Get Rich with Dividends: A Proven System for Earning Double-Digit Returns

CHAPTER 10

Using Options to Turbocharge Your Returns

For many investors, options are scary. These investors have heard horror stories about people who got burned trading options, or that they’re complicated, or that they’re not for the little guy.

There are complex options strategies, and people do lose money when they speculate (there are also many investors who make money) with options. Most people who lose money trading options do so because they buy options. In a moment, I’m going to show you how to be the seller, the person who is more often on the winning side of the trade.

The strategy that I’m going to show you is simple, carries no risk to your principal (only opportunity risk), and can boost your returns by double digits annually.

First let’s go over definitions of the two kinds of options: puts and calls.

Put: A contract giving the buyer of the option the right, but not the obligation, to sell stock to the seller of the option at a specified price by a specified date.

Call: A contract giving the buyer of the option the right, but not the obligation, to buy stock from the seller of the option at a specified price by a specified date.

Let’s look at an example.

Shares of Microsoft are trading at $26. An investor buys the January $30 call for $1. This means the call buyer has the right (but not the obligation) to demand the shares of Microsoft at $30 from the call seller at any time between now and the third Friday in January. (Options expire on the third Friday of ...