Welcome to Part 3 of this multi-part series of blogs where I will teach you a better way to invest in the stock market: Understanding Call and Put Options.
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If you have missed previous parts, please click on one of the links below to read it:
Read Part 1
Read Part 2
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In Part 2, we were discussing how investing in the stock market is a Guessing Game. We also talked about how the worst part of the Guessing Game is the bit where people speculate with Calls and Puts and buy Options based on how they hope or wish the stock will perform.
However, there are two sides to the Options market. For the buyer of an Option to acquire it, there has to be a writer of the Option who creates it and then sells it to the buyer.
Buyers are speculators, guessing and gambling in the hope they get the direction right. Writers create Options, sell them, open their positions on the stock market with a Credit, earning income irrespective of whether the market or the Option goes up or down.
Covered call investors use the stock market as a vehicle to earn income from it, every month irrespective of market direction, just like property investors use the property market as a vehicle to earn income, (rental) irrespective of whether the property goes up, down or sideways in value.
In this blog, learn how you can be the creator of the Options to generate a monthly income for yourself while significantly minimising your risks. We are getting deeper into the topic now so this blog is longer than the first 2 but hey, you are here to learn and we did stress the importance of patience in the first blog, right? So read on!
Let’s Understand Options – Calls And Puts
A Call option (or just ‘call’) is a standardised contract that gives the buyer/holder the right, but not the obligation, to buy 100 shares of stock that are subject to the option (the ‘underlying stock’) at a pre-determined price (the ‘exercise’ or ‘strike’ price) for a set period of time (expiry month). In other words, for us covered call investors, we are selling someone else the right to buy our stock at a set price by a certain time.
A Put option (or just ‘put’) is a standardised contract that gives the buyer/holder the right, but not the obligation, to sell 100 shares of stock that are subject to the option (the ‘underlying stock’) at a pre- determined price (the ‘exercise’ or ‘strike’ price) for a set period of time (expiry month). In other words, you are selling someone else the right to buy your stock at a set price by a certain time if the stock drops below the set price on or before the expiry date.
If they buy a 35 October Call Option for X, then they can buy the share for $35 anytime before the contract expiry date (being the third Friday in October). If the share price goes above $35 then they can buy it for $35 and they make a profit. If it doesn’t then they just paid for an option they won’t exercise because why buy the share at $35 if it is available on the open market for less?
A Put Option means they believe the share price is falling or will fall so they buy say a 35 October Put Option for X. If the share price falls below this $35, then they can sell the shares to the investor who sold them the option for $35, even though the share is not worth that on the open market. Of course, these options are traded themselves, being bought and sold many times before they reach the expiry date.
The people who own the stock can become writers of options, what we call market makers. Therefore the stocks people own that are optioned are paid for the option, the exclusive ‘first dibs’ on that stock, bought by the option buyer as either a Call or a Put. Now we look at the other side of the option, the creating side. We as market makers open our positions with a credit, earning income for the month on our stock capital no matter what happens on the market with the stock. The buyer on the other hand takes on the risk, outlaying money, opening their positions with a debit, waiting in anticipation that they have predicted the direction of the market correctly in the hope to make money. This puts the risk of the option to the buyer who holds the risk. They hold an option that decays in value and will expire by the end of the contract period unless they exercise the right or on-sell it. It all depends on what happens to the value or price of the stock over the month the option is in force.
Covered calls protect the stock holder so regardless of whether the price goes up or down, they make their money and have no exposure to the vagaries of the market. They also don’t need a crystal ball or a snappy App to determine market direction.
Before we explore covered calls in detail, let’s examine why people mostly ignore this safe, proven way of investing and prefer to gamble with options, s and penny stocks, bitcoin, forex, day trading and all the other easy ways to lose your investment. Basically, it gets back to that most human of human natures, greed.
Learn the Call and Put Options by attending the “60 Minute Investor” Online Masterclass for Free!
Greed Isn’t Good Or Bad, It’s What You Do With It
Greed is one of the driving forces of human nature. It is present in all of us to some extent and in varying aspects. We are all greedy to an extent about something, and greed is not necessarily a negative thing. It is, as with everything, what you do with it that counts. How you apply your natural greed makes all the difference. Some of us are greedy for a better world and do all we can to help others while making sure we don’t do any harm, or at least as little harm as possible.
Greed is a relative of ambition, which in turn knows determination, motivation and persistence. Some people are ambitious in ways that are self-centred and all about what’s in it for them. Others are altruistic and do what they do for the good of others. Most of us are somewhere in between. We neither have the ambition to be in power like a prime ministerial hopeful, nor do we want to save the world and live in a Third World drain pipe while helping the sick. Moderation is the key, and there is nothing wrong with being ambitious, or even greedy for success and improvement… so long as you achieve your goals ethically, morally and without harming others.
Helper or Helped?
One of the really cool things about making a good living the way I do is that I have plenty of free time to devote to altruistic projects. I love helping other people and I would say most of us feel the same way. The English actor and commentator, Stephen Fry, asked the question;
“Which would you rather be. Someone asking for help or the person able to give it?”
The answer is obvious, surely? The person giving the help is a far better position to be in than one having to ask for help. I’m not saying you should never ask for help when it is needed, not at all. What I am saying is I agree with Stephen Fry. It is far better to be the person who is in a position to be asked to help, to be able to offer their assistance.
One of the motivators behind writing this blog is my personal objective of spreading financial education as far and as wide as I can. One way to spread the word is through a blog. A blog has a certain gravitas, or weight, value, credibility that other media may lack to some people’s minds. That it is printed and bound, published and distributed, and made available for the world to read does indeed give the information within some weight. If that information is valid and has veracity and the reader applies the lessons within, then it will have made a worthwhile contribution not only to the individual reader but also to their family, friends and society as a whole.
The results of my members and, seeing average, ordinary people applying the concept that we educate them with and building another pillar of income and at times replacing their income, inspires me to continue on my path. On a daily basis, since 2005 I receive emails and texts from my members all around the world thanking me and my team for what we are doing, and this is rewarding.
Being able to generate an income through educated investing means that you are in a position to be the one who can help, not the one needing help. When you have to drag yourself to work everyday to do your J.O.B., when you are living payday to payday and the threat of you or your spouse being laid off keeps you awake at night; you are lucky if you can help yourself let alone anyone else. The pandemic or plandemic seen in 2020 and beyond has removed job security, peoples freedom, businesses have shut down for good and relationships destroyed. This is why now is the time to step up and learn a better way to generate another income and educate yourself.
Getting back to greed, the one thing that often stops any of us from achieving what we want to in life is ourselves and our own limitations, fears and negativity. If you think you can’t do what I do to make a living, then you are correct. One hundred percent spot on. If you think you can learn how to do what I do and then give it your best shot, you are correct. One hundred percent spot on. Your perception is your reality and if you tell yourself you can’t then you can’t… how could you not? If you tell yourself you can then you can, or at the very least you will give it your best attempt to make it happen.
Too often we build barriers and hurdles for ourselves that we should never have made. We tend to think that if we believe in ourselves then we are being selfish and egotistical and in effect greedy, putting ourselves before others. The reality is if we are unable to help ourselves then we can’t help anyone else, so a little ‘greed’, ‘selfishness’ or what have you, isn’t such a bad thing. Get greedy for success, but not for success at any cost and at the expense of your loved ones, friends, family, colleagues and community.
How many people have dreams, visions and goals that they strive towards and have ideas they want to pursue only to discuss these with family, loved ones, neighbours or work colleagues who deflate them; as opposed to telling them to push their boundaries, live their dreams, pursue their goals? One of my key sayings when I teach around the world is:
“Don’t allow other people’s opinions become your reality.” George Fokas
See, if those people who bring you down with their opinions have not done what you want to do, then it is purely an opinion.
I love how many people, who have no idea what we teach and what we do, voice their opinions without knowing facts…. Napoleon Hill in his Think and Grow Rich book said, “Opinions are the cheapest commodities on Earth. Everyone has a flock of opinions ready to be wished upon anyone who will accept them. If you are influenced by opinions when you reach decisions, you will not succeed in any undertaking, much less in that of transmuting your own desire into money.”
See people thrive on negativity, they want to bring others down to their level of ignorance and insecurity. If only these negative people put all that energy into their own lives to grow, they too would be successful, however, they aren’t and the jealousy kicks in and this is why, they are where they are.
Let’s put you into the right frame of mind to attract wealth and grow rich in Part 4. Click here to read Part 4.
Learn the Call and Put Options by attending the “60 Minute Investor” Online Masterclass for Free!