Comparing Put Options Trading to the Rest
The nature of this newsletter is to provide insight and ideas to make more money in trading — specifically a cash-secured put option trading strategy — than what is offered in alternative investment strategies.
First of all, take a look at the chart below — I think this is the best visual representation there is to illustrate what we are taking on.
A few things to note in the chart above:
The Online Savings Bank returns are what you would get from banks like Ally, Goldman Sachs’ Marcus, or American Express. Most people’s online savings accounts actually earn far less!
The S&P 500 return from 2019 is the best performance its had since 2013.
The Cash-Secured Put strategy targets a 1% return each week — on the surface, this doesn’t sound exciting nor lucrative. Over the course of the year, though, an investor receives a 68% compound return, and on top of that, look at the lack of volatility in that graph. You tell me if you know anyone realizing these kinds of returns.
This isn’t a case of asking someone at the craps table to blow on the dice before you roll them and then hoping for the best. This is a way to significantly minimize risk while still managing a modest, short term return, but we do it again and again and again. We aren’t trading scary, volatile penny stocks, marijuana stocks, or pharmaceutical stocks. That’s a recipe for failure. We are trading relatively safe, interesting companies that happen to garner different levels of trader interest each and every week.
In general, given the nature of the U.S. stock market and the huge amount of capital that has moved into the space, we are expecting at least a flat market, but probably a rising market overall. Coupled with this outlook, we are limiting our exposure to a maximum of 5 days out. That way, if for some reason there is the kind of crash that people like Jim Rogers, Peter Schiff, and Doug Casey have been talking about, we are not emotionally tied to these positions over the long term. And finally, we are coming in at a strike price that is currently below the stock price (traders call this negative ‘moneyness’). You are putting the odds in your favor to make a successful trade.
They concept behind the strategy consists of two main factors: (1) removing emotion from each and every trade, and (2) moving in and out of positions very regularly. At no point do we want to own equities. Equities are good to own at different times of a market cycle. In a bull market that is a decade-old, now is NOT the time to own equities for the long term.
In the next post, we will get into the common ways people push back on this strategy — and I will detail what it is that they are missing.
Regards,
John