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Are you thinking about joining Motley Fool Options?
On its website, it states that members of Motley Fool Options could significantly increase their returns (i.e. 100% or even 200%) on their favourite long-term stocks while limiting downside risks using Motley Fool Options strategy.
And their options trades have a win rate of 86%.
Is it too good to be true?
Also, is investing using options too risky and complex for beginner investors?
In this in-depth review, I will help you answer all these questions and make an informed decision.
How To Use Motley Fool Options Service
There are two main ways to use Motley Fool Options service:
- Magnify your investment returns
- Generate monthly income
Magnify Investment Returns Using LEAPS
So, how exactly does Motley Fool Options service help you significantly increase your returns on your investment?
Before we go into details, let’s first look at how you invest in stock market the normal way.
Normally, if you want to invest in good long term stocks (such as the stocks recommended by Stock Advisor), you need to buy the shares with 100% cash.
Let’s say that you want to invest in 100 shares of DocuSign at the current price of $265/share on 12th Nov, 2021.
If you buy these 100 shares outright, your upfront investment is $26,500.
That’s a lot of money.
Now, what if you could “own” these 100 shares for just $15,000 while getting significantly higher returns?
With Motley Fool Options strategy, you could do this.
Does it sound too good to be true?
What’s the catch here?
Let’s take a closer look at Motley Fool options strategy called ” LEAPS”.
“Long-term equity anticipation securities (LEAPS) are publicly traded options contracts with expiration dates that are longer than one year, and typically up to three years from issue.”
This options contracts are “Call Options” that give you the right to buy 100 shares of the underlying stocks at a future date.
These “Call Options” are deep in the money options with at least one year until its expiration date.
“Deep in the money” means the call option strike price is significantly below the current share price.
Why is it in the money?
Because the option contract gives you the right to buy the share way below the current price.
Let’s look at this DocuSign Call Option with a strike price of $125 and expiration date of Jan 19, 2024.
With current share price at $265, this option contract gives you the right to buy 100 shares of DocuSign at $125 until Jan 19, 2024 which is more than 2 years from now.
With deep in the money call options, the delta of these options are close to 100% which means that the option price will increase close to 1% for every 1% increase in the underlying share price.
On the other hand, for at the money call options (meaning the strike price is very close to the current stock price, the delta of the at the money call options is close to 50%.
That means for every 1% increase in the underlying share price, the option price will go up by close to 50% only.
So, with deep in the money call options, you can participate in the upside of the underlying share price to maximum.
Essentially, what this means is that you only need to use $15,000 to participate in the same upside through LEAPS as buying 100 shares right now upfront with $26,500.
Let’s assume that DocuSign share price doubles to $530 before Jan 19, 2024.
If you had bought 100 shares upfront with $26,500, your investment would gain $26,5000 and would be worth $53,000. (i.e. 100% return on investment)
Now, what if you bought the LEAPS instead, your $15,000 investment would also gain $26,500 and would be worth $41,500. (i.e. 176% return on investment)
So, you can see that you could use LEAPS to increase your investment returns on your favourite long term stocks.
Now, what if the share price drops?
What would happen to your LEAPS?
Let’s use the same example as above except the share price of DocuSign drops by 50% to $132.5 before Jan 19, 2024.
If you had bought 100 shares upfront with $26,500, your investment would lose 50% and would be worth $13,250. (i.e. -50% return on your investment)
Now, what if you bought the LEAPS instead, your $15,000 investment would actually lose less than $13,250 because there is extrinsic value in the LEAPS that could cushion your loss a bit.
To summarise, buying LEAPS would allow you to use significantly less capital to generate greater returns when the underlying share price goes up, compared with buying the shares with 100% cash upfront.
When the underlying share price goes down, buying LEAPS would have smaller loss compared with buying the shares with 100% cash upfront.
Still too good to be true?
Okay, here’s the risk.
There is an expiration date on your LEAPS, whereas you have no expiration date to worry about if you are holding the shares.
So, what can you do when your LEAPS is approaching expiration date?
Let’s use the same example as above.
Assuming it’s 30 days until expiration date Jan 19, 2024, DocuSign share price is down 50% to $132.5.
If you had bought shares with 100% cash, you would be looking at an unrealised loss of $13,250.
If you are still bullish on this stock, you would likely continue to hold the share.
With LEAPS, you would be looking at an unrealised loss of close to $12,000 because there is still intrinsic value as well as extrinsic value.
So, what you could do is to ROLL your LEAPS out to a much later expiration date to wait for the share price to recover.
This is just like selling your shares to realise the loss and then immediately buy back at the current market price.
Essentially, you are sort of “resetting” your position.
Generate Monthly Income By Selling Options
Another way to benefit from Motley Fool Options service is that it shows you how to sell options and generate income.
Let’s say that you want to buy DocuSign shares, but you feel that the current market price is too high at $263.
What you can do is that you can sell put options on DocuSign.
If I ask you, would you be more willing to buy DocuSign shares at $230 or even $210?
Your answer would mostly likely be yes because you would be buying the shares at a more than 10% discount of the current price.
What is more, you get paid to wait and buy the shares a discount.
Too good to be true?
Personally, I am a huge fan of selling put options to acquire my favourite shares as well as earning some extra income.
Right now, a DocuSign PUT option with a strike price of $230 and expiration date that is 30 days away is worth $3.73.
When you sell this put options, you will immediately get paid $373.
This option then gives you the right to buy 100 shares of DocuSign at $230 per share 30 days from now.
On the other hand, a DocuSign PUT option with a strike price of $210 and expiration date that is 30 days away is worth $1.49.
So, when you sell this put option, you would get paid $149 immediately and have the right to buy the shares at $210.
You are getting paid less because you have the right to buy the shares at a much lower price.
Now, what is the risk here if you are selling the put option with $230 strike price?
If the share price never comes down and keeps going up, the risk is that you miss the upside but you still get to keep the premium for selling the put options.
What if the share price goes down but never reaches your strike price $230, your put option will expire worthless and you still get to keep the premium for selling put options.
So, what happens here is that you are getting paid to wait for the stock price to drop.
Hmm, what if the share price falls below your strike price to $200 or even lower $100 in the next 30 days?
First of all, it’s extremely unlikely for share price to fall more than 20% or 50% in such a short time, especially the underlying company has very solid fundamentals and are very profitable.
But if this extremely low probability event does happen, you would have to buy 100 shares of DocuSign at $230 even when the current share price is at $200 or $100.
So, there is the risk of selling put options.
The way to mitigate your risk is to ONLY sell put options on good stocks that you don’t mind to hold for the long term.
Motley Fool Options Picks
Now, let’s take a look at some of Motley Fool Options picks and how they have performed.
In April 2020, PayPal stock was trading at $110.55.
Motley Fool Options team made a recommendation to buy “deep in the money” LEAPS at a strike price of $75 with an expiration date of January 2022.
So, what happened to this trade?
PayPal went up roughly 150% from $110.55 to $275 in less than a year since the trade recommendation.
Initially, the LEAPS cost $4,289.
In less than a year, it was worth $20,923.
That’s almost 400% return on your original investment.
That’s much higher return and lower capital than if you had bought the shares with full cash up front.
Here are a few other examples of Motley Fool Options picks:
- A 2014 trade on Facebook LEAPS netted an 88% return on just a 46% market move – nearly 2X the return you would have had from just buying shares outright.
- A 25% gain in Ferrari stock netted a 70% return on LEAPS, nearly 3X the return you would have had from just buying shares outright
- A 45% gain in Disney stock netted a 188% on LEAPS, nearly 5X the return you would have had from just buying shares outright
As you can see now, LEAPS is a powerful yet little known way to help you have more upside, more time and less money at risk.
Now, let’s look at one of their most popular income generation strategies – Selling Put Options.
As you can see from the example below, they were able to generate decent extra income from just selling put options on Shopify which is a stock that they want to buy at a cheaper price.
In just a single year, they were able to generate over $3,200 just by doing the same thing 7 times.
Personally, I think selling put option is one of the most powerful strategies that has been kept from the general investing community.
Because there is this misconception that options are very risky.
Yes, it’s very risky if you don’t know what you are doing and what the risks are involved.
As an investor, I consider myself quite risk averse.
But, when I first learned about options, I wish I had known about these strategies a long time ago because I would have increased my investment returns by so much.
As I am quite conservative when it comes to options, I only sell put options, covered call options as well as buy LEAPS.
And I only use these option strategies on fundamentally strong companies that I want to own for the long term.
So, if you are thinking about exploring the world of options, I highly recommend to learn more and practise it on demo account to see how it works and how to do it properly.
What Motley Fool Options Service Include
So, exactly what do you get from Motley Fool Options Service?
First of all, you get all the top options trades each month emailed straight to your inbox.
Each option trade alert walks you through their thought process for the trade, identifying appropriate pricing and what they think about the stock – the business – underlying the trade.
Inside each trade recommendation, they also outline the risks, possible rewards, and intelligence behind the trade.
Some of these option trade recommendations are mainly for income generation while other option trade recommendations are meant to help you increase your investment returns on the underlying stocks.
If you are new to options, you don’t have to worry because you also get complete instructions on how to place the trade.
There are also tons of options education resources where you dive right into their easy-to-understand guides on options strategies.
You also get access to ALL its past option trade recommendation and performance as well as their research reports.
So, you can learn from their winning trades as well as their mistakes.
Best of all, they understand that each investor has unique needs and risk tolerance, so they offer lots of alternatives.
For example, they would tell you how you can lower your risk or reduce your upfront investment if you want to follow their option trade recommendation.
Who Is Motley Fool Options Service For
To be clear, Motley Fool Options service is NOT for options traders who are looking to frequently buy and sell options for short term profits.
Rather, it’s for investors who are looking to use options as a tool to increase their investment returns on stocks that they want to hold for long term.
Personally, I have been selling put options on my favourite long term stock holdings for a long time.
For me, it’s more of a way to further reduce my cost basis of my stocks rather than generate income.
As for LEAPS, I am also using this option strategy on some of my favourite growth stocks to free up more of my capital and at the same time increase my returns.
But, I don’t use LEAPS on my dividend stocks because I still want to earn dividends from them.
That’s why I highly recommend Motley Fool Options if you are a long term investor.
Because it’s really a great (but little known) way to help you exponentially grow your investment portfolio without increasing your risk.
Motley Fool Options Service Cost
So, how much does Motley Fool Options service cost?
Its annual subscription is usually priced at $999/year, but right now you could get a one-time special discount of $100 through this link.
Is it worth it to pay $899 for their option trade alerts?
$899/year is effectively about $75 per month.
Selling put options could easily help you cover $75/month.
Recently I sold one put option contract on BABA, I got paid a few hundred dollars upfront.
If you own stocks and sell covered calls while the market is moving sideways, the premiums you get from selling covered calls could easily more than cover the cost of Motley Fool Options.
Also, there’s a 30-day satisfaction guarantee!
If by any chance you don’t feel that Motley Fool Options is a good fit, you could transfer your entire membership fee as credit to another Motley Fool portfolio service such as Stock Advisor and Rule Breakers.