How to create Options with Options (Trading)

More options mean more opportunities to learn

I recently had the chance to jump on a podcast with Austin Bouley, The Founder of 10% Credit Spreads  and I was reminded of two things when it comes to Options Trading:

1) Options trading will forever have a spot in my investing and income generation tool belt.

2) I will forever be learning and shall remain humble no matter what.

Austin runs a popular YouTube channel (10% Credit Spreads) on Options Trading and is the Founder of The Impeccable Stock Software to help you consistently profit as a trader. Needless to say he knows his stuff. I would rank him in the expert Options Trader category. The Jedi of Options.

Me? I’m the Padawan that just figured out how to turn on his lightsaber.

My first full year of of options trading I made $20,000. The year before I made only $4,500. This year? I’m tracking at $8,000 and was down $16,000 at the beginning of the year. This was all done with novice level trading of covered calls and selling puts. Imagine what I could do with some extra time, Austins software, and some more self-control. I’m going to share the two things that got me started in options and why it’ll always hold a spot in my money making repertoire. 

Padawans have to start simple

That first year I started trading, I did so with Covered Calls. Like a lot of traders this is the easiest (and relatively safest) ways to get started because you have to own shares in a company to do it. I expanded towards the end of the year with selling Puts using my own capital and no Margin. What? Here’s the quick rundown…

Selling a Covered Call

What: A covered call is created when the seller is holding a long position in a stock and then selling (writing) call options on that same asset, representing the same size as the underlying long position.

When: When you think stock prices are unlikely to rise much further in the near term.

Selling a Put

What: A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame.

When: When you think the stock prices are going up.

Margin Account: A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities.  Margin increases investors’ purchasing power, but also exposes investors to the potential for larger losses.

… and this is the “easy” stuff. Explains why it took a bit to learn the basics and even now I’m still learning.

The TL;DR here is in options trading is really just betting the market is going to go one way or the other. You make money if you made the right bet.

If you spend time learning you can quickly turn this into additional income on the stock you already own.

It’s not all sunshine and rainbows though

As mentioned, I’ve had up years and down years in my short trading history.

Year 1: $4,500 profit

Year 2: $20,000 profit

Year 3: Tracking at a $3,000 profit (was -$16,000 in the beginning of the year)

Overall I have come out on top and profitable even with a margin account, but I have had some stress over making sure I turn my inevitable losses upside down with more wins. Here’s why I think I have had a tumultuous ride so far and what I have done about it…

Why I think I did well (and not so well in Year 3):

1) The Markets were doing well when I made the big bucks. I was primarily selling puts (if the stocks go up) and covered calls (if they go down). If I got assigned on a put that was okay because it would go down just a bit and I would sell them off the following week in a covered call contract. It worked beautifully until it didn’t. Year 3 the market was sideways and down so my initial “strategy” didn’t work as well which you can see in the initial $16,000 loss on paper.

2) I wasn’t paying attention to the metrics and charts as much as I should have. There are Greeks in options that give you information on an options contract and metrics to look for on a chart such as a support level of a stock (where the price hasn’t dipped below in a certain time period).

What I did differently that got me back into the Green!

1) Got control of my emotions and paid attention to the Greeks. While I was slightly riskier in the contracts I chose, I let time decay (Vega) eat away at the premiums of my contracts instead of trying to close out earlier than I needed to.

2) I realized I was inevitably going to lose. It was about minimizing losses and maximizing gains. The only way for me to do that was fall back on the understanding, be a bit more strategic, and don’t let my emotions post lunch time sammy get the better of me.

Create more options with options

There is no denying that I have plenty more to learn. There’s also no denying that I made $20,000 one year with selling covered calls and puts. That’s life changing money to the majority of people and it’s as simple as getting into a brokerage (or using your current one), selling a covered call, and understanding a bit about options trading. This is not advice at all since there is plenty of risk (and tax implications) with options, but it sure helped me further my journey towards finacial freedom. Keep on learning ya’ll.

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