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Options Trading: A Low-Risk Approach
Aug 3, 2024
Investing in Options: Low-Risk Strategy
Lecture Overview
Presented by Seth Freudberg, Head Trader at SMB Capital's Options Trading Desk
SMB Capital: Proprietary trading firm based in NYC
Focus: Introduction to a low-risk options trading strategy
Common Misconceptions
Options are perceived as too risky compared to stocks
Many options strategies are safer and can outperform stock performance
Pre-Requisite
For beginners, a separate video on options basics is recommended
Case Study: Chevron (CVX)
Focus on July 21st options expiration day
Example trade: Using Chevron stock (CVX)
Stock price on July 21st: $158.69
Strategy Explanation
Buying Stocks vs. Selling Puts
Traditional approach: buying 100 shares of CVX for $15,869
Suggested approach: selling put options
Look for the put option with a Delta close to 20
Example: 150 put with a Delta of 19.94%
Approx. 20% chance of expiring with value, 80% chance of expiring worthless
Cash Flow and Margin Requirements
Selling a 150 put yields $130 (1 option = 100 shares)
Need $155,000 available (in case of assignment)
Results Tracking
Sell puts each month
Example months:
July
: Collect $130, put expires worthless
August
: Collect $163, put expires worthless
September
: Collect $29, put expires worthless
October
: Collect $134, put expires worthless
November
: Stock closes below put price, assigned shares
Managing Assigned Shares
Sell calls against the assigned shares
Example months:
December
: Sell 155 calls, collect $42, call expires worthless
January and February
: Similar process, collect premiums
March
: Stock assigned at 155, break even on shares, collect $345
Final Results
12-month campaign: Collected $1,659
Stock price moved from $158.69 to $159.15
Stock Ownership Return
: 4.25%
Option Strategy Return
: Over 11%
Additional returns from money market investments
Key Takeaways
This strategy works well if you believe in the long-term prospects of a stock
Safe approach to generate cash returns and manage risk
Professional traders frequently use cash-secured puts and the wheel strategy
Additional Learning
Free workshop with additional strategies for consistent income
Link provided for registration
📄
Full transcript