what are options easy residual income

What Are Options?

Searching for an easy residual income needs knowledge. We hear about things like Options Strategies, Options Trading, or Binary Options.  But most investors don’t really know all that much about them.  And it’s kind of a shame because when options are used correctly, they can make your investing more stable and profitable.

 

what are options easy residual incomeOptions started as a very sound business idea.  They were a response to a highly liquid and wildly fluctuating stock market. Few other assets move like the market does for one very simple reason. Usually investments are more cash flow oriented.  When you’re buying a bond, or a rental property, the price can only go so high before it’s no longer worth the cash flow it produces.  And on the flip side, the price can only go so low before investors start to view the cash flow asset as a real bargain.  You’ll even see this on dividend paying stocks which tend to be less volatile than stocks that retain all of their earnings.

 

The stock market can fluctuate wildly because when cash flow stops being considered, investors start to play the game of “who’s the greater fool.”  They become focused on charts, and the momentum of supply and demand.  As Warren Buffet would say they are watching the score board more than the playing field.

 

Business Like Investing….

Warren Buffet’s mentor, Ben Graham, said “Investing is most intelligent when done most business-like.”  In other words, even though stocks don’t necessarily pay out their earnings to shareholders, they are real businesses that make real profits, and grow in equity.  Even though the market loses sight of what’s actually being bought and sold, it does eventually get a reality check.  The market corrects itself periodically.  Bubbles bust, and crashes recover. Businesses that run off on tangents tend to revert back to the price being close to the actual value of the stock.

 

Of course, the only investors that can take advantage are the ones who actually understand the businesses.  How much are their sales growing?  Their net profits? Their Equity? Their Cash?  Is their debt under control?  What is the likelihood that the competitive advantage be maintained in the marketplace?  These are all questions a value investor seeks to answer.  In doing so they form an idea of what the intrinsic value of a stock is, and wait until it’s on sale.

 

Do it like Real Estate Investors….

Everyone knows at least something about real estate.  When you’re interested in buying a house, you put in offer in writing, and form a contract.  Once the contract is made, it is binding until the final closing day.

 

But with stocks, most people don’t use any sort contract.  They just buy at or close to the fair market value at any given time.  But for someone who uses options, you can put in an offer just like you do with Real Estate.

 

Think of it this way.  Let’s say you find a stock that you really like.  But you know that you don’t want to buy it for more than $100.00.  If the price is at $110.00, you will be forced to hope and wait that until it drops at or below $100.00.  But since some investors are always worried about their investment tanking, they want to have standing offers so they can get out at a fixed price. In fact, they pay a small premium for those offers in order to limit their potential downside.

 

So here is what you can do as the investor who wants the right stock at the right price.  You can sell a contract to the holder of the stock (A Put Option).  Let’s say that your offer stands for 30 days, and you’re willing to buy the stock at $100.00.  The holder of the stock will pay you $1.00 for your offer to stand for 30 days.

 

In other words, you will get paid $1.00 to buy the stock for $100.00 if it drops that low.  If it does drop to that price, congratulations! You just got paid $1.00 to buy the stock $10.00 cheaper than it was.  If it doesn’t drop, you keep the $1.00, and you can sell another contract for another premium paid.  Many investors just keep selling these offers until and receive cash flow until they finally get the stock they want.

 

Turn your stock into a rental property….

Great! So now you took 5% or even 10% off of your cost to acquire your stock.  That’s the power of contracts.  But it gets better.  Let’s say you hold that stock and it rises in value.  You find that the stock is now overpriced based on its fundamentals.  You could just sell it, and make a profit.  There’s nothing wrong that.

 

But maybe you want to hold on to the stock.  Maybe you think that it’s going to perform well over the long run.  So what you can do is start selling Call options.  A put option is you selling your offer to buy a stock at a fixed price.  A call option is you selling an offer to sell your stock at a set price.

 

So in our example you bought the stock at $100.00 and it rose to $115.00.  Rather than selling at $115.00, you can sell your offer to sell your stock at $118.00.  Investors will pay for these options because they want to own a stock that’s going up.  So they pay you $1.00 to sell at $118.00.  If the stock does rise and you made even more money than you would have at $115.00.  If it doesn’t reach $118.00, you keep the $1.00, and you sell another contract more cash flow.

 

Heads I Win, Tails You Lose

Some investors greatly increase their ROI simply by getting cash flow as they enter and exit a stock.  They can follow a stock getting paid to buy low, and then paid more to sell high, and repeating this process.  And there really isn’t much of a difference between this practice, and simply making good deals in other areas of business.  That’s the real essence of contracts.  Make sure you get what you want at the price that you want.

 

If you are interested in learning more about how to use this strategy, and other winning strategies subscribe for our free curriculum.

About The Author

herbertkoehler

I am a college drop out who found my passion as an investor. I love the many facets of finance, investing, and business. But even more than that, I love sharing what I learn with others.

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