Featured Image Source: Alan Ellman (The Blue Collar Investor) Google+ Page
He spoke at the San Francisco MoneyShow, a business conference held in August 2018 for audience members to become better informed and educated investors. His presentation addressed “How to Select the Best Options in Bull and Bear Markets.”
In an interview at the event, Ellman shared suggestions about stock and option trading strategies.
1. What is your best advice for an investor starting out in options trading?
“Take your time developing the skill set essential to successful option trading. It won’t take that long to master the three-required skills: stock selection, option selection and position management.
Consider starting with covered call writing, a low-risk option strategy that is relatively intuitive to retail investors and allowed in our self-directed IRA accounts.”
2. What is your favorite options trading strategy? What are the major risks associated with this strategy and how do you minimize those risks? How would an investor learn more about this strategy?
“Covered call writing: I have been using this as my go-to stock strategy for over two decades. I recommend it because this is the investment approach where I have been able to generate the highest returns and have realized the greatest success.
The covered call trade involves first buying a stock or exchange-traded fund (ETF) and then selling a call option leveraging those shares (1 option contract = 100 shares). Call writers (sellers) are now obligated to sell our shares at a price the option-seller determines (strike price) by a date the seller determines (expiration date). In return for undertaking this obligation, we receive a cash premium, immediately generated into our brokerage account. For example, if we buy 100 shares of XYZ at $48.00 and sell the $50.00 call option for $1.50 (per share), $150.00 per contract (less small trading commissions) will be instantly added to our brokerage cash account.
The major risks are:
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Early exercise: Our shares can be sold prior to contract expiration. This may be important from a tax-perspective if not trading in a sheltered account. Early exercise is extremely rare and usually associated with dividend distributions (ex-dividend dates).
Share appreciation limited by the strike price: In the previous hypothetical, if a share price moved from $48.00 to $52.00, we would only benefit $2.00 in share appreciation, but our maximum return would be realized.
Share-price decline: This is more of a risk in stock ownership which is the first leg of a covered call trade.
These risks can be managed and minimized by mastering the three-required skills: stock selection, option selection and position management (exit strategies).
You can learn to use this strategy on https://www.thebluecollarinvestor.com (my website/huge library of free resources).”
3. What is your current day-to-day role with options? Do you favor option trading over stock trading? Why or why not?
“I trade with 15 – 25 stocks and total 50 – 100 contracts per month (plus a few in my mother’s account). Most of the portfolio setup is accomplished at the beginning of a contract (the week after the third Friday of the month). Management will only take a few minutes a day and much of it can be automated. On or near contract expiration, I will dedicate about an hour for management opportunities. Screening for these stocks will take a few additional hours per month for those not receiving the stock and ETF watch lists provided by The Blue Collar Investor.
I favor covered call writing over stock trading because I generate significantly higher returns. Here’s the reason why: selling call options lowers our cost-basis thereby enhancing the opportunities for successful trades.”
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4. How did you first become involved in options? What was your background that led you to that point?
“I am 100% self-taught. I do hold a Series 65 certification (Investment Advisor Rep) but choose to limit my time to educating retail investors how to become financially independent and CEOs of their own money. Covered call writing caught my eye in the early 1990s when I read an article that the strategy was permitted in self-directed IRAs. I was a dentist for most of my professional career and after publication of my first few books (totaling seven, including a book on put-selling and a general investment book which is required reading at several universities), I have been receiving speaking invitations and that has resulted in traveling all over the United States. I decided to sell my dental practice and devote full-time to investor education. I have held the #1 slot on options on Amazon.com now for 11 years. I have also developed several calculators to assist in elevating returns. These past 11 years have been incredibly rewarding.”
5. Is there anything else you want our readers to know?
“There is no one strategy right for every investor. For those starting with options, I strongly advise starting with covered call writing. It is low-risk, intuitive and can be used in sheltered accounts.
Covered call writing is not a get-rich scheme. It is a strategy that will generate monthly cash flow and beat the market on a consistent basis. In this regard, I use a baseball analogy: you will never hit a grand slam home run, but you will hit singles and doubles all day long.
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The recipe for success: (1) Education, (2) Paper-trade (practice with a hypothetical account), (3) Now you have years and decades to benefit from this great strategy.”
If readers are interested in learning more from Ellman, whose time and responses are greatly appreciated, he can be reached at The Blue Collar Investor.