Philosophy Behind The Woodyard Option Report
The evaluation model used by the OptionSelector
results in a list of options that should expire worthless to the buyer (see long
term performance page). Bear in mind that as a subscriber to The
Woodyard Option Report you will only be selling
Most of the time when you talk to someone about options you will here that options are risky.
Yes, there are options that you can buy/sell that are riskier than others but
our strategy for options is conservative and reduces your risk versus buying stocks directly.
To illustrate, here is a hypothetical situation. XYZ Company has an option
listed in The Woodyard Option Report for
$25.00 and the next business day you see that the option can be sold for a fee
of $0.75 and the stock is currently trading at $27.00. Your research indicates
XYZ's fundamentals and technicals are favorable. You could decide to do one of
two things- buy the stock or sell a put option.
Selling The Option
If you sell the put option, you would collect the $0.75 fee per share the next
business day. Using the same assets you employed to conduct this transaction,
you could conduct at least 6 transactions like this in a one-year period. This
would net you $4.50 per share, in this example assuming a fee of $0.75 per share
for each of the 6 transactions (not including transaction fees) over one year.
Buying The Stock Instead
But, if you chose to buy the stock at the current price of $27.00, that stock
would have to increase in price by 16.66% over a year to equal the profit you
would have made simply by selling the put options. Moreover, you would have to
cover the entire cost to purchase the stock. That investment's growth is now
tied solely to the growth of that stock. However, with an option, you are not
obligated to purchase the stock unless the option is exercised. Therefore, the
money that would be used to purchase the stock can remain in your investment
portfolio and can continue to work for you.
What If The Stock Price Falls
Until the price falls below the strike price it is still worthless. But
remember, before you sold the put you did research on the company and determined
that the stock was a good buy at the currently trading price at the time. So if
the stock goes down and the put you sold is exercised then you get the stock at
a better price that you would have if you had bought earlier. This is like
finding the item you wanted at the department store when it was ON SALE. Also,
bear in mind that at any time, the option can be bought back. If the cost to buy
it back is less than the price you sold it for, then you make money and you are
finished with that option. If not, you can sell an option that is further out
that could possibly sell at a higher fee than the option that was just bought
back. Also, if you think the fundamentals and technicals are still favorable you
can let the option be exercised and, if you are correct, and the price goes up
you may make money. Remember, the only options you should sell are those whose
underlying stock you have researched and would consider owning shares of that
company at the price at the time of your research.
The Secret Power Of Options
But perhaps the greatest secret to making money with options is how you can
realize a profit even when stock price drop or remains stagnant. Let's say you
sold a put option in XYZ at the strike price of $25.00. Using the example above,
you collect your $0.75 fee per share the next business day regardless of what
happens to that stock's price. Since the stock is currently trading at $27.00,
you already have a $2.00 per share cushion before that option would be
exercised. And, since you have already collected a $0.75 fee on every share when
you sold the option, the price would have to fall below $24.25 before you would
lose money. However if you purchased the stock, any drop in price is a loss for
you. (The above calculations do not include minimal transaction costs.)
What Do I Need To Trade Options
There are two ways to satisfy the requirement of being able to buy the stock
should the option be exercised. They are:
Cash Backed- the cash needed is in your brokerage account.
Margin Backed- the brokerage account is a margin account and the cash plus the
stock owned is enough so that any shortfall can be borrowed from the broker.
The cash-backed is the most conservative and, depending on your risk tolerance,
this may be the method you use. For those who can tolerate higher risk, margin
backed may be used. A benefit of the margin-backed method is that your cash is
being utilized twice - once for adding stock to your portfolio and the stock is
used for backing up a possible future loan.
at the Right Price!
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