Tuesday, May 12, 2009
Get Paid to Trade Options!
by Bryan Perry
Let's face it: It's not our parents' economy, and the ways they made their money isn't likely to work in this environment.
The good news is that it isn't our parents' market, either. Gone are the days of simply buying and selling stocks … that is, if you had enough capital left over from the extraordinary fees that brokers charged simply for the privilege of working with them.
With the arrival of more trading exchanges, armies of brokers competing for your business and the explosion of the derivatives markets (i.e., commodities, options, single-stock futures) during the past few decades, it's exciting to wonder what new ways of making money our children and grandchildren will be using.
In the meantime, we've got plenty of strategies to tap into, to turbo-charge our portfolios today.
TO MAKE LONG-TERM GAINS, THINK LIKE A SHORT-TERM TRADER
When the markets are non-directional (i.e., up one day, down the next, with no clear pattern or predominant bullish or bearish bias), some folks cash out their holdings and wait for an "all-clear" signal when the market starts trending higher on a more-regular basis. Others leave their money in the same securities they liked before the craziness started and hope that things don't get too much worse before they get better.
You may trade options for a variety of reasons -- the potential profits you can make on a relatively modest investment, the rush that comes with cashing in a winning trade, or the ability to keep some skin in the game while you wait for a better opportunity to tend to your long-side portfolio.
We all know that you can make money -- oftentimes pretty quickly -- by trading options, whether stocks or the market itself are going up or down.
But using options as a speculative tool is only one way to pad your portfolio with "extra" profits. There are other strategies out there -- using both options and something called "hybrid options" to help investors to use their existing stocks to generate income.
Making a million bucks with stock trading has gotten increasingly difficult during the past year, but options traders are finding it easier than ever to practically print money for themselves, thanks to the influx of new options and innovative strategies.
You might not automatically consider options when it comes to building your retirement wealth or for generating income, but think again. Options are one of the fastest-growing investing strategies -- and with good reason.
There are multitudes of ways to profit from options but some are more attractive to income investors than others, namely covered call writing, put selling and newer hybrid options securities like Stock Return Income Debt Securities (STRIDES).
DON'T KNOW WHERE TO START? YOU'RE 'COVERED'
There's an options income strategy for every level of investor, and one of the easiest to implement and understand is covered call writing. Simply put, covered call writing means selling calls against stocks that you already own.
Covered call writing is a bet that a stock you already own will continue moving up or will trade sideways for a bit. (That's when it's trading within a range and not making any significant jumps or drops.)
The calls you sell (also known as "writing") are considered "covered" because you already own the underlying stock. This means if you are "called" to produce the stock, you are covered because you already have the shares.
However, if you are new to investing or simply don't hold many stocks long in your portfolio, you can benefit from the action that covered call writing can bring by buying into an Exchange-Traded Fund (ETF) like the S&P Covered Call Fund (BEP).
The best part is that you don't have to do any of the call writing yourself, but you can profit from the legwork being done for you!
This basket fund invests in stocks that the S&P 500 Index (SPX) holds and the professionals who run the fund write call options on the S&P 500 Index. Funds like this one are as liquid as common stocks, and you can buy them as you would any other security through your online trading platform or your broker.
The downside with funds like BEP is that someone else is deciding what calls to write, and finding out the particular transactions can be difficult.
THE 'WRITE' WAY TO CREATE INCOME WITH OPTIONS
The converse of the covered call is the naked put-write, which simply means you sell puts on stocks that you don't currently own but might like to. With this strategy, you get income up front for selling, or writing, the put.
Don't be intimidated by this strategy. If you can buy an option, then you can sell an option.
The caveat, however, is that you might end up owning the stock, which is why it's imperative that you only establish put-writes on fundamentally solid stocks that you would be happy owning -- even at reduced prices. Investors like writing puts because it helps them to buy stocks at a discount or to get paid while they wait.
While the two strategies I mentioned above are easy to understand and execute, there are a host of new options income strategies that require just a little bit more work -- but have shown that the profits are worth it.
Earlier this year, I began using Callable Stock Return Income Debt Securities, or STRIDES, to generate income with my options trading experience.
STRIDES use a short-term bond coupon that paired with an option strategy. They are Merrill Lynch (MER) products that serve as hybrid-types securities. They are structured like bonds that mature in a fairly short time frame (one to two years), which allows you to get fairly quick profits while still enjoying long-term taxation.
Even better, each pays a dividend yield. The amount varies, but the STRIDES' name will tell you exactly how much.
For example, a name might read the Apple (AAPL) 12% STRIDES.
I like these kinds of products because they pay 9%-12% in a world where one-year CDs are only paying 2%.
The downside here is that these types of positions are often less liquid than traditional options because, in most cases, you must go through a broker to get them. They do have ticker symbols, but the more important identifier is the nine-character Committee on Uniform Securities Identification Procedures (CUSIP) number to identify the security.
The American Bankers Association owns the CUSIP system and it's operated by Standard & Poor's to identify stocks of all registered U.S. and Canadian companies, as well as U.S. government and municipal bonds. Your broker will know how obtain these for you.
INCOMING: OPTIONS CAN BRING WEALTH YOUR WAY
Just consider that at one point the stock market was a new idea. In time, investors will come to understand that options can make millions and you don't have to be one of the laggards. Bottom line: Start trading options today help secure your tomorrow.