No, I am not actually writing a guide on options trading for beginners and I don’t profess to be qualified to do it. I am armed with a Graduate Diploma in Financial Management, not new to this financial instrument but I am definitely new to using it to make some real money.
Instead I am sharing my experience here, having attended a course called Options Mastery Programme, that there are good options strategies which can yield an additional monthly income. Options are derivative instruments and the discussion here is for stock as the underlying instrument.
If you are absolutely new to options, here is a great video illustration of the call and put options, what they mean and how they work:
Myths About Options
Let me first dispel some myths about options. Many people will immediately proclaim it is dangerous stuff, that it is very risky to get involved in options. Any investment is risky if you do not know what you are doing, and you can refer to this article when I wrote about Value Investing. So yes, you must properly learn this stuff.
Probably the other common myth is that options are only for the experienced traders, the people who do it full-time. Actually the basic concepts of options are explained in the video and there are only two types of options – calls and puts, and really no big deal.
Yes, there are other terminologies you have to learn, like ATM (at-the-money), ITM (in-the-money), OTM (out-of-the-money), intrinsic value, extrinsic value etc but really this is a new language used just like when you learn a new subject of study like chemistry, physics etc. It takes some effort but not rocket science esoteric stuff, so don’t worry.
The other thing worth pointing out is that though I use the word “trading”, what I am recommending here is definitely not day trading or that sort where you have to glue yourself to the trading terminal all day long.
Options Mastery Programme
So what is actually taught at Options Mastery Programme (OMP) class? Is it all the theoretical stuff of options, the various complex options strategies like Butterfly Spread, Long Straddle, Long Strangle etc.
The basics have to be taught of course as students are from diverse backgrounds but what I like is Mr Ken Teng who blogs here teaches what works in practice. In fact, you walk away with 3 options strategies which he has been using over many years, and proven to benefit himself and his students with good profits.
The OMP Rules
OMP has a systematic framework for you to do your investment. It is almost like a step-by-step blueprint for you to follow. I won’t go into the details but selling put options and collecting premiums every month is one strategy, oversimplified here.
The thing about selling put options though is that you NEVER sell put options on any stocks which you do not wish to own in case the options are exercised. And there are just 2 simple but important rules taught by OMP:
- Do the companies have economic moat? Economic moat refers to whether companies have unique competitive advantages which are sustainable over the long run to ward off competitors which are trying to steal their lunch. Examples of companies with economic moats are Nike (strong brand), Pfizer (patents), Walmart (cost advantage), Facebook (network effect) etc.
- Do the companies have consistent earnings per share (EPS) over a long period of time (like 10 years). Look at Nike EPS and you can see it is consistently having good profits.
Listed above are the two key qualifying criteria and there are additional rules/guidelines to follow for the individual option strategy.
Potential Monthly Income
Since April this year (2016) I have been trying out options from an earlier course and then incorporating the new stuff learned from OMP later. Initially, it was learning, revising, experimenting, making mistakes until I was really appreciating the strategies well beginning early August.
Based on the earnings from August till October MTD, I am happy to report about 3% return every month or USD1,300 per month.
It will take time to build your base investment capital and with every monthly profit, it adds on to your capital. If you have USD100K capital, that translates into roughly USD3K income per month. Set you goal and you can reach financial freedom when this income exceeds your monthly expenses.
I like to quote Warren Buffett:
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1
There is no such thing as foolproof investment with zero risk, and higher return comes with higher risk.
With this in mind, at OMP investment rules are established for each strategy and students are encouraged to do paper trades initially and do back-testing simulation of trades before actual trades are conducted. Portfolio sizing is also taught to ensure good diversifications.
My Personal Take
I believe strongly that we should learn skills outside of our professional training and vocation and to build passive income streams. Achieving financial freedom and time freedom is a great thing but each individual should chart his or her path towards that.
I was initially very skeptical when told monthly return of 2 to 3% or even more is possible given that we are very used to hearing low single-digit return annually for many financial products. And because of this, I took more than 6 months to slowly test out the system to see that it works, with fairly minimum risks, IF you follow the rules!
I currently practice short-term and long-term investment strategies and enjoying some monthly income stream. As the global market is still very volatile, I am cautious but in the longer term I believe OMP is going to be a critical component of my passive income. I am thus very appreciative to Ken and his dedicated team.
If you reside in Singapore, Ken Teng and his team regularly conduct preview workshops to share the syllabus of the course and the takeaways. This is a course which comes highly recommended by me and as always, please leave me comments below or if you would like further information, do email me at email@example.com.