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Today, I want to share with you how you too can sell options for monthly income safely and simply.

First, what are options?

“An option is a contract agreement which gives the buyer the right to buy or sell stocks at an agreed-upon price. We call this agreed price Strike price.”

For simplicity, we are only talking about options on stocks here.

There are two types of options:

• Call option – it gives the option buyer the right to buy the stock at Strike price.
• Put option – it gives the option buyer the right to sell the stock at Strike price.

When you sell options, the options buyer pay you money(i.e. premiums).

As options seller, your responsibility is to buy/sell the stock at the agreed price(i.e. strike price) when the option is exercised by the option buyer.

Let me give you an analogy to help you understand better.

I assume that you buy travel insurance from insurance companies whenever you go overseas.

When you buy travel insurance every time before you fly, you pay premiums to the insurance company in exchange for protection.

In this case, the insurance company collects money from you upfront.

If nothing happens by the time you return, the insurance company gets to keep the money for free.

But, if something happens during your trip, the insurance company will give you the payout based on the insurance contract.

As option sellers, you are like the insurance company, selling protection to options buyers and collecting premiums upfront.

Is the insurance business a good business?

Yes, of course.

First, it gets consistent cash flow month after month.

Secondly, most of the time it gets to keep the money for free.

But, when something terrible does happen, the insurance company has to give you a large payout based on the signed contract.

So, that is the risk the insurance company is taking.

Similarly, there’s risk in selling options.

In fact, it’s very risky if you don’t know what you are doing, just like all other investments such as stocks, Forex or Futures.

But, the key difference between people who make money and those who don’t is that they know how to manage their risk.

If anyone tells you that their strategy is guaranteed to make you money 100% of the time, they are definitely NOT telling the truth.

Not a single strategy out there does that.

There will always be winning trades as well as losing trades.

But, as long as your total winnings exceed your losses, you are profitable overall.

That is what the insurance company does as well.

It ensures its profitability by managing its downside risks.

Now, I am going to show you how you can build your very own “insurance company” while managing your downside risks.

Here’s how you can do it.

First of all, you find Good Stocks to sell options on.

The key here is picking good stocks.

What are good stocks?

Do you think Apple is a good stock?

How about Coca Cola?

What about Kraft Heinz?

Even if you don’t know anything about fundamental analysis, you would still know that these companies are great companies that have been doing well for many many years.

Now, let say that Kraft Heinz is now trading at $78. And this price is a good price from a valuation point of view.

Would you mind owning a small part of this great business if you think this is a great company for the long term?

Chances are that you won’t mind.

So, what if I tell you that you can buy this stock at a discounted price?

That means buying the stock for much less than the current price $78.

My guess is that you would be more willing to buy at a lower price.

Everyone likes a good deal.

Myself included.

Selling PUT options does exactly that.

How does PUT option work?

When you sell a put option, you are agreeing to buy a stock at an agreed price (i.e. strike price) at a later date.

One option contract gives the PUT option buyer the right to sell 100 shares at strike price when the contract expires.

For example, you are selling one PUT option contract on Kraft Heinz with a strike price of $75 and expiration date that is one month from now.

That means you agree to buy 100 shares of Kraft Heinz at $75 one month from now, regardless whether the market price at that time will be higher or lower than $75.

Let say, the premium quoted for this PUT option is $0.30.

If you sell 10 option contracts, you will collect $300 as premiums upfront.

Here’s the simple calculation:

$0.30 x 100(shares) x 10(contracts) = $300

There are two different scenarios that will happen.

Scenario 1: Stock price is above the strike price of $75 at expiration

If the option is never exercised, you get to keep $300 in your pocket for free.

In the case that the PUT options are never exercised by the expiration date, you’ll sell PUT options to collect premiums again and again.

Our main objective is to get monthly cash flow from selling options instead of acquiring the underlying stocks.

Why?

When you buy a stock, you make money when you sell it at a higher price.

But, sometimes it might take a long time for the stock to reach your profit target.

Or you might be waiting for the price to come down a bit more before you decide to invest your money in the stock.

In the meantime, you just wait and get nothing out of it.

Your precious time is wasted.

And what if the stock price just keep going up before you manage to get in at a lower price?

You will miss on the big move and the profits it brings with it.

But, everything changes when you become an option seller.

You get paid upfront every month from selling options while waiting to buy a great stock at a discounted price.

Even if you don’t get to buy the stock, you still get the cash flow every month from your option premiums.

The only downside is that you will miss out on the profits if the stock price goes up substantially. But, no one can predict when and how much higher the stock can go. It could well start making the big move after many months or years.

Scenario 2: Stock price is below the strike price of $75 at expiration

If the stock price falls below $75, the options will be exercised.

In the case that the option gets exercised, you will buy these shares at $75.

So, what do you know next?

You sell covered CALL options to help you get out of the stock at your break-even price or better price for a profit.

If your CALL options are not exercised, you get paid to wait for the stock price to go back up while bringing down the cost price.

It’s a known fact that stock market will be going up over the long term.

Along the way, there will be market crashes.

But, it’s only temporary.

The stocks have always managed to bounce back and make new highs.

The recent 2008 market crash was a perfect example.

Even after the worse recession, the Great Depression, the stock market again bounced back and continue to go higher and higher.

So, it is just a matter of time that the stock will come back up again if you are investing in a good company.

 

There are literally thousands of stocks trading on the stock exchange. So, what stocks should you buy? How do you pick the right stocks? Because having a sound stock picking strategy is key to your investment success.

High Risk High Return

Most of us think that if we want high return, we have to be willing to take high risk.

For example, penny stocks is a typical high risk high reward investment. Its daily price fluctuation is much higher than other stocks.

So, it’s possible for you to turn your $10,000 investment into $15,000 in one single day.

But, it’s equally possible for you to lose and be down to $5,000 from your original $10,000 investment just as fast.

To me, this is no different from gambling.

And it’s probably the fastest way for you to lose ALL your money.

Why?

Penny stocks are dying companies.

So, the chances for price appreciation over time are close to zero.

Next, you are playing against professional traders who make a living manipulating these penny stocks.

For them to make money, they’ll trick you into buying high and selling low.

They have more capital. More experience. More information.

Almost all the odds are against you.

So, it’s best for you to stay away from penny stocks.

Low Risk High Return

But, wouldn’t it be ideal if you can get high return but with a low risk?

Here’s how.

You can buy undervalued stocks using value investing strategy.

Why is this low risk and high return?

Because value investing is all about minimizing risk and maximizing return.

As value investors, they only buy good businesses at a significant discount to their intrinsic value.

This is what they call Margin of Safety.

Margin of Safety = Intrinsic Value – Market Price

Investing with a margin of safety lowers the downside risk and also boosts the potential return.

Generally, the higher the margin of safety, the better the investment is.

For example, if you estimate that the true value of Business XYZ is $10 per share. Now, the market price is $10 per share.

If you are an value investor, you might want to wait for the share price to drop to $8 per share or even $6 per share before you click “buy”.

The person who bought it at $6 would definitely have a lower risk and higher return than the person who bought it at $8.

However, there are two things that you will never know for sure:

• You cannot predict the future (e.g. the future stock price movement)

The stock price could go up or down. Also, it could stay at an elevated level or at a depressed level for prolonged period of time.

With that being said, the stock price of business XYZ could go even lower than $6 or it could bounce back and continue to go up and above $10.

• You cannot determine the intrinsic value of any business with 100% accuracy

There is no valuation method that can give you an accurate valuation of any business. Your valuation is only as good as your assumptions made.

That means your estimated valuation could be too high or too low.

If it is too high, you are running the risk of buying the stock at a worse price.

Because of this, the best you can do is to lower your risk when it comes to investing your money in the stock market.

How do you do that?

• Be conservative with our valuation for any business
• Adopt a higher margin of safety
• Invest with appropriate position sizing
• Diversify your portfolio

Now, you have a much better idea about how to invest in the stock market for high return at a low risk.

How To Pick Good Stocks

Next, we will look at how to pick individual stocks.

For value investors, they only buy good businesses at a sensible price.

So, what constitutes a good business in the value investor’s eyes?

To determine whether or not it’s a good business, we ask ourselves these three questions:

• What is its past performance like?
• How is the business doing currently?
• How will the business be doing in the next 5 years or 10 years?

To assess whether or not a business is doing well, the first thing you should look at is their financial numbers.

So, what are the financial numbers we should care about?

If you have started business before, you will know that these three basic formulas are the most important ones to any business.

1. Profit = Revenue – Cost
2. Net Cash Flow = Cash Inflows – Cash Outflows
3. Equity = Assets – Liabilities

For a business to survive, it has to earn a net profit and generate a net positive cash flow.

If not, it will have problems paying its employees and other expenses and continue its business operations.

So, to tell whether a business is doing well, we first look at the following:

• Revenue
• Cost
• Net Profit
• Net cash flow

Generally, you will need to examine these numbers for the past five years at least.

Has there been consistent growth in its revenue and net profit?

Was it able to produce positive cash flow year after year?

Next, you need to assess its financial position.

Does it have an above industry average debt to equity ratio?

If yes, it means it’s taking too much loan.

Businesses which are highly leveraged are exposed to more risks.

For example, if the interest rate keeps going up, it’ll incur increasing interest expenses and might lead to cash flow problems if its business performance deteriorates.

As value investors, we like to see

• Stable earnings and net profits that are growing steadily over the years
• Strong positive cash flow from operations
• A healthy financial position

Why?

It tells us that it has done well in the past and it’s doing well currently.

Next, we need to find out whether it will continue to do well over the long run.

For a business to sustain and grow for the next 10, 20 years, it needs to have its competitive advantage.

Warren Buffett coined this term “Economic Moats” to refer to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits from competing firms.

According to Morningstar, there are 5 types of economic moats:

• Intangible Asset
• Cost Advantage
• Network Effect
• High Switching Cost
• Efficient Scale

So, does the company have economic moat?

If yes, then it’s worth a closer look and could be a potential candidate for our stock shopping list.

In summary, the right way to pick stocks that give you high return with low risk is to buy good businesses at significant discount to its true value.

Personally, I love income investing strategies that can generate stable income for me. What I love even more is income investing strategies that can produce income on a monthly basis.

Why?

Most of my bills need to be paid every month.

Phone bill. Utilities bill. Cable bill…

Most of you already know that I quit my job and kissed goodbye to my monthly paycheck a couple of years ago.

So, I had to create new income streams to cover my monthly living expenses and pay all my bills.

Ideally, it could generate consistent monthly income.

Investing was such an income stream.

What Is Income Investing?

Income investing refer to a method of investing that aims to generate cash flow from your investments such as stocks, bonds and real estate.

Common Income Investing Strategy

Let’s first look at some of the common income investing strategies.

Dividend Stocks

Investing in dividend stocks is a very popular investing strategy. The underlying company usually has a long history of paying out consistent dividends.

Depending on the dividend policy of the underlying companies, these companies generally pay out dividends once or twice a year.

However, it’s not guaranteed that dividends will be paid out every year. The underlying company can decide when and how much to pay.

Bonds

When you buy bonds, you are essentially making a loan to the bond issuer.

Depending on the terms of the bonds issued, you might get an interest payment semiannually or annually.

But, the minimum investment amount for bonds is generally quite large. So, it’s not realistic for retail investors to invest in bonds.

Having said that, there is another way for you to invest in bonds with less capital.

Bond funds.

The good thing about bond mutual funds or ETFs is that they produce a monthly income.

Rental Property

Rental property is another popular income investing strategy.

How it works is very simple.

You buy a rental property, lease it out and collect rental every month.

As we are looking for decent monthly investment income, buying a rental property using a mortgage loan does not really help us achieve our goal.

Yes, it’s possible for you to find a rental property that generates positive cash flow every month even after mortgage payments.

You might think that your cash flow would double, triple, quadruple or n-tuple if you could find more deals like this.

No doubt that’s a smart idea.

But, the risk you are taking with multiple rental properties will increase substantially in a rising interest rate environment.

When your mortgage payment exceeds your rental income, your positive cash flow would turn into negative cash flow.

And we are not yet even talking about the possibility that the value of the properties could go down.

So, rental income is nice if you have the cash to pay for the rental property in full.

REITS

Real estate investment trust is a good alternative to rental property.

REITs, a real estate investment trust (REIT), is a company that owns, and in most cases operates, income-producing real estate.

Many REITs are publicly listed on exchanged where you can buy and sell easily, just like stocks.

Legally, REITs are required to maintain a payout ratio of at least 90%. Many have dividend yield that is in excess of 10%.

Here are some advantages for investing in REITs for income:

First, it’s a much more liquid investment if you compare it to buying the actual property. Also, it’s not as capital intensive.

Second, it gives you exposure to different types of commercial real estate such as shopping malls, hospitals and offices.

Third, you get dividend payouts on a quarterly basis.

My Income Investing Strategy

But, here’s the problem.

Although fully paid-up rental property with monthly rental income would be the most ideal, I don’t have so much capital to proceed.

Other income investing strategies such as dividend stock investing, bond investing and REITs investing don’t promise a consistent monthly income.

My search for monthly investing income led to this – Cashflow Investing Strategy.

How this works is that we sell PUT options on high quality and attractively valued stocks to generate consistent monthly income at NO ADDITIONAL RISK. (I will explain this later on)

So first, what are options?

“An option is a contract agreement which gives the buyer the right to buy or sell a financial asset at an agreed-upon price. We call this agreed price Strike price.”

There are two types of options:

• Call option – it gives the option holder the right to buy at Strike price.
• Put option – it gives the option holder the right to sell at Strike price.

In our Cashflow Investing Strategy, we are ALWAYS options sellers.

When we sell options, we collect PREMIUM from the option buyer upfront. 

Premium is the amount of money that the options buyer has to pay to purchase the option. Premium is usually a small percentage of the stock price.

Are Options Very Risky ?

To many people, they feel that trading options is very risky and difficult.

But, did you know that Warren Buffett, a conservative investor, sold PUT options to boost his investment returns?

Yes, he also uses options.

Options are just a tool that he uses to buy the stock he wants at the price he wants.

Let me give you an analogy.

For example, we want to go from point A to point B.

There are a lot of ways we can do it.

We can take bus.

We can ride our bicycle.

We can take a taxi.

Bus, taxi and bicycle are just vehicles that can help us get to where you want to go.

Similarly, options are just a tool that we use to help us buy stocks at our target buy price and sell stocks at our target sell price.

Stock investing by itself is risky, just like all the other types of investments out there.

When you buy a stock, the stock price can go up or down.

It’s possible that the stock price can stay at a depressed level for a prolonged period of time.

Similarly, it could also stay at an elevated level for a long period of time.

As no one can predict where the price will go in the future, what matters most is how you manage your risk.

Now, let say the stock price is $10 and you want to buy the stock at $10 right now.

What you can also do is to sell a PUT option with a strike price of $10. (Let’s leave out option expiration date for simplicity’s sake)

Scenario A: If the stock goes up to $11, you keep the money you make from selling the options without having to put up a lot of money to own the actual stocks at all. 

Scenario B: If the stock price drops to $9, you lose less money as holding the stock itself.

Why?

When the stock price goes down to $9, you are obligated to buy the stock at $10.

But, the premiums you earned from selling PUT options can be used to reduce your cost price.

That’s why it’s always better to sell PUT options at NO ADDITIONAL RISK or even less risk.

The only downside is that you will not enjoy the potential upside if the stock price suddenly shoots up substantially within a short period of time. But, the probability of such things happening is generally quite low.

How Cashflow Investing Strategy Works

For our strategy, we incorporate the principles of value investing in selecting the stocks we want to sell options on.

We all know that value investing is all about buying good businesses for less than its intrinsic value.

And it’s a proven high return and low risk investment strategy.

First, we use value investing principles to find high quality stocks at attractively valued price.

Next, we want to make sure that the stock price has a low possibility of going down or going down by much in the near term, from a technical analysis point of view.

Then, we will start selling PUT options in the short term at a strike price that is near the market price.

Now, there are two things that might happen:

Possibility #1: Options expire worthless.

Options will expire worthless if the stock price stays above the strike price at expiration date.

This is the scenario that we like the most. When options expire worthless, we get to keep the premiums for free.

If the stock price still stays near and above the strike price, we can continue to sell PUT options to get paid month after month.

But, if the stock price goes up by a lot, we will move on to our next target to sell PUT options on.

Possibility #2: Options are exercised.

Options will be exercised if the stock price goes below the strike price at expiration date.

So, what happens when the options get exercised?

You have to buy the stocks at the strike price.

What you do next is to start selling CALL options on your stock holdings to help yourself get out of your position at a profit or at break-even price.

By repeating this process over and over again, we should be able to create a steady pay cheque for ourselves month after month safely and simply.

 

So, you are new to investing. Before you look for the best investment strategy, you MUST do this one thing first.

Get Your Mindset Right 

You have some savings that you can use for investment.

I assume that your savings are probably your hard earned money.

Why do I say this?

Because I want to remind you that it was not easy for you to save up so much money.

Perhaps it’s long hours in the office.

Or maybe it’s dealing with hard to please clients.

What is more?

You could have chosen to spurge all the money on yourself instead of saving it up.

Think about why you made the choice to save.

For early retirement?

A bigger house?

Kid’s college tuition?

Financial security?

Emergency?

Be mindful of your why and treat your money with more care.

Why do I say this?

This is because investing comes with risk.

But, too many people only look at the upside and ignore the downside risk.

That’s NOT the mindset you want to adopt when you start your investing journey.

Just image what you would do if you are asked to bet your entire savings on a fair coin toss.

It’s a double or nothing.

Would you do it?

Of course, you wouldn’t.

Then, would you be willing to risk 30% of your savings to make an equivalent gain?

Maybe not.

Why?

Because losing a substantial amount of money could affect your standard of living. On the other hand, a comparable gain would not improve your life by as much.

In other words, you might feel the risk is not justified by the return.

So, why would you do it differently when it comes to investing?

Risk of Ruin

Below is the table of the risk of ruin.

You can see that the more you lose, the harder it gets to recover your loss.

In fact, when you lose 50% of your capital, you will have to make a 100% gain to make back your lost capital.

Warren Buffett famously said,

“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No.1”

So, don’t get lost in pursuit of high return in the short term when you should focus on consistent returns for the long term. 

Because the effects of compounding even moderate returns over many years are extremely powerful.

You can see it from the table below. An initial investment of $10,000 will grow to over 2 million over 30 years at an annual rate of growth of 20%.

Best Investment Strategies For Beginner

Invest in index ETF 

An ETF is an exchanged traded fund.

You can buy and sell ETF shares just the same way as stocks.

An index ETF follows a specific benchmark index closely. For example, S&P 500 index ETF aims to track the performance of S&P 500.

Here are some reasons why buying index ETF is a good investment strategy for beginner investors:

• It’s passive
• Majority of active fund managers cannot beat the market
• It doesn’t require you to study how to select good stocks 

Value investing

Value investing is an investment strategy where you buy good businesses at a discount to their intrinsic value. In other words, you will be looking for undervalued stocks to buy.

Warren Buffett has used value investing strategy to help him make billions of dollars over the span of 60 years.

So, this strategy is proven to work.

Often, we have the misconception that if we want high return, we have to be willing to take high risk. 

This is not true.

Value investing is one of the few strategies that can offer you low risk and high return.

Why is it low risk and high return?

Because value investors invest with margin of safety.

Margin Of Safety = Intrinsic Value – Market Price

The difference between the intrinsic value and the market price is called margin of safety.

What it means is that investors will only buy the stock when the market price is significantly below its intrinsic value. 

A high margin of safety offers more protection and higher returns.

Dividend stock investing

Dividend stock investing strategy is about finding companies that will pay consistent and predictable dividends in the future.  

Companies that have a long history of paying consistent dividends are generally well-established companies.

Examples of such companies are utilities companies and REITS.

The best part about this strategy is that it offers investors both income and capital appreciation. 

Dollar cost averaging strategy

Dollar cost averaging strategy involves buying a fixed dollar amount of an investment on a regular schedule(i.e. monthly), regardless of the share price.

So, when the price is high, you buy fewer shares. 

When the price is low, you buy more shares. 

The best thing about dollar cost averaging strategy is that it helps reduce your risk of huge losses when you invest all your money when the market is at its highest.

No one can predict the future. 

You won’t know whether the market will continue to go up or it will crash soon. 

So, what you can do is to control your risk.

With dollar cost averaging strategy, you don’t have to be worried about buying at the high. 

Why?

Because when the market comes down, you will be buying on its way down to lower your average cost.

In Summary, if you are a complete beginner to investing, the best investment strategies are those that minimize your risk while helping you achieve your investment goals.

A lot of people invest in stock market but only a small percentage of people are considered highly successful. Today, we are going to look at the 7 traits that highly successful stock investors have in common.

A clearly defined investment strategy

Highly successful investors make investments using a clearly defined investment strategy.

A clearly defined investment strategy leaves no room for ambiguity, so they know exactly what investment opportunities they are looking for.

For example, Warren Buffett, one of the most successful investors, is only looking to buy good businesses at a discount to their intrinsic value.

Discipline

A good investment strategy means nothing if you don’t have the discipline to stick to it.

Successful investors understand that very well.

For example, Warren Buffett has been following his value investing strategy for over 60 years.

And what are his results?

Consistent double digit returns over the years.

His value investing strategy has been proven to generate good returns for the long term with limited downside risk.

If he had not followed his own strategy religiously, he would not have achieved such spectacular returns.

Patience

Good investment opportunities don’t come so often.

That’s why you will need to have the patience to wait until the time is right.

Warren Buffet’s quote perfectly illustrates the point:

“I call investing the greatest business in the world … because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”

You don’t have to swing at every pitch. You just sit there and watch pitch after pitch go by and wait for the one right in your sweet spot.

When the right opportunity comes, you jump in and take full advantage of it.

Well-read

Successful investors are always avid readers.

Did you know that Warren Buffett spends almost 80% of his day reading?

Once he was asked about the key to his success, he pointed to he pointed to a stack of nearby books and said,

“Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

Power of compounding

Power of compounding is sometimes said to be the eighth wonder of the world. If used well, it can dramatically increase your long term investment performance.

Successful investors, especially Warren Buffett, understand the true power of compounding and use it well to their advantage.

In fact, this is key to his massive investment success.

To put things in perspective for you, you can take a look at the table below.

With an initial investment of $10,000, you will have more than 14 millions dollars after 40 years if it grows at 20% a year.

How powerful is that! 

Take control of their emotions

Successful investors don’t let their emotions take over and affect their decisions.

In the stock market, a lot of people lose money because of their greed, fear, hope or anger.

To succeed in investing, you have to stay objective when it comes to investment decisions.

Here’s a simple example.

Successful investors know stock price fluctuation in the short term is due to supply and demand. Over the long term, the stock price will come to reflect the true value of the underlying business.

That’s why they can stay put or buy even more when the price drop is not a result of a change in the business fundamentals.

On the other hand, some investors will start to get panicky and sell away their stocks out of fear when market goes against them.

Risk management

Investing comes with risk.

Warren Buffett famously said,

“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”

Why did he say this?

Because he understands how difficult it is to recover your loss.

If you lose 50% of your capital, you will need to achieve a 100% return to make back your loss.

So, successful investors only take calculated risk.

They will only invest if the return can justify the risk they are taking.

However, many people like to chase after quick money and high returns. 

What they don’t know is that there is a reason why the return is abnormally high.

Because the investment is extremely risky.

Take penny stocks for example.

Some people are attracted to penny stocks because of its potentially high returns.

But, the risk they are taking with their money is even higher.

Here’s why.

Penny stocks are generally dying companies. The huge price fluctuation which they see comes mostly from professional traders’ manipulation.

So, they are basically playing a game where they have all the odds against them. This is something a successful investor would never do.

In summary, to be successful in investing, the best way is to learn from people who have achieved the investment success you want and model after them.