The #1 Options Strategy for Income in 2020 – and Beyond

Most investors recognize that options are the most powerful money-making tool that has ever existed.

It's responsible for dozens, hundreds, and even thousands of percentage gains, in as little as a day.

The secret is leverage…

For just a fraction of what a single share in a company costs, you can gain control over 100 shares in that same company… Increasing your returns by 10 times or even 100 times, depending on your strategy.

Or, if you prefer, options can provide you with a steady source of income.

It's the surest way to make money fast and regularly despite the ups and downs of the market.

Unfortunately, there’s a lot of misconceptions out there about options. Brokers will tell you it’s “too risky.” Wall Street investment firms say it’s “too complicated for the retail investor.”

And so-called TV talking heads say it’s “best left to the experts.”

(Meaning themselves, of course.)

Well, I don’t know about you, but I’m insulted by being called a “retail” investor. I’m just an American trying to get ahead in a world of rock-bottom interest rates, pitiful yields, and a stock market that is unhinged from reality.

I don’t much care for the financial “experts” that failed to predict the 2020, 2008, and 2001 stock market crashes.

So I’m going to go ahead and continue to use options, no matter what the self-serving “experts” on Wall Street want.

The thing is, trading options is actually very easy. And it can be a lot safer than trading stocks, bonds, or ETFs.

After all, for the cost of less than a single stock, you can profit as if you owned 100. What could be better than that?!

In this report, I’ll go over the basics, then show you my #1 favorite options strategies, so you can get to work making money immediately.

First, a quick primer.

Options for Dummies

Options come in two kinds: calls and puts.

The difference between them is what right they give the person who buys them:

  • A call option is an agreement that gives the buyer a right to buy 100 shares of the underlying stock at a predetermined price. In return, the buyer of the option pays the seller an upfront fee.
  • A put option is an agreement that gives the buyer a right to sell 100 shares of the underlying stock at a predetermined price. In return, the buyer of the option pays the seller an upfront fee.

It's good to be the seller. Because as you can see, those who sell options – or “write” them, as it’s sometimes called – options get a payment up front. That can be very attractive.

And if that's what you want to do, go here

But it's also good to be the buyer!

You just have to be on the right side of the trade.

When to Be the Buyer

Let's say you buy a call option that gives you the right to buy 100 shares of XYZ stock at $10, and then that stock goes up to $20.

At this point, you can could buy the 100 shares for 100*$10, according to the right given to you by the call option contract.

But because XYZ is now trading at $20, you can instantly sell them for $10 more than you paid for them. Since you have the right to buy 100 shares at that price, that means you make 100*$10=$1,000. 

To put it another way, you make make (20-10)*100=$1,000 – the difference between the current price of the stock and the price you have a right to buy the stock at, times 100.

$1,000 isn’t a bad deal for an options contract that probably cost you somewhere around $100-$200 to buy!

On the other hand, say you buy a put that gives you the right to sell XYZ at $20, and the stock then falls to $10.

At that point, you could buy 100 shares at $10, for a total of 100*$10=$1,000. Then, because of your put option, you could immediately sell those same 100 shares for $20, for a total of 100*$20=$2,000.

In the end, you’d end up with $2,000-$1,000=$1,000.

Subtract from that whatever you paid for the option to begin with, and there's your profit.

Pay attention to that, but it’s one of the juicy money-making advantages that options give you.

With a put option, you can make money from a stock falling without having to short the stock (which is extremely risky).

Instead, by buying a put, you know exactly what you’re at risk of losing. At most, you could lose only what you paid for the put option.

And in practice, you’d probably lose much less than that, because you can always sell that put option back way before it decreases too much in value.

Now, the predetermined price a call buyer can buy a stock at, and a put buyer can sell it at – $10 in both of our examples – that’s called the strike price.

So a call option that gives you the right to buy a stock at $10 has a strike price of $10, for example. In Wall Street lingo, this would be called a “$10 call.”

Meanwhile, the “underlying security” is the fancy name for the stock you get a right to buy or sell.

For example, let’s say Apple Inc. (Nasdaq:AAPL) shares are trading at $100, and you want to make money from them going up. So maybe you’d buy a call option on Apple with a strike price of $110 – an “Apple $110 call.”

In this case, your option depends on what happens to Apple’s shares. That makes Apple’s shares the underlying security.

Let’s take a look at how this works…

Making Money on Big Stock Moves – Buying Calls or Puts

For example, let’s say you buy a “$100 put on Amazon.”

Remember, that’s simply another way of saying that you bought a put option that gives you the right to buy 100 Amazon shares at $100 each.

Unfortunately, options sellers won’t sell an unlimited right to buy or sell shares at a predetermined price.

Instead, there’s always a time limit, called an expiration date.

Using that Amazon example from earlier, your right to buy 100 shares at the strike price of $100 would expire at some predetermined date.

In fact, whether you’re buying or selling options, the expiration date is usually the first thing you choose.

For example, let’s say you think Amazon is going to have an amazing holiday season, and will report some stellar earnings in January. If so, you want to buy a call option that expires after January. If your call option expires before January, then you’d have to:

  • “exercise” the option – meaning use the right the option gives you, which for a put means selling 100 shares of Amazon at the strike price;
  • let the option expire worthless; or
  • sell the option for pennies on the dollar before Amazon reported its earnings and saw a bump in share price.

So instead, you’d buy something like the “January 15, 2021 $3,060 calls on Amazon,” or put another way, the “January 15, 2021 $3,060 Amazon calls.

That’s the quick way of saying that you bought calls that give you the right to buy 100 Amazon shares at $3,060 each, and that this right expires on January 15, 2021after the holiday season.

Here's a chart that shows how you’ll profit when you buy a call:

Source: AnalystPrep

Anything below the black line means your position is at a loss. Meanwhile, moving from left to right means the share price of the underlying stock is moving up in price.

As you can see, because you pay to buy a call, you start at a loss. But you can never lose more money than you paid upfront – that price or “premium” is your max loss.

Then, if the share price of the underlying stock rises – and we move to the right of the on the chart – the value of your call option starts increasing.

Once it’s increased enough to cover your upfront cost, you’re in the green – above the black line in the chart.

When you buy a put option, the chart is reversed:

Source: AnalystPrep

Again, you start at a loss – below the black line – because you paid upfront for your option. But again, that’s the maximum you stand to lose, so you know exactly what you’re getting into.

Then, if the share price of the underlying stock falls – and we move to the left on the chart – the value of your put option starts increasing.

Once it’s increased enough to cover your upfront cost, you’re in the green – above the black line in the chart.

And that’s really all there is to it. Just to recap, the key terms here are:

  • Call option – an option that gives the buyer the right to buy 100 shares of the underlying security at the predetermined strike price, which expires at the expiration date.
    • Calls make money when shares go up
  • Put option – an option that gives the buyer the right to sell 100 shares of the underlying security at the predetermined strike price, which expires at the expiration date.
    • Puts make money when shares go down

To be clear, buying an option gives you the right to buy or sell 100 shares of the underlying security. That means you can if you want to – but you have no obligation to do it. It’s up to you.

Now, usually option traders that buy options won’t actually choose to exercise them. That’s because it’s much easier to just sell your option to someone else who does want to exercise it.

If the underlying security has changed in price enough to make the option you bought profitable, then the option itself will rise in price too. And mathematically, the profit from selling the option ends up almost always matching the profit from exercising the option.

Interested in learning what stocks to buy options on? Check out this presentation on the obscure 18-digit “code” to beat Wall Street.

How to Find the Best Stocks to Trade During a Market Crash

So far, we’ve talked mostly about buying options, whether calls or puts. As you saw, buying a call is a strategy that pays off if the underlying stock goes up in price.

Meanwhile, buying a put is a strategy that pays off if the underlying stock goes down in price.

But someone must be selling all these options that we’ve talked about buying. How do these option sellers, or option “writers” as they’re also called, make money?

Well, they make their money upfront…

Earning a Steady Income Using Options – Selling Calls or Puts

As you saw earlier in this guide, option buyers pay an upfront fee in return for getting a right to buy or sell 100 shares of an underlying stock.

As you’ve probably guessed, that upfront fee goes to the option seller or “writer.” That’s how they make their money.

But in return for getting money upfront, the option seller is at the mercy of the option buyer.

After all, if you buy a call from me, you have the right to buy 100 shares of the underlying stock at the strike price, at any time before the expiration date.

Usually options only end up getting exercised at the expiration date, if at all.

Nevertheless, if you have the right to do that, that means I as the seller of your call option have an obligation to buy 100 shares from you at the strike price – if you choose to exercise your option.

In short, option buyers pay to gain a right, while option sellers get paid to gain an obligation. A little less freedom, as it were, but the money comes up front.

You may also have noticed that the option seller will want the opposite of the option buyer.

Let’s go back to our Amazon example to illustrate this. Let’s say you buy “January 15, 2021 $3,060 Amazon calls” because you think that Amazon will have blow-out holiday sales.

That’s the quick way of saying that you bought calls that give you the right to buy 100 Amazon shares at $3,060 each, and that this right expires on January 15, 2021after the holiday season.

Now, let’s also say you bought those calls from me. Well, that means that if you’re right, and Amazon’s shares shoot up enough between now and January 15, 2021, you’re going to make a lot of money.

Let’s say Amazon’s shares shoot up to $3,100, and you exercise your option. That means you’d buy 100 shares of Amazon at the strike price – which is $3,060

And be able to sell those 100 shares at the current market price – which we just said was $3,100.

That’s a profit of $3,100-$3,060=$40 per share. And since each option covers 100 shares, you’d be sitting on $40*100=$4,000 (reduced by the upfront payment, which cuts into your profit).

But that right you have to buy Amazon shares at below the market price, that comes from me, the option seller. It’s the person who sold the call who has an obligation to sell you 100 Amazon shares at $3,060regardless of what the market price is.

As you can imagine, that’s a losing proposition for me. After all, I have to buy 100 Amazon shares at the market price, which is $3,100…

And then sell them to you for just $3,060. That’s a loss of $3,060-$3,100= -$40 per share. At 100 shares, that’s -$4,000 (reduced by the upfront payment, which lowers my losses).

In other words, the option buyer makes as much money as the option seller loses.

On the other hand, if Amazon’s shares didn’t go up enough, the call buyer would be sitting on a mostly worthless option. The call seller, meanwhile, would still have that payment they received upfront.

Let’s take a look at those charts from before again. Here’s one for selling a call:

Source: AnalystPrep

Because you’re selling the option, this time you start at the top, in the green. You got your upfront payment from whoever bought your call, and that’s your maximum profit.

So you know exactly how much money you’ll make to start.

Then, if the share price of the underlying stock grows – and we move to the right on the chart – the value to the buyer of your call option starts increasing.

Once it’s increased enough to cover their upfront cost, they’re in the green – which means you’re in the red.

And because the call buyers profit is theoretically unlimited, your loss is also theoretically unlimited.

That might sound scary, but in reality, you’d get out of the trade way before anything too bad happens. When you sell an option, you can close the trade simply by buying it back.

Selling a put option looks similar, but in reverse:

Source: AnalystPrep

Again, you start in the green because as a seller, you pocketed a payment upfront.That’s your maximum profit.

Then, if the share price of the underlying stock falls – and we move to the left on the chart – the value to the buyer of your put option starts increasing.

Once it’s increased enough to cover their upfront cost, they’re in the green – which again means you’re in the red.

And again, because the put buyers profit is theoretically unlimited, so is your loss.

Puts work the same way, except put buyers make money when the underlying security drops in price, while put sellers want the underlying security not to fall in price.

This may seem like a lot, but all you really need to remember is this:

  • Buying a call is a bet that the underlying stock will go up in price.
    • If it doesn’t, the most you can lose is the upfront price you bought the call for.
  • Buying a put is a bet that the underlying stock will go down in price.
    • If it doesn’t, the most you can lose is the upfront price you bought the put for.
  • Selling a call is a bet that the underlying stock will not go up in price.
    • If you’re right, you get to keep your upfront payment for selling the call.
    • If you’re wrong, you get to keep your upfront payment but lose money when the call is exercised.
  • Selling a put is a bet that the underlying stock will not go down in price.
    • If you’re right, you get to keep your upfront payment for selling the put .
    • If you’re wrong, you get to keep your upfront payment but lose money when the put is exercised.

In short, buying options means making bets on large swings in stock prices. But selling options means you’re making a small but steady stream of income by selling those options to others.

Research shows that on average about 75% of all options end up worthless. In other words, 75% of the time, the option sellers make money. But their maximum profit per option is much, much lower, and their potential loss is much higher.

So when choosing between buying and selling options, you have to weigh the potential reward against the potential risk.

Option buyers on average make money way less often. But when they do, they make a lot of money. And their risk is preset – you only risk what you paid for the option at the start.

Option sellers make money most of the time. But each trade only brings in a little bit of money – the price the option buyer pays for the option. And the option seller’s risk varies – depending on how far the underlying stock goes against you, you have to pay 100x the difference between that and the strike price.

Then again, winning a whopping 75% of the time means you can probably afford the occasional hit. 

For more on how you can make a steady income by selling options, check out this guide – it'll show you how to turn $7 into $1,480 upfront by tomorrow afternoon.

Now, buying or selling options is a great way to increase your returns and earn some extra income.

But options can do much more than that…

Make Money When You Don’t Know Which Way a Stock Will Go

So far, we’ve covered how options can easily make you money when a stock moves up or down.

But suppose you know that a stock will move, and by a lot, but you don’t know in which direction.

Maybe the company is about to release a key earnings report…

Or is scheduled to make an announcement about some upcoming product.

Whatever it is, you know it will move the company’s shares. But without knowing whether the announcement will be good or bad, you don’t know whether to bet on shares going up or down!

So buying a call or a put would be a blind guess.

Well, there’s an option strategy made just for this exact situation.

It’s called a “strangle,” and it will make you money as long as the underlying stock’s price moves by a lot. It doesn’t matter whether it moves up or down, as long as it moves.

And it’s very, very simple.

Think of it this way. Let’s say that Nio, the Chinese electric-car company, has shares trading at $40 per share, and you think that by January 15, 2021, Nio’s shares will move 12.5%, but you’re not sure of the direction.

If you thought they would move up 12.5%, you’d buy January 15, 2021 $45 Nio calls.

If you thought they would move down 12.5%, you’d buy January 15, 2021 $35 Nio puts.

If you’re not sure which one, you do a strangle – and buy both! 

That’s right, a strangle is simply buying both a call and a put option on the same underlying security and the same expiration date, but different strike prices.

You may already have guessed how you make a profit from a strangle.

As long as one of the two options in the strangle – on Wall Street, they call these the two “legs” of the trade – goes up in price by more than what you paid for both options, you’ve made a profit!

In this case, that would probably happen if either:

  • Nio’s shares went from $40 to above $45 – which would make your calls much more valuable; or
  • Nio’s shares went from $40 to below $35 – which would make your puts much more valuable.

That’s a strangle for you: Buying a call and a put with the same underlying security and the same expiration date, but different strike prices. It’s a bet that the underlying security will make a big move, without having to guess whether that move is up or down.

Here’s a chart to make sense of it:

Source: TheOptionsGuide

As you can see, you start off below the line, at a loss, because you’re buying options. In this example, that’s $200.

Now, if Nio shares go above $45, your call option will start getting more valuable. In this specific example, you’ll start making a profit at about the time Nio shares hit $48.

If instead Nio shares go below $35, your put option starts getting more valuable. In this specific example, you’ll start making a profit at about the time Nio shares fall to $32.

That’s all there’s to it. When you can’t choose between a call or a put, the strangle is a strategy that means you don’t have to choose!

There’s a similar strategy called a “straddle” that is more expensive, but doesn’t require the underlying security to move nearly as much.

Just like a strangle, a straddle has you buying a call and a put with the same underlying security and the same expiration date, but this time also with the same strike prices.

Here’s what that chart looks like:

Source: TheOptionsGuide

Again, you’re buying two options, so you start off below the line, at a loss.

In this example, that’s a loss of $400, because of the specific strike price you pick here – more on that below.

Because both options have the same strike price, you see that both arrows start at the same point and then diverge. The right arrow shows how your straddle will start getting profitable if Nio shares rise above about $46.

The left arrows shows the straddle will also start getting profitable if Nio shares fall below about $34.

So your upfront cost is higher than with a strangle, but Nio’s share price doesn’t have to change as much for your trade to go in the green.

It’s a trade-off: strangles are cheaper up front, but take more share movement to get profitable, while straddles are more expensive up front, but can get profitable quicker.

Now, there’s one thing about a straddle’s strike price I haven’t told you about yet. But to do that, I need to cover one last thing.

As you’ve already seen, buying a call option is a bet that the underlying security will go up. And buying a put option is a bet that the underlying security will go down.

Another way of putting this is that you want the strike price of your calls to end up lower than the underlying security’s share price. For example, you buy a $110 Apple call when Apple’s shares are at $100, because you’re hoping that those shares move up to $110 and beyond.

For a put option, it’s the opposite. You want the strike price of your puts to end up higher than the underlying security’s share price. For example, you buy a $90 Apple put when Apple’s shares are at $100, because you’re hoping that those shares move down to $90 and beyond.

In both these examples, the call and put options went from being pretty worthless to suddenly letting you buy or sell Apple shares at a better price than their current market price.

When that happens, option traders say these options are in-the-money (or ITM).

A call option is in-the-money when its strike price is below the underlying security’s share price.

Meanwhile, a put option is in-the-money when its strike price is above the underlying security’s share price.

In-the-money options are the most valuable, because exercising them makes sense. So the price for buying them is also the highest.

Whenever an option isn’t in-the-money, it’s said to be out-of-the-money (or OTM). For example, that $110 Apple call we talked about earlier is out-of-the-money when Apple’s shares cost $100.

And it’s in-the-money when Apple’s shares are $120, for example.

Out-of-the-money options are way cheaper than in-the-money options, because the risk for the seller is much lower. After all, exercising an out-of-the-money option would lose the buyer money, so they won’t do it.

Finally, when the strike price of a call or put option is exactly the same as the underlying security’s share price, that option is said to be at-the-money (or ATM).

Using the same Apple example, $100 Apple calls and $100 Apple puts are both at-the-money if and only if Apple’s shares cost $100.

Here’s a handy chart that helps me remember it all:

PutsCalls
In-the-money (ITM) optionThe price of the underlying stock is less than the strike price of the optionThe price of the underlying stock is more than the strike price of the option
At-the-money (ATM) optionThe price of the underlying stock is the same as the strike price of the optionThe price of the underlying stock is the same as the strike price of the option
Out-of-the-money (OTM) optionThe price of the underlying stock is more than the strike price of the optionThe price of the underlying stock is less than the strike price of the option

And remember: the more an option is in-the-money, the more expensive it gets.

I cover this because in a straddle, both the call and the put options need to be at-the-money.

Because both options are at-the-money, the premium you pay for the trade is much higher than with a strangle.

On the other hand, this means that even a small move in the underlying security’s share price will make either the call or the put go deeper in-the-money – which will almost instantly mean you’re making a profit.

Related: If you want to earn a steady income with options, check out this guide – it'll show you how to turn $7 into $1,480 upfront by tomorrow afternoon.

Let’s Get Trading

As you’ve seen, options can be a very powerful tool. They can increase your income…

They can boost your profits…

And they can even let you make money without having to guess where a stock will go next!

In many cases, they do this at a lower risk than buying shares. And they’re definitely safer than shorting stocks.

Now, to get started trading options, you’ll need to open an options account. Most stock brokers will let you do this, so just contact your broker online or on the phone, and they’ll be able to set you up.

They will probably have you fill in a brief form to make sure you know what you’re doing with options. Depending on your answers, you may not be able to sell options or buy strangles and straddles.

If that happens, you can always go back to them and ask to have it changed. And remember to bookmark this page, so you can always come back to it whenever you need a refresh on options.

Remember, this guide is only the tip of the iceberg when it comes to how options can make you money. There are dozens of other strategies, and plenty of systems and formulas for figuring out what to buy or sell and when.

RELATED: For how you can start making money with options straight away, check out this presentation.