Some thoughts before we start
Hey all, I hope you're all as excited as I am for the next topic… Options!
Just like the picture above, Options are all about choices, and you’ve made the right one coming here today. You’re going to learn what all the professionals already know (including Warren Buffett), that options can take your Portfolio to the Next Level, and I’m here to walk you through it, step by step.
This is the definition of a 'Next Level' investing strategy. Options can take your portfolio from making 8% annually up to 15%. When I think about the question 'What is the next level in investing?' this is it. So buckle up, this should be a fun, and rewarding journey.
Put in the work to get the reward.
What we'll cover today
Why options are the best. (and why you should think so too)
Funny, embarrassing story
What is an option anyway?
Real life example(s).
Components of an option contract.
How you can be an insurance agent.
How your mindset can change Everything.
Your homework assignment.
Why I think Options are Awesome (and you should too…)
Stock options help to add versatility to your investment account. They can protect you in a bear market, and can make money for you in a bull (they also do great in a sideways market). I plan to teach you all the basics first, then show you my favourite ways to use them. Here’s a list of some of the benefits of using options.
If you're just starting out, and don't have a lot of money to throw at the market, they can help you buy the stock you can't afford for a fraction of the cost.
If your looking to collect dividends, you could use selling covered call options and increase you dividends from quarterly, to monthly, all while increasing the total amount you take home.
Stock options can make you money in any market. Stocks going up like crazy? You could buy a call option, and catch a ride to the top for a fraction of the price, while collecting all the rewards.
Market going down? Well you could Short the market and have to put up a ton of cash, or You could buy a put option and catch the cheap ride to the market bottom.
Market going sideways? You can sell a call and a put above and below the channel and collect a premium while you wait for the market to get moving again.
The combinations of Options are almost endless, and with a tool like 'back-testing' (mentioned in the newsletter) at your fingertips you can discover new and great ways to use options on the stocks or indexes you already know and love (or at least want to love…)
We all start at the beginning
Please Note: if none of that made sense, or it sounded like I was speaking Martian just then, (roughly translated to 'Bleep blop blorp') Don't worry! I've been there.
I remember when I was just starting out. I had absolutely no investing knowledge, and didn't know any investing lingo. People would talk about a bull market, and I, quite literally, thought they we're talking about buying and selling cows. No joke. Kinda embarrassing. And now, I can talk stocks and options in my sleep (and my wife Jen says I sometimes do… Just kidding… mostly).
But hey, we all start somewhere, the important thing isn't when you start, it's that you actually DO start. So good job. The hard part is basically over.
Rules before we start / Butt kicking
Stock options, without proper knowledge, are extremely risky. You could unknowingly risk your entire account and lose it all in a blink, end up living in a van, down by the river. This is one of the reasons why not many people like to teach options outside of a course or controlled setting.
So I have a couple rules before I start teaching this stuff to you:
Get the knowledge first
Practice and complete the suggested 'Homework assignments'.
Ask lots of questions and help each other as much as possible.
Once we've learned all that's needed to successfully add option trades to your account, you can start adding them to your investing strategy and reap the rewards!
This may sound like a lot of work, and honestly, that’s because it is! Remember, 'Anything worth doing, is worth Overdoing' and learning options is definitely worth doing. If that sounds 'too hard' or 'unfair' then this may not be the right path for you, and that’s fine. It might be difficult to grasp at the start, but I know you can do this. If a goofy guy like me can figure this out, you’ll have no problem, and I'm here to help.
I told you from the start that I will be that kick in the butt to keep you motivated and progressing forward, so make sure you utilize me, and I promise to help you as best I can along the way.
Options, what are they?
Well, In its most basic form, an option is a contract between two parties. One party has the 'rights' to either buy or sell an underlying asset at a specific price, by a certain date, while the other has the 'obligation' to either sell or buy the same asset at that specific price by that specific date. I know it sounds like a tongue twister now, but soon you’ll understand this with absolutely no problems, hang in there (insert cute cat poster here…).
The underlying asset we want to use them on is… you guessed it, Stocks! (or for some of you, indexes).If this doesn't make sense yet, take a deep breath…. We'll start small and work our way into it. Let's start with a potential 'real life' example to get better acquainted with what options can do.
Option Example #1: Intro to Frank...
A nice guy named Frank (Frank says Hi…) decides to go grocery shopping. After entering the store he see's a worker set up at a booth selling coupons. The sign reads 'Free Toaster!' The fine print reads….if you buy this coupon for $2, all you need to do is spend $200 on groceries' to receive your free toaster.
Frank looks at the toaster and decides he could (and probably will) spend $200 today, and that toaster sure looks shiny. So he purchases the coupon for $2.
The coupon is written a little weird, and is confusing to Frank, so he decides to ask the clerk what everything means. The clerk says 'no problem' and hands him this handy option graphic…
TOAST
This is what the coupon/contract is for, or the underlying object. In this case it’s a shiny new toaster. (in the case of a stock option this will be the stock's ticker symbol)
May 20 16'
This is the coupons (option contracts) expiration date. This means that on or before that date you have to decide whether to exercise your right to get your toaster, or just let the coupon (option contract) expire worthless.
Note: 'Exercising your right' basically means receiving (or giving) whatever it was you were in contract for, in this case as mentioned earlier, it's for that sweet, sweet toaster.
If this were a stock option you would receive, you guessed it, some shares of stock. But we'll get to that…
200
This number is the agreed upon price that must be met in order for the option to be utilized. This is called the Strike Price. At or above this price your coupon can be exercised to get that new toaster. Handing in the coupon at any price below this would result in not receiving any gain (toaster).
@ $2
This is the price the buyer pays for the coupon and the amount the seller receives. The buyer is paying for the right, the seller is getting paid up front for that obligation.
Now that Frank understands how the coupon works, he decides to go on with his shopping. Frank grabs a few extra items just to makes sure he spends that $200 (he really wants that shiny new toaster). Frank takes his groceries up to the till, and ends up at $211.48. The cashier hands him his receipt. Now frank must decide whether to cash in that coupon or save it for later.
Conditions for new toaster include:
Must pay $2 to receive the coupon
Spend at least $200 dollars in groceries at one time
Must be before the date on the coupon
Must turn in the coupon in order to receive the toaster
Now that all conditions are met, Frank decides to 'exercise his right' to a new toaster. He hands in his coupon, and the store fulfills its 'obligation to deliver' that toaster. And boy is it ever shiny!
TOAST
This is what the coupon/contract is for, or the underlying object. In this case it’s a shiny new toaster. (in the case of a stock option this will be the stock's ticker symbol)
May 20 16'
This is the coupons (option contracts) expiration date. This means that on or before that date you have to decide whether to exercise your right to get your toaster, or just let the coupon (option contract) expire worthless.
Note: 'Exercising your right' basically means receiving (or giving) whatever it was you were in contract for, in this case as mentioned earlier, it's for that sweet, sweet toaster.
If this were a stock option you would receive, you guessed it, some shares of stock. But we'll get to that…
200
This number is the agreed upon price that must be met in order for the option to be utilized. This is called the Strike Price. At or above this price your coupon can be exercised to get that new toaster. Handing in the coupon at any price below this would result in not receiving any gain (toaster).
@ $2
This is the price the buyer pays for the coupon and the amount the seller receives. The buyer is paying for the right, the seller is getting paid up front for that obligation.
Now that Frank understands how the coupon works, he decides to go on with his shopping. Frank grabs a few extra items just to makes sure he spends that $200 (he really wants that shiny new toaster). Frank takes his groceries up to the till, and ends up at $211.48. The cashier hands him his receipt. Now frank must decide whether to cash in that coupon or save it for later.
Conditions for new toaster include:
Must pay $2 to receive the coupon
Spend at least $200 dollars in groceries at one time
Must be before the date on the coupon
Must turn in the coupon in order to receive the toaster
Now that all conditions are met, Frank decides to 'exercise his right' to a new toaster. He hands in his coupon, and the store fulfills its 'obligation to deliver' that toaster. And boy is it ever shiny!
In this situation, Frank as the customer is the option/coupon buyer. Frank has the Right to a new toaster if he spends $200. The grocery store on the other hand, is the option seller, it has the Obligation to give Frank a new toaster if he spends $200.
That is essentially all an option contract is, you have a:
Buyer (Frank)
Buyers have rights
Frank has the right to use (exercise) that coupon at any time before it expires.
Seller (Grocery store)
Sellers have obligations
The store is obligated to give that toaster to Frank if all conditions are met.
An underlying asset (groceries)
Strike price ($200)
Expiry date (may 20, 2016)
Price ($2)
This is an important point to drive home so I'm going to repeat myself here.
Buyers have rights
Sellers have obligations
Repeat this to yourself until you feel like you won't forget it.
Frank can exercise his right to get the toaster, once he buys $200 worth of groceries, at any time up to expiration. The store is assigned that obligation, to deliver that toaster, at any time up to expiration.Regardless if you exercise your right or not, the store gets to keep that $2, (and they also enticed people to spend at least $200).
Again, As a buyer you can exercise your right to acquire that toaster at any time up to expiration. As a seller you have no choice when you will be assigned to deliver that toaster.
Let's go through another example
Option example #2: How car insurance is an option contract.
Our pal Frank just bought a shiny new red convertible. He paid in cash, and he now decides he's become quite attached to the car and would hate it if anything bad were to happen to it. So, what does our pal Frank do? Well he goes and buys some insurance for the car.
Car insurance is essentially an option contract.
Frank decides the monthly plan is best (expiration date). As long as the contract is paid for (option premium), if anything does happen to his car, the insurance will cover the charges (right to exercise his option).
The insurance company takes into account the likelihood (based on age, gender, model, etc.) of our dear friend Frank getting into an accident and charges a certain premium for that. In this case they are charging monthly, and if Frank wants to keep the coverage, he has to keep paying each month. In this case the car insurance company is the option seller and Frank is the option buyer.
Frank has the right to make the insurance company pay to fix the vehicle, while the insurance company has the obligation to get the car fixed. Frank pays a premium each month to have that peace of mind on his new red convertible. The insurance company continues to collect that premium each month, for the risk of having to cover the option contract if there is an accident. The question you should be asking yourself is; ‘who has the better end of the deal here?’ Well, the answer to that can be tricky…
Some people believe it’s a zero sum game, meaning that for Frank to win, the insurance company has to lose. But I believe they can both win, because they have different goals. Frank wants his vehicle protected, he wants peace of mind. The insurance company wants to make money, and to best serve their clients. Both parties can win here.
Note: In truth the insurance company sells insurance to many different types of drivers, from crazy teens to old granny's and everything in between. They are essentially diversified through age, gender, and driving record. They also set themselves up by charging more to the more 'at risk' individuals to set themselves up in case an accident does occur. But I promise you this, the insurance company wouldn't sell insurance if they were doing it at a loss. So,If the car is damaged, Frank can Exercise his right to have the insurance company fix the car,On the other hand the insurance company is obligated to have that car fixed.
But, what if, continuing this analogy, we really liked fixing cars??
The most important aspect to option trading
Well, the simple answer is: Your Mindset This is the part to really pay close attention…
When you change the way you think about options, the 'Next Level Investing style', a whole world of possibilities opens up. You get to be that insurance salesman, continuing to collect that premium, and you are actually happy when that car breaks down, and that's an amazing thing!
Most people would sell the insurance, hoping to just collect that premium and have the option contract expire, worthless. They would hate it if that car were to get damaged, they would be hoping and praying that the car doesn’t crash , but not us. We win either way. And that's when the whole darn game changes. This is how the best investors in the world think about stock options, and it’s how I want you to think about them too.
Taking Options to the 'Next Level'
The big difference between us and the insurance salesman is we get to pick and choose our clients (stocks), and we only choose the ones we love.
We only do these style of option trades on the companies that we already Know, Like, and Understand (KLU). Because of this difference, we are always setting ourselves up to win!
We get to choose between those crazy young drivers and the old dependable ones.
We'll get a higher premium selling contracts to the male teen drivers (higher volatility stock) or instead we can keep selling a safe lower premium to those 60 year old drivers with the perfect driving record (blue chip stocks). Either way, we end up on top, and that's pretty awesome.
Your homework
Sign-up for my newsletter to get exclusive content from me and get my top 5 favourite resources for finding great stocks (stocks you will learn to Know, Like, and Understand). This is the foundation of how this style of option investing works so it's extremely important.
Thanks again for reading this far.
You're AMAZING!
Have a great week, we'll talk soon.
~Ryan Chudyk~
In this situation, Frank as the customer is the option/coupon buyer. Frank has the Right to a new toaster if he spends $200. The grocery store on the other hand, is the option seller, it has the Obligation to give Frank a new toaster if he spends $200.
That is essentially all an option contract is, you have a:
Buyer (Frank)
Buyers have rights
Frank has the right to use (exercise) that coupon at any time before it expires.
Seller (Grocery store)
Sellers have obligations
The store is obligated to give that toaster to Frank if all conditions are met.
An underlying asset (groceries)
Strike price ($200)
Expiry date (may 20, 2016)
Price ($2)
This is an important point to drive home so I'm going to repeat myself here.
Buyers have rights
Sellers have obligations
Repeat this to yourself until you feel like you won't forget it.
Frank can exercise his right to get the toaster, once he buys $200 worth of groceries, at any time up to expiration. The store is assigned that obligation, to deliver that toaster, at any time up to expiration.Regardless if you exercise your right or not, the store gets to keep that $2, (and they also enticed people to spend at least $200).
Again, As a buyer you can exercise your right to acquire that toaster at any time up to expiration. As a seller you have no choice when you will be assigned to deliver that toaster.
Let's go through another example
Option example #2: How car insurance is an option contract.
Our pal Frank just bought a shiny new red convertible. He paid in cash, and he now decides he's become quite attached to the car and would hate it if anything bad were to happen to it. So, what does our pal Frank do? Well he goes and buys some insurance for the car.
Car insurance is essentially an option contract.
Frank decides the monthly plan is best (expiration date). As long as the contract is paid for (option premium), if anything does happen to his car, the insurance will cover the charges (right to exercise his option).
The insurance company takes into account the likelihood (based on age, gender, model, etc.) of our dear friend Frank getting into an accident and charges a certain premium for that. In this case they are charging monthly, and if Frank wants to keep the coverage, he has to keep paying each month. In this case the car insurance company is the option seller and Frank is the option buyer.
Frank has the right to make the insurance company pay to fix the vehicle, while the insurance company has the obligation to get the car fixed. Frank pays a premium each month to have that peace of mind on his new red convertible. The insurance company continues to collect that premium each month, for the risk of having to cover the option contract if there is an accident. The question you should be asking yourself is; ‘who has the better end of the deal here?’ Well, the answer to that can be tricky…
Some people believe it’s a zero sum game, meaning that for Frank to win, the insurance company has to lose. But I believe they can both win, because they have different goals. Frank wants his vehicle protected, he wants peace of mind. The insurance company wants to make money, and to best serve their clients. Both parties can win here.
Note: In truth the insurance company sells insurance to many different types of drivers, from crazy teens to old granny's and everything in between. They are essentially diversified through age, gender, and driving record. They also set themselves up by charging more to the more 'at risk' individuals to set themselves up in case an accident does occur. But I promise you this, the insurance company wouldn't sell insurance if they were doing it at a loss. So,If the car is damaged, Frank can Exercise his right to have the insurance company fix the car,On the other hand the insurance company is obligated to have that car fixed.
But, what if, continuing this analogy, we really liked fixing cars??
The most important aspect to option trading
Well, the simple answer is: Your Mindset This is the part to really pay close attention…
When you change the way you think about options, the 'Next Level Investing style', a whole world of possibilities opens up. You get to be that insurance salesman, continuing to collect that premium, and you are actually happy when that car breaks down, and that's an amazing thing!
Most people would sell the insurance, hoping to just collect that premium and have the option contract expire, worthless. They would hate it if that car were to get damaged, they would be hoping and praying that the car doesn’t crash , but not us. We win either way. And that's when the whole darn game changes. This is how the best investors in the world think about stock options, and it’s how I want you to think about them too.
Taking Options to the 'Next Level'
The big difference between us and the insurance salesman is we get to pick and choose our clients (stocks), and we only choose the ones we love.
We only do these style of option trades on the companies that we already Know, Like, and Understand (KLU). Because of this difference, we are always setting ourselves up to win!
We get to choose between those crazy young drivers and the old dependable ones.
We'll get a higher premium selling contracts to the male teen drivers (higher volatility stock) or instead we can keep selling a safe lower premium to those 60 year old drivers with the perfect driving record (blue chip stocks). Either way, we end up on top, and that's pretty awesome.
Your homework
Sign-up for my newsletter to get exclusive content from me and get my top 5 favourite resources for finding great stocks (stocks you will learn to Know, Like, and Understand). This is the foundation of how this style of option investing works so it's extremely important.
Thanks again for reading this far.
You're AMAZING!
Have a great week, we'll talk soon.
~Ryan Chudyk~
The next step:
How to Increase your odds of getting Rich for Retirement Part 2: There are only 4 ways
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