Gravity. It’s an interesting force in science and the stock market. What goes up, must come down… even if it will go back up again.
The wreck that we are seeing develop in tech stocks has a silver lining. Lots of dough is going to be made from tech stocks, and chances are that you won’t even have to buy a single share to profit.
In order to make money from options consistently, it pays to sell. Studies have shown that more than 75% of options that are bought by investors expire worthless. But that money doesn’t just disappear into thin air. The people who sold those options to the buyers are making off with the spoils.
I’m going to show you how you can make money by selling options against tech stocks – and how you can rake in some cool cash as a result.
Up until recently, buying tech stocks has been a strong one-way bet. There are even new industry terms that didn’t exist a couple of years ago…
- The Amazon effect: Any business that can be duplicated by Amazon (Nasdaq: AMZN) faces instant destruction.
- The gig economy: Anything that adopts the Uber model has to succeed beyond your wildest dreams (despite the fact that Uber subsidizes every ride taken to the tune of a $3 billion loss last year).
- The crypto effect: Anything to do with cryptocurrencies is bound to multiply at least 100-fold.
- The Tesla effect: Elon Musk is turning everything from automobile companies to traditional rental car companies on their collective heads.
But there are cracks developing in the tech sector. And it won’t take much for a temporary tech wreck to turn into a full-fledged tech rout. Even if that doesn’t happen, volatility is picking up. And volatility is an option trader’s best friend. As volatility increases, the premiums you have to pay for options increase. So do the premiums that you receive for selling options.
If you are looking to get into some of the best-of-breed tech stocks, this could be your opportunity. At best, you will own shares at much lower prices – maybe 20% to 40% below where they’re trading. At worst, you’ll get paid handsomely for trying.
Let’s use internet darling Apple (Nasdaq: AAPL) as an example. It’s trading at $143 right now and is one of Warren Buffett’s largest and newest holdings. In fact, he’s been adding to the shares like mad in recent filings. And why not? It’s a fundamentally sound company with more cash in the bank than any other company.
So let’s say you are interested in buying Apple – not at the current price, but at $100 – a full $43 below the current price. The probability of getting it at that price is less than 10%, but you never know! The sweet part is that just for taking the chance of owning one of the premier companies in the world, you’re going to get paid some dough.
If you sold the Apple April 2018 $100 put options, you’d have to put up around $15,000 in margin to control 1,000 shares. If you wanted to buy fewer shares, just multiply the total cost by 15% to figure out your margin requirement.
For each option contract you sold, you’d get about $110. So for 10 contracts, or 1,000 shares, you’d rake in about $1,100 on your $15,000. That’s a return of about 7.3% in the next few months on a very low-risk trade.
Either you’ll own Apple at less than $100, or you’ll take in a nice chunk of change just for trying. Now, if you wanted to do the same type of trade on more volatile stocks, like Netflix (Nasdaq: NFLX) or Amazon, you’d bring in multiples of that amount, but you’d also be taking on more risk.
Selling options takes a little getting used to. But study after study has shown that if you want to make money consistently from the options market, it pays to be a seller, not a buyer. In my Automatic Trading Millionaire service, we do this all the time. Click here for more examples.
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