I recently had the opportunity to pick up a copy of Lee Lowell’s 2009 book Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor.
Lee wrote an excellent primer on options trading, but the publisher probably should have put a little more thought into the title. Get Rich With Options has very little to do with getting rich with options. Instead, it is a level-headed explanation of various low-risk options trading strategies that generate small, consistent profits over time.
(Though to be fair, “Generate Small, Consistent Over Time With Options” doesn’t look quite as good in print.)
For readers who are accustomed to thinking of options trading as a high-risk/high-return endeavor, Lee’s book will be a real eye-opener.
Most of what Lee does revolves around selling options rather than buying them. Yet interestingly, his first strategy is buying deep-in-the-money options as a substitute for stocks.
This is the polar opposite of how most options speculators operate. Most tend to buy cheap out-of-the-money options with something of a lottery-ticket mentality. The returns to buying out-of-the-money options are potentially much higher. Of course, there is also the high likelihood that the option expires worthless and you lose your entire investment.
When an option is deep in the money, it moves in virtual lockstep with the underlying stock. (For the experienced options traders out there, Lee generally recommends buying the deepest in-the-money options available with a delta of at least 90 percent.) But, you initial investment is significantly lower. So, you get the same potential upside on a much smaller investment with lower downside. For a short-term stock trade, that makes all the sense in the world.
Lee’s next strategy is my personal favorite: selling naked put options. Though I rarely sell puts personally, I regularly use outside managers that do. It’s a fantastic strategy for generating consistent income and functions, in principle, like an insurance company. Like an insurance company, the seller collects consistent premiums, though once in a while, disaster (i.e. a market decline) will strike, and you have to pay out a “claim.” (Note: The insurance analogy is mine, not Lee’s. I don’t want to put words in his mouth.)
Lee sees two important elements to put selling. First, selling the options generates immediate income. But secondly, put selling can allow you to buy a stock you want at the price you want. It’s a coin toss in which you win both ways. Heads, the stock rises and you keep the options premium. Tails, the stock price falls, you still keep the option premium, but you buy the stock at a price you consider reasonable. There is the risk that the stock could fall much lower than your stock price, but you would have carried that same risk had you simply bought the shares outright. There is really nothing not to like here.
Lee’s third strategy — his favorite — is actually a collection of spread strategies that involve using multiple options contracts to limit the cost of trading. This is something that many new traders may find intimidating, but Lee does a good job of breaking down the trades into digestible pieces that even a beginner can understand.
And finally, Lee’s fourth strategy is covered call writing. In Lee’s first strategy, he recommends buying options that are deep in the money. But covered calls are a different animal. When you sell a call option against a stock you own, you’ll looking to earn a little extra income from the stock above and beyond its dividend and regular capital gains. But you’re not wanting the option to get exercised, as that means selling the stock. Ideally, a covered call option expires worthless and you simply pocket the premium.
I would add that, in today’s low volatility environment, Lee’s options strategies are less profitable than they would be in a more “normal” volatility regime. That’s ok. This is the time to read up on the strategies so as to be prepared when the opportunities reappear.
If you are new to options trading — or even if you are an experienced hand — I recommend giving Get Rich With Options a read.