How to Profit from Options

How to Profit from Options — in ANY Conditions

Freedom Financial Archive | Originally posted Dec 02, 2022

Dear Reader,

I’ve built my career in the energy space predicting events that most people thought were “unthinkable.”

As profitable as the energy sector has been for savvy traders like me over the last 20 years…

All my research indicates that its best days — from an investing standpoint — are still ahead.

My tenure serving as a Senior Energy Analyst for no less than three high-profile Wall Street firms has taught me many things…

That there are economic headwinds and potential crises in every sector of the market, including the energy sector.

So, how do I protect my investment?

And when things are going well, how can I maximize my gains?

These problems are not new.

But what I’ve learned most along the way is the high-profit potential that these market swings can bring for investors.

When I think of a profitable energy portfolio, I think about stocks that are going to perform well (or fall in price) in the kind of volatile market we see.

And a strategy that has worked well for me is what I’m going to share with you today.

Because although high-profit potential is what we all want, you need protection as well.

So, I’m going to show you how trading options can help you achieve both.

It takes five minutes to make this type of trade.

But it’s one of the best ways to capitalize off a market downturn or upswing.

Let’s get started…

First Off, What the Heck Are Options?

One of the ways I’ve found success when stocks go topsy-turvy is through options.

Taking a little bit of money and putting it in an options trade can help offset the losses of your overall portfolio.

But before we dive into that, let’s first make sure we’re on the same page about what an option is:

An option is a tradable contract that gives you the right, but not the obligation, to buy or sell a specific underlying financial instrument at a specific price within a set period.

Now, let’s break down that definition piece by piece…

First, a tradeable contract means it’s a standardized contract that you can buy and sell.

In fact, stock options trade alongside stocks, meaning you should be able to buy them from any stockbroker.

Their prices fluctuate just like stocks, too, meaning you can buy one now and sell it either at a profit or loss down the road.

The price you pay for an option is called the premium.

Options give you the right but not the obligation to buy or sell a specific underlying financial instrument.

The underlying instruments of the options we will recommend are stocks and exchange-traded funds (ETFs).

Each options contract gives you the right to buy or sell 100 shares of the stock or fund.

Since each option is worth 100 shares, their prices react sharply to changes in the stock price.

A 10% change in a stock’s price could translate into a 50% price change in the option.

When you buy an option, you have the right to buy or sell the underlying shares for a specific price, known as the strike price.

But those rights expire after a set period. The day the option expires is its expiration date.

Don’t worry…if it sounds confusing, I’ll visually show you how these terms work in an example below.

The Types of Options

There are two types of options contracts: calls and puts.

A call option gives you the right to buy the stock at the strike price. You buy call options when you expect the stock’s price to rise.

The value of the option will increase if the share price rises.

But if you’re expecting things to get worse, you buy put options.

You buy put options when you expect the stock’s price to fall.

The value of your put option will increase as the share price falls. You can choose to sell your put option any time before the expiration date for a profit or loss.

Why Should You Use Options?

You may have a portfolio that holds high-quality stocks you’ve bought and plan to hold for a long time.

But in a bear market, you may be concerned that the value of these stocks will fall over time.

And in a bull market, you want to turbocharge your investments to take advantage of rising prices.

For now, let me talk about being in a bear market in these highly volatile times.

If you allocate a small percentage of your portfolio to options, you can cushion the decline in your overall portfolio in case a bear market gets much worse.

Even better, if you manage to sell your put options near a market low, you’ll have extra cash from the sales proceeds that you can invest into more shares of your favorite stocks at low prices!

Buying high-quality stocks near bear market lows are one of the best ways to build generational wealth.

Only those with spare cash near market lows can do much buying near the lows.

And often the source of this cash will be the profits that are taken from selling put options at high prices.

Make sense?

Let me give an example…

Say you’ve identified a stock that you expect to fall in price from $50 today to below $40 by July 2023.

You could buy a put with a strike price of $40 and a July expiration date.

As the price falls, the value of your put will rise.

And you can sell the contract any time before July for a profit or loss because this stock might fall below $40 even sooner than you expect…

Or it might rebound if the health of its business improves!

Buying a call option is the opposite.

If a stock price rises, the value of your call will also rise but at an accelerated rate (in most instances).

So, options are bets on whether you feel a stock is going to go up or down in price during a set period.

A nice thing about options is that they usually cost a small fraction of the stock price.

As I mentioned, you control 100 shares of stock with each option contract.

They’re leveraged instruments, so very tiny movements in the stock can translate into big moves for the option.

Also, there is a difference between “in-the-money” options and “out-of-the-money” options.

An in-the-money call option means the option holder can buy the security below its current market price.

Out-of-the-money options require a larger price movement to become profitable, and they are more likely to expire worthless.

Remember… options cost more if they are in the money, but they are also safer.

Your risk tolerance has a lot to do with it.

Out-of-the-money options are “more risk more reward” types of options.

Watch That Expiration Date!

The most important thing to remember is the expiration date.

Because time decay is not your friend.

Time decay accelerates as an option's time to expiration draws closer since there's less time to realize a profit from the trade.

Most stock options expire on the third Friday of their expiration month.

So, using the earlier example, you have until the third week of July to sell the $40 put.

After the expiration date, the options contract is worthless.

If you were right and the stock price dropped below the strike price, and you don’t sell it before it expires, your broker will automatically exercise your option for you.

That is, if you didn’t sell your single contract of $40 puts by expiration and the stock is at $38, your broker would buy 100 shares of the stock at the contract’s $40 price and then sell them on the market for the $38 price.

Your profit will be $200, which may or may not be better than what you could have made if you had sold the stock earlier.

Things get even worse if the stock is above the option’s stock price at expiration.

Your option has zero value, meaning you’ve lost 100% of the money you’ve invested.

So, here’s what you do…

A good strategy is to set calendar alerts for yourself to sell to close a speculative put option position at least a few weeks before it expires.

Depending on the strike price and where the stock is trading at the time, your loss could be 80% or 60% of the money you committed.

Most brokerage firms also allow you to set price trigger alerts that will tell you when your option has hit a predetermined price.

If your price trigger is a certain percentage below your purchase price, then you can limit your loss on any given trade.

If your price trigger is far above your purchase price, it can alert you to the fact that your profit target has been hit, and it’s a good time to sell for a profit!

If you place a small percentage of your portfolio into put options on, say, an S&P 500 Index ETF (exchange-traded fund) or a basket of stocks that you think are overvalued, then you could have an opportunity to sell these puts when market prices are much lower.

The gains on your puts over the course of a bear market can cushion your overall portfolio’s loss. Plus, once you cash in these gains by selling puts, you can reinvest these proceeds into your favorite stocks at bargain prices.

The same goes for call options.

If you think a stock is going up, up and away, buying call options will serve you well as you ride the wave.

Do you see now how you can both protect your investment and make incredible gains as well?

Let me show you how one of our trade options looks so you can get familiar with them…

Let’s say I think the stock price of pipeline company Enterprise Products Partner LP (ticker: EPD) is going to rise in the coming months.

Here’s what I might recommend:

Action to take:

Buy to open EPD July 2023 $30 call option up to $6.50 per contract.

(NOTE: This is NOT an official trade but just used as an example)

In this example, we are betting that shares of EPD will rise above $30 before the option expires in July 2023.

As I said earlier, most stock options expire on the third Friday of their expiration month, meaning this option expires on July 21, 2023.

The phrase “buy to open” simply means we are taking a new position.

You may see it on your broker’s website or may need to say it to your broker if you make this trade by telephone.

To make this bet, you will need to buy the options contract from your broker.

Every broker is different, so the exact steps you take to enter the trade will be different.

Luckily, the recommendation contains all the information you will need for your broker to find the correct option.

(1)   (2) (3) (4)

EPD July 2023 $30 Call Option

(1) Underlying Instrument

(2) Expiration Date

(3) Strike Price

(4) Type (either call or put)

Remember, the price you’ll pay for the option is called the premium.

It depends on several things, including current market conditions. Just like a stock’s price, an option’s premium can change minute to minute.

A call’s price will increase as the share price of the underlying stock rises. Of course, that also means the call option’s price will fall if the underlying stock’s price falls.

But that’s the only thing that will change. An option’s underlying instrument, expiration date and strike price will never change.

The most important part is the expiration date.

Past that date, the option becomes worthless — and the rights to the stock that the option gives are no longer valid.

So, you must decide what to do with your option before it expires.

Our goal is for your option to increase in value so you can sell it for a profit. But keep in mind you may need to sell your option for a loss. 

Steps To Take Before You Trade Your Options

If you have a stockbroker, you should be able to trade options.

Depending on your broker, you may need a margin account.

You may also need to apply for permission to make options trades.

You see… brokers have a responsibility to make sure their clients don’t get in over their heads.

So, they require investors to satisfy certain requirements to make certain kinds of trades.

They often break options trading into different levels or tiers based on complexity and risks. Those levels or tiers differ from broker to broker.

To make the kinds of trades we recommend, you’ll need permission to “buy puts and calls” or “trade long puts and calls.”

In general, you’ll need to fill out a quick three- or four-page form that your broker will provide you.

It asks a few questions about your financial situation, investment background and what your interests are.

Be sure to check the boxes that say, “buying calls and puts”.

Once you submit this form, your broker will typically give you approval within two or three days.

If you don’t already have a broker, I can’t give you specific advice. (It’s a legal thing.)

But I can point you in the direction of a few brokers you can use. They can handle all your equities, options, and bond needs.

The four main players are:

TD Ameritrade — (800) 454-9272

Fidelity — (800) 343-3548

Charles Schwab — (866) 232-9890

E*TRADE – (800) 387-2331

Remember, every broker is different. They have their own fees and trading platforms, so do some research to find the brokerage that best fits your needs.

Keeping Track of Your Trades

Once you buy a stock option, it will show up in your brokerage account. Simply log in and look for your personal portfolio page.

If you prefer, you can keep an eye on your option on other financial websites.

Some of them will require the option’s formal symbol — a 16-digit code that identifies every option.

Not every site uses the official symbol, but we include it in our recommendations just in case.

And that should be all the information you need to get started.

The bottom line is this…

You can invest in stocks for the long term… as well as use options trading like I described above to both protect your investment and have the potential to create massive gains for your portfolio.

I think bull markets are an opportunity. I think bear markets are too.

It’s all in how you play your cards.

Keep an eye on your inbox for more trading opportunities in the coming weeks and thank you for your subscription.

And keep this report handy in case you need to go back for reference as you trade options.

Kind regards,

Freedom Financial News