What’s up everyone, It’s Cody In this video, I will share with you step-by-step
on how to sell put options like Warren Buffet.
This has been my secret passive income source that generates consistently thousands of dollars
per month.
I will walk you through my most recent trade that has helped me generate an annualized
return of 123%.
Warren Buffet is known for being one of the most successful value investors.
What most people don’t know is that Warren Buffet has also been selling put options to
generate an income of 2.4 billion in 2018 and 968 million in 2019.
If you feel like your stocks always go against you right after you bought them.
Or if you want to make money whether your stocks go up, down or sideways, this video
is for you!
This type of video takes me a lot of time to make.
I want to make sure that you can also join my journey of reaching financial freedom sooner.
Smash the like button and subscribe to my channel now to get your ticket to financial freedom!
I will break down this video into 4 parts to make sure it’s easy to follow.
Part 1: Laying the groundwork: I will touch upon how to increase Rate of Return & lower
your risk Part 2: The Lingos: Where i will introduce
to you some basic terminology.
Part 3: Walk you through of my most recent trade that generated a 123% annualized Return
Part 4: How to Make Money by Selling Put Options: This is the part where I summarize my thought
process before I sell any put options.
Let’s get right into my Part 1: Laying the groundwork
You must first understand the importance of your % rate of return
This is like the speed limits to your destination.
If you are driving to a destination and it is 100km away and your drive at 100km/hr,
you will reach the destination twice as fast as driving at 50km/hr.
It’s the same with investing, if you earn 10% per year, you will reach your destination
much faster than if you are only earning 5%.
If you can get your portfolio to grow faster, you will see how your dividend income also
grows more quickly.
Once your dividend income equals the amount you need to live on, you never have to work
for money again.
The long-term return on stocks is around 10%.
Any investment that can make more than 10% is respectable and will shorten your journey
to financial freedom.
Bonds, GICs and bank deposits might be good for short time horizons, but not great for
growing your wealth quickly.
What about buying stocks that pay dividends?
Dividend payments are much more reliable than stock prices.
They also let you sleep better if you focus on the cash coming to you rather than the
stock price fluctuation.
But Cody, you just told me at the beginning of the video to stop buying stocks!
Yes, I did and it is still true.
The put options selling strategy I am about to introduce is more likely to generate a
better return.
The worst thing that can happen is that you will get paid to own the stocks you want to
own anyways at a cheaper price.
Write this down: “you will get paid to own the stocks you want to own anyways at a cheaper
price”.
Can you just look at the rate of return and not worry about the risk?
The answer is of course not.
Last year people won more than one billion dollars playing poker.
And the casinos made twenty-seven billion just by being around those people.
Now, imagine that this strategy will allow you to become a casino.
You can open up virtual poker tables for speculators.
All you have to do is to deal the cards and collect the fee for every round of the game.
This way, you might not take home millions of dollars but you will earn steady income
just like a casino.
To make it even better, being a casino puts the odds in your favour as long as there are
speculators to deal the cards to.
The selling put strategy is usually deemed to be risky.
But If you combine it with buying quality, recession-proof stocks with a history of dividend increase.
This strategy increases the return and lower risk compared to buying stocks outright.
It might contradict ideas you already have about investing.
It goes against the standard dogma - but the standard dogma has people retiring in their 60s.
Let’s don’t forget to look at this strategy from a different perspective - in the lens
of a casino owner.
Now that I laid the groundwork, let’s get into Part 2: The Lingos
First thing you should learn is how to smash the like button before selling a put option.
Selling options for income is easier than you might think.
It’s one of the few strategies where you can be wrong about the direction of the market
and still win.
Warren Buffett, one of the most successful investors, actually uses this time-tested
strategy to generate income.
While this strategy is easy to understand and execute, you should spend some time learning
the basics before you execute your first options trade
let’s look at what an option is.
If you are new to option trading, trust me, learn the fundamentals.
Just think of the word option.
In our everyday lives, an “option” is a choice.
It works similarly when you’re talking about investments.
When you’re investing, an option gives you the opportunity to buy or sell a stock at
a certain price on or before a specific date.
There are two types of options: call options
put options If you buy a call option, you are expecting
that the underlying stock is going to increase in price.
If you buy a put option, you’re expecting that the underlying stock is going to decrease
in price.
You do not buy options with this strategy.
You are going to be selling put options.
In this case, You will make money whether the stocks increase, stay put or decrease in price.
STRIKE PRICE The strike price is the predetermined price
that you can buy or sell the underlying stocks for.
EXPIRATION DATE Option contracts don’t last forever.
You need to exercise your option before or on this date, or you can let it expire when
you are selling options and just keep the premium.
Here comes the juicy part: The premium AKA Time Value
When you buy an option, you are buying time value for the stock price to move in your favour.
The price you pay for that option is called the premium.
Each option contract consists of 100 shares of the underlying stock.
Now, If you are selling a put option, then you are on the other side of the table.
You are selling time value to speculators, and you will receive the premium as income.
Remember selling put options allows you to be the casino now, you are just dealing cards
and collecting fees as income.
Are you still with me?
I know this might sound confusing at first.
Even though this video is explained in plain English, you might need to go through the
videos a couple of times to fully understand.
Don’t get discouraged!
The information I share is a lot easier than high school subjects and it’s more valuable
as well.
My hope is that this video will allow you to live a more comfortable life and have more
time to smash the like button and support my channel.
Now Let me Walk you through my most recent trade that generated a 123% annualized Return.
I will first analyze the chart and share why I made this trade,
Then, I will walk you through exactly how I took profit even when the stock price went
against me.
Kroger is the United States' largest supermarket by revenue in 2019.
And the Dividends Growth Rate has been growing at 13.4% per year.
I have been waiting for this stock to pull back to add on more positions.
I am not going into details about Kroger but you can learn the detailed analysis about
this company in this video.
And this is exactly what happened on June 12th, Kroger pulled back below their 50 day
and 200 day moving average.
As I discussed in the technical analysis video, 50 day and 200 day moving average can act
as major support levels.
And I know that a good stock like Kroger is very likely to bounce back up from this support
level.
So I decided to sell some puts right below the stock price $32.35.
I sold two put contracts on June 12.
The quantity is showing -2 instead of 2 because I sold the puts instead of buying the puts.
KR is the Kroger’s ticker and The strike price is at $31.5 expiring June 19 2020.
The P behind strike price stands for put contract.
If it’s a call it will be a C. I got paid $212 dollar as premiums.
This is the fee casino collects from the speculators.
Remember what I said earlier about “If you feel like your stocks always go against you
right after you bought them?”
It happened to me as well!
The stock price kept dropping from June 12 to June 15.
The stock price recovered back above the 200 day moving average before it plummeted down
to below $31 dollar on June 18.
The strike price of these two puts was at $31.5 and the stock price was then sitting
below my strike price.
You might be thinking” uh oh , Cody Messed up, now let’s see what he is going to do”
Since I am selling put options, I am selling the time value to the speculators on the other
side and receiving the premium as income.
Each day that passes while the stock price is above my strike price, there is less and
less probability that I need to buy 200 shares of the underlying stocks.
The time value will decay.
As time value decays everyday, I can buy back my contacts at a cheaper premium to close the positions.
A good example would be: Imagine you are an insurance company.
You provided a 7 days travel insurance plan for $212 dollar.
Your customers never made the claim during the first 6 days.
On the last day, you offered your customer $60 to cancel their travel insurance.
And they say yes because they don’t think they need it anymore.
And this is exactly what I did to close my two put options.
Right after the market opened on June 19, The stock price recovered to $31.66, which
is above my strike price of $31.50.
I took the chance to buy back these two puts for $60.
By closing the positions, I realized $149 as a profit.
Because I might need to buy 200 shares of KR at $31.5, I set aside $6,300 to make $149.
This is roughly 2.36% return and it is annualized to a return of 123%.
And you just witnessed how I made money even when the stocks went against me.
Selling puts allows you to win whether the market moves up, down, or sideways.
If you trade options using this strategy, it can be less risky than trading stocks.
The worst thing that can happen is that I will get paid to own the stocks I want to
own anyways at a cheaper price.
According to the Chicago Board of Options Exchange, selling options is one of the few
strategies that outperforms the buy and hold strategy over time.
If you want to learn more about this selling put options strategy, join my private fb group
to view my past trading positions and bounce ideas with like-minded investors.
Click on the link in the description.
Part 4: How to Make Money by Selling Put Options
Here is my thought process before selling a put:
Find good quality dividend growth stocks that I want to own for the long-term.
I will decide on the strike price that I would be comfortable buying those stocks for.
Based on technical analysis, I will find the major supports for those stocks.
I don’t need to know where the stock is going but instead I am trying to predict where
the stock price will not be at by the expiration day.
I will check the Volatility Index (VIX).
VIX measures the level of fear, or stress in the market.
When the fear is high in the market, I will get paid more premium as an insurance seller.
Imagine if you are selling umbrellas.
Would your customers pay more for the umbrellas on sunny days or rainy days?
I will give you three seconds to think 3-2-1.Yes, you will get paid more on rainy days because
of the fear and stress that the rain is costing your customers.
The average VIX price for the past 10 years is around 16-20.
So when the VIX is lower than the 16, I will sell less puts and keep cash on the sideline.
I will wait until the fear in the market built up again before selling more puts.
Capital Requirements.
This is by far the most important point.
Before you sell one put, make sure you have enough money to buy 100 shares of the stocks.
Or else, you are using margin.
This means that you are actually borrowing money from your broker.
Do not use any margin, especially when you are starting out with this strategy.
Using margin is a double-edge sword.
You can make more money.
However, when you lose you could wipe out all your gains and even more.
And you will wonder why you put in so much work to earn these incomes and you gave them up so easily.
I will dedicate a video to margin usage in the future.
For now, stick to the rules.
Don’t use any margin Thanks to all my passive income sources.
If I really want to, I can retire today at the age of 29.
The more important question is - why am I able to retire so young while most people
work into their 60s?
How can you also achieve early financial freedom?
I’ve thought about this question and came up with the reason.
The reason is because of “financial literacy”.
I can choose to retire early because I have financial literacy.
Most people spend years acquiring the skills they need to excel in their careers - and
this is a good thing.
However, spending just a little more effort learning how to manage your money better will
shorten your journey to financial freedom.
Good job on staying until this part of the video and you all are my true supporters!
You all deserve to smash the like button for yourself.
If you enjoy this video, support me by destroying the like button if you still haven’t done
so already, subscribe, and click the notification bell and change it to “ALL”.
Thanks for watching and see you in a couple days!