SELF HELP 17

How To Trade Options For Fun And Profit

This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.

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An option gives the purchaser the right to buy or sell a stock at a certain price for a certain amount of time, but not the obligation. Options are sold in lots of 100. You can make calls, puts, or spreads. Covered or naked.

The simplest way to trade options is to already own the stock. Like, imagine you have 100 shares of Bank Of America stock (lucky you!). But you’re nervous about the market and you’ve already made 30% on your shares. You’ve read about the doomed systems on Twitter, subscribed to financial substacks you don’t understand, and made comments like “money printer go brrrr” without actually knowing what you’re talking about.

So you decide to sell your Bank Of America stock, but then you remember that you are a fool. You think of the time you left your fiancé, certain you would get married eventually. But you never did meet anyone like her again.

So instead of selling your stock for the listed price of $37.50, you write a “covered call” to sell the stock at $39.00. Someone gives you $1.50 a share for your call order, that gives them the right to buy your shares for $39.00 at any point in the next two weeks.

If the stock shoots up you feel like a dummy. You no longer want to sell it. Also, you wish your fiancé would take you back but she’s married now with three children and doesn’t think about you at all. It’s too late. BofA is trading at $40. But the thing is, you were going to sell at $37.50 and now you’re being forced to trade at $39. You also got the $1.50 per share option money, so effectively you sold the stock for $40.50, almost 9% over what you would have sold for yesterday morning.

What you’ve really done here by agreeing to sell your stock for $39 when it was trading at $37.50 is taken out an insurance policy against your own bad judgement. It could be said that nothing is more profitable than self-knowledge, but not by me.

And you did have that experience, of living with someone, truly knowing and being known by another human being (though you’ve both changed since). You cashed in your shares for a variety of experiences and, if you’re being honest with yourself, would have gotten divorced anyway.

The pros never own the stocks at all, at least not with their own money. They bet on a direction and then sell the right to cash in their bets, or the bets expire worthless. An options trader who is right 70% of the time can make a fortune.

If you like a stock, but you’re not really sure, you could purchase an option to buy at the current price, wait a couple of weeks for the option to expire, and if the stock has moved in the direction you like you exercise the option. What you paid for the options is the equivalent of paying $400 to inspect a house before making the down payment, or getting engaged for a year rather than beelining straight to the chapel.

But that’s not what option traders do.

I interviewed an option trader the other day. He was so smart I couldn’t understand a word he said. I’m watching classes now and when I interview him again I think it will all make sense. So right now I’m keeping it very simple, since that’s all I know.

Trading options on stock you don’t own is a fantastic way to lose money, especially if you sell short, selling shares you don’t own and then buying them back at a lower price when the stock falls. If the price rises you’re on the hook for the difference. If you’re smart enough to make money shorting stocks you’re smart enough to know when not to listen to my advice, so I’m not going to include a caveat. But even the trader I spoke with didn’t believe in selling short. Because when you sell short potential losses are infinite.

A friend of mine, a gambler who lives in Las Vegas and played poker professionally before the computers and the Russians got involved, explained to me how he made money in the stock market.

Fifteen years ago, in his early 30s, he met the founder and CEO of one of the largest companies in the world. They spent several days on the river fishing Chinook salmon and winter steelhead. He thought the CEO was a very solid person so he took all his savings and bought stock in the CEO’s company. Fourteen years later his $2,000 was worth $40,000.

“I’ll never have that kind of inside information again,” he said.

“Why not,” I asked.

“Because I don’t inhabit that world,” he said. “And I hate fishing.”

It’s the best stock advice I’ve ever heard. Here’s the thing though. If my friend, a professional gambler, had waited one more year to sell his stock it would have been worth $80,000.

“That’s why people go to work in the morning,” he said. “So they don’t have to think about things like that. It’ll make you crazy.”

One more thought on the stock market. Almost everybody who invested in the stock market in the last 10 years made money. The exceptions are the contrarians, people who think they know better than anyone else. Those were the big winners and the big losers. Everybody else did just fine.

stephen

p.s. Thank you again for reading. Coming soon I’ll explain real estate wholesaling and lifting weights after 50. Also best practices for after you’ve been cancelled.

I’m available for clubhouse chats and classroom visits. Don’t forget to like and leave comments. It helps xoxox