each year. But we have to pay it, right? We just can't take the chance of being without it if disaster strikes.
But here's where I hope the light bulb goes on over your head as it pertains to the stock & option markets:
Insurance companies are insuring you for things that won't happen.
In other words - low odds types of events. That's how they make so much money!
And those same principles are exactly what we're doing when we sell out-of-the-money (OTM) put options.
And making us lots of money throughout the whole year.
Well, when we sell a put option to someone, we're collecting their premium upfront (just like insurance companies), and offering them insurance against the stock crashing.
Take Walt Disney (DIS) for example. It's currently trading at $114 per share.
Someone who owns the stock is looking for some kind of insurance against it falling in price.
How do they do that? They buy a put option that allows them to sell the stock to someone else at a price of their choosing.
If this specific stockholder doesn't want to see DIS fall below $90 per share, they can buy a $90 put option as insurance and pay the going rate for it.
If DIS falls below $90 at any time, the put option holder can exercise their right to sell their shares for $90.
Even if DIS is trading at $20, the put option holder still gets to sell their shares for $90.
It's peace of mind for them. So they buy the insurance.
Who's the insurance company in this case? The put option sellers (like me!)
We offer the insurance and collect the premium. And we do this year round.
The key to making money from this strategy?
By deciding where the stock is most likely not going to fall to.
Most stock & option buyers are always trying to figure out where the stock is going.
But put option sellers are basing their trades on where the stock is not going. Huge difference, and the odds are well more in our favor.
As long as DIS doesn't fall below $90 per share by the expiration date, we keep the insurance premium and repeat the process for the next month.
You can literally do this on hundreds of stocks each month and collect thousands of dollars in the process.
The key is picking an area where the stock has such a low probability of falling to. That's how you decide which put option to sell.
You're in complete control. You choose the stock and you choose the strike price level.
But how do you know where a stock most likely won't fall to?
You do your research just like any other investor. You look at stock charts, you check the stock's fundamentals, and you use a secret weapon like a probability calculator. Check out my article on using this great tool.
Pick a point where the stock has very little probability of falling to. And then sell the corresponding put option. You'll collect the premium and if the stock doesn't fall to that level by expiration, the money is yours free and clear. Wash, rinse & repeat!
And what if the stock does fall to the level by expiration?
Well, this might be the best part - you get to buy a high quality stock at a ridiculously low price. That's a great outcome!
And most likely, that stock will move higher again and you'll gain the price appreciation. Your bank account will thank you for it.
My best advice for anyone wanting to sell put options - only execute this strategy on stocks that you feel would be great to own at below market levels.