Are you trading for income, growth, or retirement?

The answer to this question for most new traders is always growth. They want to grow an account and “get rich quick” but if you learn to look at trading with a longer-term perspective you’ll realize being successful in the markets isn’t about growing from a little to millions overnight. What you really want is consistent account growth. It sounds like the same thing but I assure you it’s not. Let me explain.

Growth

If you already have consistent income and trade to grow your wealth, account, or create additional income then the best strategy for you is probably to be a buyer. If you want to see those BIG gains and get the lottery style win then buying options either deep ITM or ATM with time appropriate for your trade will get you the biggest % gains. Gains as a buyer can be exponential and your max loss is defined, time is your enemy and so is the implied move so the trick is knowing when to lock in gains because they can quickly disappear. If you buy a lot of time and want to use this strategy to invest in the market you can do so at a much lower cost basis by purchasing deep in the money options this essentially allows you to buy equity for a fraction of the cost and really get the most out of your money.

WARNING: Advanced!

DO NOT TRADE SPREADS or SELL OPTIONS WITHOUT A PROPER UNDERSTANDING OF PRICE ACTION!

Income

Ok, now that I’ve thoroughly scared the new traders, I want to talk to those of you who understand how to anticipate direction and how to formulate a proper trade plan. If you are still having trouble being consistently profitable in your trading, I am going to guess it’s one of a few possible things.

1. You have trouble deciding when to take profits.
2. You hold on to your losers longer than you should.
3. You wait too long to lock in gains and watch the premium get sucked out despite price initially going your way.

If you feel like these things are happening to you and you are looking for the solution, good news, there is one! Become comfortable creating spreads, especially if you are trading for income!

If you are trying to treat trading as your job and provide consistent income for you and your family, then you need to have defined profit goals for each month to put food on the table and pay the bills. When you are a buyer your results tend to be more inconsistent as stocks don’t always run up/down the same. When you write a spread you have a very good idea of the kind of profit to expect and when to cut losses because your max profit, as well as your max loss, is defined. If a spread isn’t working, cut. If it is working, let theta work for you and the profits roll in. Simple.

The cool thing about buying/selling verticals is you only need to know where price isn’t going in order to be profitable. Selling spreads is the “All-Star Strategy” as it carries more risk, but the probability of success is much higher. This is my favorite strategy for creating consistent weekly income. 

Retirement

If you are investing in the market you want to make sure you are getting a good price. You also want to make sure these assets are working for you and producing income otherwise they aren’t working for you to their maximum potential! In this section I’m going to tell you a couple of ways you can maximize your return on these types of investments.

1. Selling naked puts – DO NOT SELL NAKED PUTS ON A STOCK YOU DON’T WANT TO OWN!

Selling naked puts is a great way to get assigned shares of a stock you want to own at a lower cost basis. If you know the price you want to buy at you can sell naked to get a better price or collect the premium if your price never comes around, let's take a look.

Example: (Today's date - 1/6/2020)

BA - $333.74/share – pays dividends

Sell 10 – 332.5 strike puts 3-4 weeks out – 1/31/2020 332.5p @ 10.00

Scenario 1 : BA falls to $325 – Collected $10,000 credit, position assigned.

Purchased 1000 BA at $332.5 - $10  = $322.5.  Up $2500 on position and now own BA at a discount. You can now sell covered calls for insurance/income, let options expire worthless and investment grow over the next 20 years.

Scenario 2 : BA goes to $400 – options expire worthless – Keep full credit of $10,000  - No ownership of BA, on to next trade.

2. Selling Covered Calls

This is a great way to have your assets produce income for you especially during weeks/months you expect them to go sideways/down.

Example : (Today's date - 1/6/2020)

BA - $333.74/share – pays dividends

Purchase 1000 shares @ $333. Sell 1 call you expect to expire worthless for every 100 shares you own.

Buy 1000 BA @ $333 = $333,000 +

      Sell 10 x 1/31/20 350c @ 4.70

Scenario 1 : BA falls to $320 – Investment in BA down $13.3k but options provide $4700 cushion. If stop loss is breached close position. If not, repeat at times you expect sidways/down price action and continue collecting premium on .30 delta options 3-4 weeks out.

Scenario 2 : BA rallies to $360 – initial investment up $17k + $4700 (10 contracts x 4.70). Options exercised (sold shares). Buy something else, repeat.

Scenario 3 : BA rallies to $345 – initial investment up $12k + $4700 (10 contracts x 4.70). Still own BA, continue selling covered calls for income.

As you can see, your trade goals will define the style of trades you should be putting on. If you are trading for growth you want to be a buyer, if you are trading for income it’s best to buy/sell verticals to establish consistent income and if you are trading for retirement then you want to make sure to be taking full advantage of options and the opportunities they provide. So think about it, why are you trading?