Trading School Beginner Level

Finally individual investors can receive education in the art of selling options.

Lesson 8: Generating Monthly, Passive Cash Flow Income

If you just got here, you should start at Lesson 1.

In this lesson I will give you examples of trades that have the potential to make 10% in a month. You can either leave your gains in the account and let it grow, or withdraw it to live on. I like the monthly income

In previous lessons I already walked you through a real life Iron Condor trade that we did. Let's look at some others.

On November 11, 2008, SDS closed at 95.59. SDS has been trading in a range and is coming back from the bottom of the range. The closing price for the November 95 Call was $7.3. This option has ten days to expiration.

A covered call would work like this: We feel this ETF will continue to go up. So we buy 100 shares at $95.59 and sell 1, 95 Call at $7.3. If SDS is above 95 on expiration day, our option will be exercised and we will have to give away our 100 shares. But we will have a profit of $671.

100 shares at 95.59 = debit of $9559
option sold = credit of $730
100 shares sold at 95 = credit of $9500

9559-730-9500= profit of $671 in 10 days.

671 divided by 9559 = 7% return in 10 days.

We also do other types of trades such as butterflies, calendars, and credit spreads. Which strategy I choose depends on market conditions. When volatility is very high, it's great to do covered calls because you get more money for the calls. When volatility is medium we can do well with condors and butterflies. When volatility is in the low range I look at calendars for nice profits.

The Iron Condor is a staple though. This is a strategy we put on every month. That's the best way to trade it. Every month, around a certain amount of days to expiration, we put on the trade and watch it. It's one strategy for monthly income. Most months we win without any adjustments. Some months we have to make adjustments or else I just decide to get out with a small lose.

October 2008 was a wild time. Never before has volatility in the markets been so high. It was a dangerous time for all traders and it was a month that our strategies would not have worked very well because the market was moving too much. The DOW was up 500 points one day, down 900 points the next day. And so in October, we were lucky enough to stay out of the market. The market did not act "normal" in September and I decided to stay out in October.

How did I know? Well I watch the markets everyday. I stay on top of my trades. I talk to other professional traders and we share notes and thoughts on a regular basis. After you have been doing these trades for a while, you get a "feel" for the market. You know when something is not right. It's like driving your car. When you hear a new noise or the steering wheel doesn't respond they way it should, you know. So you stop the car to see what's wrong or you take it to the shop. In this game, we just stay out of the market until things gets better.

The good part is, things usually settle down in a few days. But in October things never settled down. But I want to make something clear. October was very, very different. It was something option traders and all traders for that matter, had never seen before. October was not a normal occurrence.

Monthly Income

My style of trading is not for people who want to hit a grand slam and make a million dollars overnight. It's not for people who want to sit at the screen all day. It's not for those of you who are addicted to action. You won't have any stock picks to give away at parties. If you have to make trades everyday, this is not for you.

The trades we do are designed to make a steady, consistent income. We want a few percentage points a month. At the end of the year our results are impressive, but look at any one month and they are not so flashy.

Some people ask me, if my system is so great, why don't people like Warren Buffet do these trades. Actually, he does. It is known that Warren is a seller of puts. But he does it for a different reason, and in a different way. He chooses a company that he wants to buy more stock in. Then he decides on a price he would like to get in at. If there are Puts at that price, he will sell those Puts and get a credit.

If the stock price stays above his strike price, his options expire and he keeps the credit. Then sells more Puts. If the stock price drops to his strike price or lower, he buys the stock at that price - which is what he wanted to do anyway. Plus, he keeps the credit giving him a discount on the stock.

The reason Warren and his billionaire friends do not use our strategies is because they have too much money. If they tried to do our trades using a million dollars at once, they would mess up the trade. They would not get the right price from the market to make it worthwhile. They could do the trade with a couple hundred thousand. But 10% on 200,000 is only 20,000. And to someone with billions to invest, that is just not worth the time.

This is also the reason I limit memberships to my site. I don't want too many people doing the same trades or else it will mess it up for everyone, including me. That's why I don't just offer one trade a month, I try to offer 3 to 5. If a trade is too "crowded", you can wait a day or two to put it on, or you can just wait for the next trade.

You don't have to do every trade I release.

By limiting the number of subscribers and by choosing liquid trades I make sure that everyone who wants to put on the trade can.

In our next lesson I will show you why what we do is relatively new and why many people don't know about it.

Let's Go to Lesson 9