How to Sell Options – as a Business
New to Selling Options? You’ll be better able to grasp this potentially lucrative investing approach if you think of it less like an investment and more like your own, personal business
With the stock market at historic highs, some of the biggest names in the stock world getting disturbingly bearish, investors of means are scrambling to alternative investments for cover.
But getting responsibly diversified isn’t always as easy as it sounds. While going “outside the box” of traditional investments can be smart, it can also be fraught with risk for those unfamiliar with the pitfalls.
The biggest problem most businesses have is finding enough customers. The big advantage in your option selling business is – you always have willing customers.
On the other hand, outside the box is where sophisticated, high net worth investors live. This is where you are supposed to prosper. This is the advantage that the 1%ers supposedly have – they have the means to hire the experts to navigate them through these sometimes tricky but potentially lucrative waters. Robert Kiyosaki, famed author of the Rich Dad/Poor Dad series prescribes as much in his recipe for wealth. Kiyosaki is a big proponent of Real Estate, Private Equity and in particular, owning a business, among other things.
Own a Business, Not an Investment
Access to alternatives is just one potential barrier to you if you’re seeking cover from an unnerving stock market or higher, more consistent yields. A bigger barrier is understanding what it is that you’re actually investing in, and being comfortable enough to wade into it.
Which brings us to selling options. Most people don’t sell options. Even many sophisticated investors don’t sell options. Why? Because they don’t understand options. Because they don’t have the time to learn how to sell options. Because you don’t read headlines like “17,000 September Soybean Calls expire worthless. Sellers net 67% profit.” in the Wall Street Journal. Soybean options are sold far away from Wall Street. And the Finance VP in the corner office is trained to analyze P/E ratios and future earnings – not crop condition reports. The same is true for the reporter that covers his work.
But I believe that I have uncovered the source of all of this confusion. The problem the uninitiated have in trying to understand option selling is this: They’re trying to explain it as an investment.
Most people don’t sell options… Why?….Because you don’t read headlines like “17,000 September Soybean Calls expire worthless. Sellers net 67% profit” in the Wall Street Journal.
And to traditional investors, this doesn’t make sense. Traditional investors assume there is one way to make money in markets – you buy something and hope the value goes up. They will often ask questions like “So what are we actually buying? And “How can you sell something you don’t own?” and “Why would I want it if it’s worthless?”
We’ve all been there. It’s hard to wrap your arms around at first. Most throw up their hands and go back to looking at dividend curves for Exxon – because that is what Cramer said to do.
This is a shame. For there is yield to be had. Good yield, Consistent yield. Durable yield.
If this is you, however, there is a change in approach you can take that could finally let you cross over that barrier and embrace the alternative.
Selling options may technically still be an investment. But the mechanics of it function more like a business. Stop thinking about selling options as another one of your investments. And start thinking of it as a business.
Businesses, at least successful businesses, have rules, procedures, plans. You make money in a business by selling something and getting paid for it. The biggest problem most businesses have is finding enough customers. The big advantage in your option selling business is – you always have willing customers.
The Best Business
Warren Buffet states that insurance is the world’s most profitable business. A company sells reams of insurance policies and collects payment for each. A few of those result in claims – which are paid out of premiums collected. The rest is kept as profit.
The world’s most profitable business?
An option selling business (at least a commodity option selling business) runs remarkably similar to this model. You sell a variety of these “insurance policies” across a swath of different uncorrelated markets. A variety of uncorrelated markets like corn, coffee, gasoline and gold ensure that one “claim” is limited to a small portion of your overall “policies.” While you will pay out on a few, the majority should keep feeding you cash premiums every month.
Big successful insurance companies like AllState and (Buffet owned) Geico know the value of diversifying your policies. Remember, you’re the underwriter. You don’t want 100% of your policies written on Florida coastal properties during hurricane season. Better to have a small amount in every state. (This is a key mistake many neophyte option writers make.)
The performance of your insurance (option selling) business will come down to two basic skills on your part:
- Your ability to select “policies” with the highest premiums and least chance of a “claim”
- Your ability to limit the size and scope of the “claims” you do pay
Higher risk policies mean higher premiums paid to you. Lower risk policies are safer, but offer lower premiums as well.
But there is advantage to be exploited. Up to 50% of these “policies” can be overpriced at any given time. That means they will pay you more premium than the actual risk warrants. Identifying which “policies” these are can potentially offer you an even bigger edge – one that real insurance companies don’t have.
Your option selling portfolio functions more like a business than an investment.
You can lose too, of course. But selling options can be a more forgiving business for beginners than some others. And professional help is available (for more information on this, visit www.OptionSellers.com/Discovery )
That’s option selling – in a nutshell. Less like an investment, more like a business. It will correlate with nothing. Not even commodities indexes. Markets move up, down, sideways, Presidents come and go. Wars start and end. Civil disturbances flare, rate hikes or non hikes. And guess what? The insurance business moves steadily along.
Starting Your Business in 2016
Consider this a manifesto – a shot across the bow of the mainstream investment community. The day of alternatives is here. It can no longer be relegated to the back page, or worse yet – treated as if it does not exist. Don’t tell me my asset mix is limited to stocks, bonds and cash. Not with interest rates at zero. Not with stocks at all time highs with the world in shambles.
What do you do for yield when bonds pay less than 1% and stocks are in the clouds? You write premium – that’s what you do. You start your own option writing business – the business of collecting premiums.
James Cordier is founder and president of OptionSellers.com, a wealth management firm specializing in option selling portfolios. He is author of McGraw-Hill’s The Complete Guide to Option Selling, 1st, 2nd and 3rd Editions and is featured regularly by CNBC, Bloomberg News and Fox Business. For more information on accounts with OptionSellers.com visit www.OptionSellers.com/Discovery.