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You can become your own little insurance company. One option no pun intended; maybe would be to buy some insurance in the form of put options. In accordance with the concept of supply and demand, the cost of buying put options will increase as big hedge funds start buying them to protect their portfolios.
The more managers reach for protection, the more the put options will cost. No one knows the future—if anyone did they would be even richer than Mr. So the insurance buying from big hedge funds is often precautionary and overdone. From the price managers are paying for these put options, in addition to some other factors, we can gauge what investors are expecting the market to move.
This measure is often referred to as volatility. The VIX , aka the fear index, is a measure of the volatility of the stock market as a whole.
So what does this have to do with you? You can sell it to them. Just like the car insurance companies sell it to you. As I mentioned, through supply and demand options pricing can get out of whack.
Here is how you take advantage of that. Implied volatility is way overdone. You sell a put option contract and collect some premium just like an insurance company would. How does this work? This options contact expires within the next 30 days. In our analogy this is the equivalent of what happens when you crash your car and the insurance company pays to settle the claim. Pretty simple right? Just like car insurers have a model to estimate how many people will place claims in a year you can estimate how many times you will lose a particular put selling trade.
There are lots of strategies you can use to leverage the concepts I highlighted in this post. I do not suggest blindly copying what I do. I suggest exploring different ideas and find the strategy that suits you best. Earlier I talked about selling put options on the SPY and collecting a premium—most likely selling to those sucker hedge funds :.
There is one downside to this approach.
The losses can be pretty big. Think about it this way: if you get in a fender bender your auto insurance might have to shell out thousands in repairs.
Learn the various ways traders make money with options, and how it works. call option contracts, your maximum profit is the amount of the premium income. Trading Options for Income – 4 Proven Strategies that Work · Strategy #1: Selling Puts · Strategy #2: Covered Calls · Strategy #3: Vertical Spreads.
Selling a naked put option can be the same way. The more the market tanks the more you pay out. Did you know insurance companies buy something called reinsurance?
Your insurance company has an insurance company of its own. Your insurance company buys insurance to cap its losses. So if you total your car and your insurance company buys you a new car, its insurance company might be paying half of that bill. So why not buy a form of reinsurance on your put option? To insure a naked put position I often buy a put option my own reinsurance further out of the money.
This trade is called a put credit spread. By placing a put credit spread I am limiting my maximum loss, but I am also limiting my profit. I have to take out of my profits the cost of the put option I purchased.
I limit my losses by buying protective puts. Often this strategy works out to 2 trades a week. I have never seen a day trading strategy that does this well year after year. Though yes, day trading might beat this strategy for a few years. I had one very simple goal in this post: convince you that there are better alternatives to day trading. Most people do not succeed at day trading long term. You can get wrapped up in the idea of big percentage gains month after month. But take a moment to do one simple exercise. Put all the gains you think you will make month after month day trading into a spreadsheet.
Now look at the Forbes richest people list. Did any of them get rich day trading?
If it was easy someone would have figured it out by now. This type of options trading only became possible for the retail investor in the last 5 to 10 years. I am not saying probability-based options trading will make you a billionaire. What I am saying is the odds of long-term success are much more in your favor. I will add that there is a time and place for day trading.
Day trading should be for a very small amount of your capital and mainly used to stay engaged in the market and have a little fun. Related Topics: monthly Income. Join our newsletter today for free. You won't regret it! Day trading here I come People all over the internet claim to make riches day trading. Do you really want to be like this guy? How the most successful options traders trade As I said, some of the best options traders use probability and statistics to form a trading strategy. Conclusion I had one very simple goal in this post: convince you that there are better alternatives to day trading.
Enjoyed this post? Here are some must reads. If yes, then Keep Reading An option is a contract that gives you the right to buy or sell shares of stock at a fixed price.
This book covers the following topics: Strategy for selling covered calls The pros and cons of options trading Make always an assessment of your personal financial situation before investing The four components of an option contract How the price of an option is affected Stock option trading concept: what they are and how they work And Much More If you are careless, selling options could get you into trouble. Ready to get started? Product Details Price.
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