What is your favorite options strategy for producing steady income?
As an options trader, I am often asked this question. I have been bombarded with questions from investors for years about how to trade stocks and ETFs for income using options.
In my opinion, the best way to bring in income from options on a regular basis is by selling vertical call spreads, otherwise known as bear call spreads.
This year alone, I’ve managed to average 15% per trade over 21 trades. My win ratio: 90.5%.
A $10,000 account that invested only 10% per trade, or $1,000, would have gains of roughly $3,150 for a 31.5% return.
Readers always ask me to bring them the most profitable strategies. Well, here it is.
I’ve put together a simple presentation for a free live event I’m hosting this Tuesday. Click here to attend for free and see exactly how I trade bear call spreads.
Bear call spreads are simple to apply and analyze. But the greatest asset of a bear call spread is that it allows you to choose your probability of success for each and every trade.
Think about it: What type of investment offers you the ability to choose your own odds of success?
And in every instance, bear call spreads have defined risk, so you always know how much you can make or lose on each trade.
My favorite aspect of selling bear call spreads is that I can be completely wrong on my assumption and still make a profit. Most people are unaware of this advantage offered by bear call spreads. I’ll explain this aspect in a few paragraphs.
Can you explain your process for choosing trades in your bear call strategy?
I allow probabilities or odds to give my strategy (bear call spreads) the edge I need for successful trading.
And why do bear call spreads give me an edge?
Let me explain it in poker terms.
Professional poker players are known to seek out “soft” or “weak” tables as a source of income. This means that the more inexperienced players there are at the table, the easier it will be for the seasoned pro to take their money.
It’s really no different in the world of options, particularly when using trading strategies with a statistical edge like bear call spreads.
Finding the consistent loser or novice trader is how the poker pros generate the bulk of their gains. When I trade credit spreads, I take advantage of the speculation of others, typically newbies who are buying out-of-the-money calls or puts with the hope that they will eventually move into the money.
There is, however, a skill in knowing who those amateurs are and what behaviors they exhibit to clue you in on their lack of experience.
In poker, the individual who shows too much emotion or doesn’t truly understand the game will be cleaned out in short order.
In options trading, everything is laid out in the options chain – a list of option characteristics at different strike prices. By looking at the “probability of expiring in the money” – the chance that a stock or ETF will close above (for calls) the chosen strike – the options trader can make decisions based on the speculation of others. But unlike poker, the participants show their hands when trading bear call spreads.
This is THE advantage bear call spreads offer over any game or investment vehicle out there.
For instance, with the SPDR S&P 500 ETF (NYSEARCA: SPY) trading around $273.50, some traders are making wagers that SPY will move above $280 by July options expiration in 49 days. The chance of that happening is 21.82%.
With those types of odds, why wouldn’t I want to take the other side of the trade? By taking the opposite side of the trade I have a 78.18% probability or odds of success. It’s like having loaded dice with each and every trade I place.
Depending on which options I choose, my probability of success can vary from 75% to 85%.
Just Ahead: More Details on Vertical Spreads
In Tuesday’s webinar, I will discuss, in detail, how I would trade SPY and other assets, using my favorite options strategy.
If you would like to learn more about my step-by- approach to bear call spreads using a variety of trade ideas, please make sure to sign up for my upcoming webinar.
When you attend, I’ll give you three live examples of how to use bear call spreads to bring in extra income.