Imagine if you will a product that can be created with just an agreement, has a value, and you can sell at a profit first. Don’t think that product exists? Well it does, and that product is options contracts.
Before you commit your monkey mind to everything you’ve heard about options, let me explain this to you. First, you can protect your agreements and minimize your risk. You can spread it amongst many products, not just specialize in one product like a side hustler might have to do. Finally, you are only limited by your investment – Although this is probably the most common limiter on any side hustle. Maybe time can be a limiter too, but not in the case of options.
There is a lot to learn to understand options. Fortunately, with the internet there is a ton of information, like Investopedia.com, TastyTrade.com and this site.
How does this impact those looking for Financial Independence (F.I.)? Well, where most people might buy a stock, you could buy the stock covered (Covered Call), where you buy the stock and sell a call against it at the same time. This either creates a monthly income (the call sell price) or lowers your cost basis. If you are willing to own the stock, maybe at a lower price, you could sell a put “Naked” meaning, you would not hedge the put, therefore forcing you to buy the stock at a lower price. Scary? Not really, remember your were willing to buy the stock at a higher price, so why wouldn’t you also be willing to buy it at a lower price?
You can also do a synthetic stock position, like a long call and a short put. Essentially, this is similar in risk to buying the stock for a lot less money. You do have a time constraint, as all options are bound by a time to expiration.
You can combine a synthetic stock purchase with a covered call and create what has been coined a “Poor Man’s Covered Call” by buying a LEAP with a shorter call. Really, this is only a calendar or a diagonal, but the cute names help you remember what they are. The fact is, you can probably make a lot more money by percentage doing a poor man’s covered call rather than owning the stock, all which much less risk.
You can start out with much less capital too, and personally, that means less risk by itself. Let’s do a covered call example:
Poor Man's Covered Call
Let’s buy a Poor Man’s Covered Call in $OIH, which sits at $11.71 on November 3, 2019.
Sell the Front Month, $12 Strike, Dec 20, 2019 for $.51
Buy the LEAP, $12, Jan 21, 2022, for $2.48
Net Debit for the Trade ($2.48 - $.51 = $1.97) or $197
Now, as I’ve discussed before, you can simulate the estimated monthly profit (as of the day you do the estimate), by doing a short calendar in your trading software for the Short Front Month and buying it back with the option nearest about 15 days. In this case we’d sell the Dec 20, 2019 for $.51 and buy back the Nov 15, 2019, would be about $.31 credit per month, or $31 (.31 X 100, which is the standard contract size).
So, the math on this:
$31 Monthly profit on a $197 investment would reduce cost basis to zero, or a risk free trade ($197 / $31 = 6.35) in approximately 7 months. You will own the LEAP for 810 days as of this writing, which is approximately 23 cycles, so after the first seven months, you would make $31 per month profit on the trade.
Looking at this another way is taking the $31 monthly income multiplied by the 23 cycles ($31 X 23 = $713.00), then you would subtract your cost, $197 ($713 - $197 = $516 Profit. This is a 130% annualized income.
Although this is static in time, it’s a good way to estimate the probability of success on the trade. The amount of income you could make is based on many issues: Underlying price, implied volatility, event risk, global economy, etc. The possibility to future-proof the trade is to have a risk-free trade. The more of those in your portfolio, the better.
There’s more to these trades that you may need to consider, but for now it’s important to realize the F.I. movement could benefit by understanding options investing.
Many people think their side hustle has to be writing something, selling something, or building something. This is not always the case. Sometimes you just have to know something and be willing to take on risk.
I suspect my options portfolio has less risk than most stock accounts of the same size. I could care less what stocks you own. If you own stocks, you probably have more risk than you understand. If you learn to trade options, you could lower your risk. I can demonstrate this over and over, but it’s hard to believe when the stock brokers have spent millions indoctrinating us into believing they’re the all knowing. Even if you want to trade stocks, learning to trade options to enter those stock purchases or using the covered call strategy to lower your cost basis is good to know.
We’ll be talking more about ways to make money in the options, stocks and futures market in other posts.
Options and F.I.R.E. - The Ultimate Side Hustle