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