If you quickly calculated that in your head (which I can’t do) an 841% return equates to $20,746. I made approximately $21,000 in options trading (calls and puts) for 2022 while using a margin account and it only cost me $2,466. Now clearly results may vary and options trading isn’t for the faint of heart or those who tend to take really big risks. With that said, here’s how I got started and why I think it will always be part of my yearly income.
Looking at my options…
I was always told options were far too risky. This was typically from Financial Advisors and people who didn’t understand options. They’d say it’s “An easy way to lose a lot of money in a short amount of time” or that “You’re not Wall Street”. What does that even mean?
Then the stock market slowly became Gameified with easy apps to drop money into making trading in the market (and options) easier to access. The most notable here is Robinhood (sign up link if you’re still looking for a ‘brokerage’). One of my close friends starting making money selling calls on Robinhood and he attempted to teach me this easy way of making money on stock you already own. At first I was hesitant because of what had been force fed to me through the people who took 1% of my portfolio every year in fees.
After one more text from him showing an easy $100 in a day with little risk, I said you’ve got to show me what this is all about and we spent a solid hour and a half reviewing calls on Robinhood. The next Monday I placed my first call option on stock I owned through Vanguard and I haven’t looked back. That year I made only $4,449 (~ $370 a month) in options with no use of margin.
What are Stock Options?
Stock Options are contracts that give the owner the right, but not the obligation, to buy or sell a stock at a specific price within a certain period of time. There are two main types of stock options: calls and puts.
A call option gives the owner the right to buy a stock at a specific price, known as the strike price, before the expiration date of the option. For example, if you own a call option for Apple stock with a strike price of $150 and an expiration date of May 1st, you have the right to buy Apple stock at $150 per share before May 1st.
A put option, on the other hand, gives the owner the right to sell a stock at a specific price, again known as the strike price, before the expiration date of the option. For example, if you own a put option for Apple stock with a strike price of $150 and an expiration date of May 1st, you have the right to sell Apple stock at $150 per share before May 1st. There is an option to sell or buy both a put and call option.
The price of an option, known as the premium, is determined by a number of factors including the current stock price, the strike price, the time until expiration, and the volatility of the stock. This premium is what you either pocket as cash or have to spend for the option.
How I got started making money with options…
After the initial introduction to options, I wanted to make money with the least amount of risk while I figured out exactly what I was doing. It was a slow grind to that first $4,000 for multiple reasons including overcoming my own mindset around options and understanding everything about options. Like what the hell a ‘Greek’ was and how it impacted premiums. With that said, the place to start for me (and most options traders) was to begin selling covered calls.
Selling calls is an easy first step in options trading because it involves a relatively simple and straightforward strategy that can generate income for the seller. When an investor sells a call option, they receive a premium from the buyer in exchange for the right to purchase the underlying stock at a specific price (strike price) within a certain time period (expiration date). The seller of the call option is obligated to sell the stock if the buyer exercises the option. If the stock price remains below the strike price of the call option until the expiration date, the option expires worthless and the seller keeps the premium as profit. This is known as a covered call strategy, where the seller already owns the underlying stock and sells call options against it.
This strategy has a defined and limited risk, as the maximum loss is the difference between the strike price and the current stock price, plus the premium paid. It can also generate income for the seller, even if the stock price does not increase significantly. All the reasons why I started here.
What helped me reach 841% in my first year?
- Having a stock portfolio I contributed to. I had a certain amount I would contribute and sold covered calls on those securities. These were also dividend stocks so I continued to reinvest those dividends earning more shares.
- Spending time learning the basics. I took time to get an understanding of the ‘greeks’ and how those can help you make decisions. I read (The Bible of Options Strategies and Options Trading Crash Course) and watched plenty of YouTube videos (The best was @InTheMoneyAdam). This allowed me to start expanding my strategy and make educated decisions.
- I educated myself on a margin account and began using margin. A stock margin account is a type of brokerage account that allows investors to borrow money from a broker to purchase securities. Margin accounts require investors to put up a certain amount of collateral, known as the margin, which is typically a percentage of the total value of the securities being purchased. Margin accounts can provide investors with increased purchasing power and flexibility in their trading activities. They also carry significant risks, as losses can exceed the amount of the margin and result in a margin call, which is a demand for the investor to deposit more funds or securities into the account to cover the losses. If the investor is unable to meet the margin call, the broker may liquidate some or all of the securities in the account to cover the losses.
How am I doing now?
At the time of writing I am currently at $6,200 in earnings which tracks at about $18,600 for the year. It’s been a tough year learning different strategies and handling a sideways/down market.
My eyes were opened about options and I hope this did the same for you. Remember that this all involves some sort of risk. It’s also important to understand the tax implications of options trading, as well as the potential impact of transaction costs and fees. As with any investment strategy, it’s important to carefully consider one’s own financial situation and risk tolerance before engaging in options trading.