How to generate cash flow thru selling options

The turning point of my life was after reading Robert Kiyosaki's Rich Dad, Poor Dad. That was year 2001. It change my life direction and kicked off my financial education journey to build wealth through passive income. Instead of working hard to enrich other people, I make it a point to accumulate assets. Asset is something that put money into my pocket. Liability takes money out of my pocket. I've read many investment books, attends seminars, played Robert Kiyosaki's cash flow game, took up sales job (my biggest paycheck was 14k per month. Amazing!!!) and involved in Multi Level Marketing.

Exposed myself to the sales and investment world was an eye opening adventure. I met up with a guy that quit his day job of 5k/month and do internet marketing full time, another quit her 8k/month job and do MLM full time. Some spent 10 over thousand just to attend a stock trading course. As for options, there's a gentleman set up a options trading fund. Taking money from those who were interested. Trade from 25k to 100k in few weeks and from 100k to none in a short period of time too. That's how I bumped into options trading.

Personally, options are an amazing investment tools. Arguably the best money-making opportunity on planet earth, yet very few people understand them. They can make you very rich or make you "lose your pants and shirts". It is a double edge sword. As the saying, "Great power comes with great responsibility".

For me, my instinct told me this is the tool that will bring me out of rat race. Hence forth start my education journey on options trading.

There are many reasons but here I would like to mention the 2 main reasons:-

(1) The odds are in your favor
80% of options expire worthless. If you sell far
out of money options, even the market goes
against you, you will still make profit. By
selecting a strategy that eventually wins about
80% of the time before you even do market
research, you are giving yourself an edge.

(2) Time is on your side
Time is constantly eroding the value of option.
The passage of time is your greatest ally

I have read this in the book "The complete guide on options selling" and would like to share with you. This is an analogy of option selling. Here it goes :-

Let's assume that a rough figure of 80 percent of options expire worthless. What does this mean to a trader? Suppose that you and I went down to a fishing hole filled with catfish and bass. We toss a fishing line in the water. The hole is primarily a catfish haven, with 80% catfish and 20 percent bass. I offer to pay you $1 for every bass you pull up, whereas you must pay me $1 for every catfish you pull up. There are even a few trophy bass in the hole that, based on their weight, I will pay you $2 or $3 or even $4 for hauling in. However, these are very few and far between and I am more than willing to take $1 for each catfish while you try and catch a trophy. Chances are that you will pull up eight catfish and two bass. You'll pay me $8 and I'll give you $2 back for your bass. I will end up netting a hefty $6 profit. You soon realize the error of your ways and we decide to go into business with our little fishing hole.

Soon many novice anglers hear about the trophy bass in the fishing hole, paying high prizes for anglers lucky enough to catch one. They are especially interested in the highly touted "monster" bass, one which lurks in the dark water below and pays a prize of $10 to the angler who hooks it.

The anglers line up at our hole to pay us $1 for every catfish they catch. We generally have to pay them $2 out of every $8 they pay us. Sometimes we only have to pay back $1. Sometimes, if somebody has a "hot streak", we may have to pay back $3 or $4. however, we almost always come out ahead at the end of the day.

Furthermore we don't require them to cast 10 times. Some may come with only a few dollars and take a few casts. Some will fish all day. Most fish until they run out of money.

Occasionally, someone will catch a trophy bass. In this case, we have to pay back $3 or $4 against our $1 bet. The trophy bass causes much excitement. The newspaper comes and snaps pictures. More novice anglers and some people who have never fished before see the picture in the paper, get very excited and stuff their pockets with dollars and come running down to our hole to pursue the elusive trophy fish. This brings us even more business and makes us happy , most of them catch catfish and put dollars in our pocket.

Pretty soon a few savvy anglers catch on to our game and decide to stop handling us dollars. They set up their own little stand on the fishing hole and begin collecting dollars for catfish. Fortunately, there are many new anglers coming to the hole now, trying to hit it big with trophy bass. Many get frustrated with catching catfish and losing their money and come to the conclusion that "fishing is bad". They quit altogether. However many new young hopefuls appear to take their place.

Soon another group of entrepreneurs springs up. Their purpose is to take the anglers' money and give it to us and take any money owe the anglers and give it to them. Some will even help you bait your hook and tell you where to throw your line. For this, they charge a fee. This now means that the anglers and you and I have to pay a fee on each fish that is caught, catfish or bass. Most of the middleman like to talk about the big bass and get anglers excited about the monster bass that lurks below. "Of course, you could lose your dollars," they warn, "but think of the payoff if you catch the monster!" This gets anglers even more excited. Some take a middleman's advice and cast to the spot to which he points. This, of course, costs the angler a slightly higher fee, for the middleman must spend more time with her. The angler, of course, still catches mostly catfish.

Others anglers study the fishing hole for hours and look at depth charts at home to see where the giant fish may make its lair. Then them come to the hole with sophisticated computers and top of the line fishing gear. More fare little better than their non-sophisticated counterparts. The reason is that they are fighting a losing battle. The odds are against them. Even though the large bass are swimming in the hole, the hole is still 80% catfish.

A few of there middleman become wise to the catfish betting strategy and encourage client to begin betting on the catfish. However most shudder at the thought "Bet on the catfish? Why would you want to do that? It's too risky. What if somebody pulls up that monster bass? What will you do then? You bet $1 and you lost $10. That could wipe you out! You may even have to run home and get more money so that you can pay that angler $10. Is that what you want?" "No, no" the ambitious angler fearfully replies. And so they go back to try catch the "monster" bass, and eventually runs out of money.

The anglers chasing the "monster" bass are option buyers. The fishing hole is the exchange. The middleman is the broker and the business owner is the option seller.

There are 2 caveats to betting on catfish (selling options).
(1) Have to come to the fishing hole with enough dollars in your pocket to pay up if an angler catches a big bass on her first one or two casts.
(2) You have to expect that somebody is going to catch a bass. When you make your first trip to the fishing hole bet on a catfish and somebody pulls out a big bass, you have to have the gumption to pay the prize and go back to your catfish betting. You can see how it can be unwise for a catfish better to assume after this incident that catfish betting is bad. Unfortunately many option sellers make exactly this mistake and then tell all who listen to their misfortune.

That's the truth about option selling. I hope you enjoy the analogy. It takes commitment and knowledge to be successful in this game. Get the Option Selling Guide by James Cordier. These will give you the knowledge and if you engage his service, this will cut short your journey to financial freedom. I do not endorse this, but I believe he is a good guy.

3 steps :

(1) Learn about options
(2) Learn options selling strategy
(3) Understand how stock volatility affect options' price