One Simple Way to Profit From Options

Simple way to profit from options

I’m almost certain that at least twice today you stopped, shook your head, threw up your hands, and conceded:

“If only I had one simple way to profit from options.”

Well, search no more.

By the end of this article, the light bulb will be shining brightly and you’ll be a cash-generating machine.

Besides, the life of the party will always be able to field questions about delta neutral positions and volatility burn… Ok, maybe not.

I’m a proponent of delta neutrality but let’s face it:

1) things (prices) move around;

2) a theoretically risk-free delta neutral position doesn’t exist. Risk is here to stay, my friends.

The bottom line is that understanding where prices are most likely to go is the easiest way to achieve large percentage gains in low-risk options positions.

Let’s assume that you understand how to locate, set up and manage trend continuation trades (ask Ed Burke if you don’t).

These entries are great vehicles for the easiest and lowest-risk option positions: Covered Calls.

Instead of opening the position with a long lot of shares or a long call, do so with covered calls or a covered write.

Let’s say you were going to buy 1000 shares of XYZ with a 6% risk and 15% profit target.

But you’re more interested in a steady income and portfolio stability than hitting that momentum trade out of the park. Your profit target is 2.5 times your risk, so you didn’t plan on hanging around long enough for the stock to double anyway.

So you buy the 1000 shares and immediately sell 10 near-month calls ATM (at the money) or slightly OTM (out of the money).

Most brokerage sites have calculators which figure premium and net return for assignment or expiration.

Shoot for at least a 5% gain if called away or the price remains the same.

By going a bit out of the money you can sometimes get 8-10% or more if called away.

If the stock stagnates and the option expires worthless you’ll pocket the income from the call sale at expiration.

You can figure the downside risk by estimating your short call gain versus the stock loss if immediately stopped out.

You should be able to cut your original 6% risk in half and still enjoy a 2:1 risk-reward ratio on the play.

If the system is 70% winners or better, however, you’ll be pocketing premium more often than not. It adds up, too.

Depending on the stock price fluctuation you can frequently roll your position or close it prior to expiration and still hit a decent percentage gain for a few weeks of sitting.

I’ve had months where I was able to squeeze several positions in during the same expiration period. Be certain you compound your winnings into the new position.

This practice dramatically improves results over the long haul.

There are some great advantages to consistent covered call writing: your stock watch list is automatically narrowed (optionable stocks only); the stock doesn’t have to outperform the market or really do anything at all in order for you to profit, and it just plain feels good to watch your cash account balance pop as soon as you unload those calls.

Hey, don’t get me wrong, I’m all for nailing that 10-bagger and dreaming about tooling around North Scottsdale in my pumpkin-colored Lamborghini.

But cycle in and cycle out you’ll come up smelling like a rose with consistent covered call trading. Just be certain you have a solid directional trading model.

Give it a try… it’s one simple way to profit from options. Just as advertised.

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