Un Grand Mistake

  • Who will laugh last?
  • No hesitation: it’s the best
  • Getting the basics right
  • Using a call option to generate income
  • Taking the other side of the trade
  • One other thing to consider

Well, we messed that up.

We knew Quebec was French, but we assumed it was French influenced, rather than actually, erm, French.

We assumed every sign would be French in big letters, and English in smaller letters.

Turns out it’s not like that. Business signs, advertising, fast food menus, shop signs, warnings signs, and dangerously (for your editor), road signs are all in French.

If only we’d paid more attention in school.

Thankfully, our rental car sat-nav system speaks English. Saved.

But enough of that drivel. On with the show…


Overnight, the Dow Jones Industrial Average fell 13.01 points, or 0.06%.

The S&P 500 fell 3.88 points, or 0.16%.

In Europe, the Euro Stoxx 50 index closed down 27.99 points, or 0.8%. Meanwhile, the FTSE 100 fell 0.55%, and Germany’s DAX index lost 0.45%.

In Asian markets, Japan’s Nikkei 225 index is down 194.56 points, or 1.01%. China’s CSI 300 is up 0.56%.

In Australia, the S&P/ASX 200 is down 17 points, or 0.29%.

On the commodities markets, West Texas Intermediate crude oil is US$50.23 per barrel. Brent crude is US$53.11 per barrel.

Gold is trading for US$1,257.40 (AU$1,659.72) per troy ounce. Silver is US$18.38 (AU$24.26) per troy ounce.

The Aussie dollar is worth 75.78 US cents.

Who will laugh last?

Canada’s The Globe and Mail newspaper reports:

Tesla Inc. topped analysts’ estimates for first-quarter deliveries as chief executive officer Elon Musk’s company prepares to begin Model 3 production in July.

The maker of electric cars and energy-storage devices shipped just more than 25,000 vehicles in the year’s first three months, Palo Alto, Calif.-based Tesla said Sunday in a statement. The deliveries exceed the average forecast of about 24,200 from three analysts surveyed by Bloomberg, and keeps the auto maker on track toward its projection of 47,000 to 50,000 cars in this year’s first half.

As further evidence of Tesla Inc’s [NASDAQ:TSLA] growth, the company’s market cap is now US$46.7 billion.

As a point of comparison, Ford Motor Company’s [NYSE:F] market cap is US$45.3 billion.

As a further point of comparison, remember that Tesla’s numbers are global sales. That’s just over 25,000 sales worldwide. Ford, on the other hand, has sold 590,219 cars over the same timeframe…just in the United States.

But whatever. The market loved it. The Tesla stock price soared on the results, rising 7.3% to close at US$298.52 per share.

As a result, Tesla CEO, Elon Musk tweeted:

chart image

Source: Twitter


But we still figure the short sellers will have the last laugh on this one. Remember, Tesla is just about managing to produce 25,000 cars per quarter. But again, from the Globe and Mail:

Mr. Musk has said it aims to make 500,000 cars in 2018 – an aggressive goal that hinges on battery-cell production at its factory east of Reno, Nev.

Nice target. We just don’t believe they’ll ever do it.

More than ever, we like Tesla as a short.

No hesitation: it’s the best

In a moment, I’ll pass Port Phillip Insider over to friend and colleague, Matt Hibbard. Matt runs our Options Trader service.

If anyone were to ask which service I believe is the most valuable and important of anything we publish, I wouldn’t hesitate for even a second. I would say it’s Options Trader.

Why do I say that?

Well, it’s not just because of Matt’s 96.3% win rate with the trades he’s issued since we launched the service in 2015. Although, that would surely be reason enough.

After all, any stock trader will tell you that a 50% win rate is all you need to aim for. Some traders will even say that you don’t need to even hit 50%. If you can cut losers quickly, and allow winners to run, you can come out ahead with a sub-50% win rate.

So, if a trader shows you their track record, and 96.3% of all trades end up in a win, that’s something to pay close attention to, right? We think so.

As we say, that’s where Matt is with his trading service. It’s almost as close as you can get to a 100% win rate. And we’re not talking about a short-term, statistically insignificant streak. We’re talking about a total of 27 trades in 18 months.

Any statistician will tell you that’s statistically significant.

So, how does Matt do it?

He does it by not speculating. Matt does it by investing. That makes him a different kind of trader. He also does it without necessarily having to buy or sell a single share of stock. Although sometimes, he does have to buy the stock (or his subscribers do). But that’s not a bad thing.

Doing so allows Matt to kick-in the second part of his strategy.

As I say, Matt isn’t speculating. In a way, Matt’s strategy is the opposite of speculating. He’s using a method that allows him to help his subscribers earn an extra income from big Aussie stocks…sometimes without ever having to buy the stock.

It allows his subscribers to buy a stock (if required) at a price that’s cheaper than if he told his subscribers to buy the stock today.

And if his subscribers do end up buying the stock, then that’s OK too. Because Matt can show them how to earn more income from the stock, other than just collecting a dividend. In fact, thanks to Matt’s strategy, he can show investors how to turn a 5% yielding stock into a 10%, 12% or 16% ‘yielding’ stock.

And while there are risks with any type of investment, Matt’s strategy, if followed precisely, can allow investors the opportunity to lower their financial risk, compared to buying a stock outright at that time.

Matt runs a terrific service, which follows a great strategy. It’s a strategy I’ve used personally, as this video shows. Just note, the trades those folks placed on my account weren’t staged. They placed them into a live market.

I logged into my Commsec account, and once in, I simply read out the trade instructions. Within two minutes, the cash from those trades was on its way to my bank account. And with the way the market is looking at the moment, in both instances, I’m financially better off now that I would have been if I’d just gone into the market to buy the stocks.

Anyway, I’ve mentioned this before, but any serious investor really should check out Matt’s Options Trader service. It won’t be for everyone. But every investor owes it to themselves and their investments to at least find out for themselves if it is for them. For details, go here.

Now over to Matt…


How to Snare Extra Income from the Markets

If you’ve been around the markets for a while, you’ve no doubt come across options. Perhaps you have a good grasp of how options work, and are using them already.

But for most people, options get put in the ‘too hard’ basket. They might get off to a good start studying options, but get lost in the mindless jargon.

The thing about options, though, is that you can make them as simple or as complicated as you like. If the latter appeals, and you’re a bit of a mathematical whiz, you’ll have enough data to study them for a lifetime.

At my advisory service, Options Trader, we prefer not to go the complicated route. While there are certain things you must understand before trading options, I show you strategies that you can put to use straight away.

Instead of using options as a way to speculate in the market — as some traders do — we use options for something much simpler than that. Generating income.

Today and tomorrow, I’m going to run through how we use options to generate income. But before we get stuck into that, first we need to understand some basic concepts. Let’s take a look at these now.

Getting the basics right

No matter how weird and wonderful an option strategy sounds (think condors, butterflies and strangles, to name just a few), all are built from two basic building blocks — a call option and/or a put option.

Some strategies use just one of these; others use both, or multiple combinations thereof. But it’s important to know that all option strategies are built from these two option types.

The other thing you must know about options is that the buyers and sellers have different rights and obligations. If you buy an option — whether it be a call or a put option — the rights are with you.

By buying an option (paying a premium), you are buying the right to do something at a future date. You don’t have to do it; the choice is yours.

With a call option, that’s the right to buy a fixed number of shares in the future, at a predetermined price. This is known as the ‘strike’ or ‘exercise’ price.

If the call option buyer decides that they want to exercise their option, the option writer (seller) has an obligation they must fulfil. That is, they have to hand over the shares at the strike price. It’s not something that’s negotiable. Once an option is exercised, the option writer has to do it.

I can’t stress enough how important it is to understand the difference between buying (gaining a right) and writing (taking on an obligation) an option. You need to clear about these before ever placing a trade.

Today I’m going to concentrate on the first of these option types — a call option — and show you how you can use them to generate income. It’s a strategy we use at Options Trader.

Using a call option to generate income

To understand how you can use a call option to generate income, we need to understand the motivations of both the buyer and seller. The quickest way to do that is to look at an example.

Please note that none of the following constitutes a recommendation.

You can see in the table below a range of options for Sydney Airports [ASX:SYD]. On the top left is the share price at time of writing — $6.70 (down 5 cents for the day). Below that is a range of options expiring on Thursday, 29 June. That’s about three months from time of writing.

chart image

Source: CommSec

I’ve put a red box around a call option with a strike price of $6.75. On the left, you can see the option’s unique six digit code — SYDY79 — with a bid price of 18 cents per share, and an offer of 23.5 cents per share.

Taking the definition of a call option: It gives the buyer the right, but not the obligation, to buy the underlying shares (in this case Sydney Airports) at the strike price ($6.75), before the option expires. In this example, the options listed expire on 29 June.

In other words, the call option buyer is prepared to pay 18 cents per share for the right to buy Sydney Airports at $6.75, at any time until the option expires on 29 June.

Typically, the option will trade somewhere near the middle of this spread between the bid and offer. In this option, that would likely be around 20–21 cents.

So why would someone look to buy this option? The answer is that they believe the share price is going to rally, and they want to lock in an entry price (the strike price) now. Buying an option — at a fraction of the cost of the shares — allows them to sit on their capital until they decide whether or not they want to buy the shares.

If the option traded through at 20 cents in this Sydney Airports example, the share price would need to hit $6.95 (before the option expires) for the trade to be profitable. That is, the strike price ($6.75) plus the cost of the option premium (20 cents). This is also known as the breakeven price.

You can see that an investor would only buy a call option if they believed the share price was going to rally beyond the breakeven price, before the option expires. Otherwise there’s no reason to buy the option.

But why would someone sell them this option given the obligation they’re taking on? Let’s take a look at that now.

Taking the other side of the trade

The reason investors write (sell) call options is to generate income. And it’s a strategy we use regularly at Options Trader. Let’s continue with the Sydney Airports example, again noting that this is not a recommendation.

When we write an option, we’re taking the other side of the trade to the option buyer. Instead of paying a premium — 20 cents in this example — we’re receiving it. And if this option expires in three months’ time without being exercised, we can then write another option.

Typically option contracts are for 100 shares. If you owned 1,000 shares in Sydney Airport, you could write 10 contracts for a total premium of $200 (20 cents multiplied by 100 shares per contract multiplied by the number of contracts), before brokerage.

Do this four times a year, and you could potentially add around $800 worth of income on a holding valued at $6,700 (with the shares trading at $6.70). And that’s before you add in any dividends. Start writing call options and you could potentially earn more than you do from dividends.

But while that sounds pretty appealing, you need to be aware of your obligations. Remember that if a buyer exercises their call option, you have to hand over the shares at the strike price. Even if it’s trading much higher than the strike price.

You can see that by writing a call option you’re potentially giving up some profit. So why would you do it?

You’d only consider writing a call option if you believed the share price was going to trade sideways, or drift lower. The goal of writing a call option is not to be exercised. That way, you can write another call option when the current one expires. And another one after that.

Writing call options is a way of harvesting income from your shareholdings. It’s a strategy to capture something inherent in all options — time decay. As options have a finite life, they cease to have any value the moment they expire without being exercised.

Other things to consider

Before writing a call option, though, you need to decide that you’re prepared to hand over the shares at the strike price. Otherwise, don’t place the trade.

You also need to be aware of any potential capital gains tax liabilities. If the option is exercised and you sell your shares for a profit, you might have to pay some tax.

And the most important one of all: Never write a call option unless you own the underlying shares. Technically, a share price could go infinitely high. If you write a call option (and don’t own the shares), and the option is exercised, you’d have to buy the shares on market. That could potentially be much higher than the strike price you wrote the option at.

The key is to only write a call option at a price you’re prepared to hand the shares over at. And only for a reasonable amount of premium. There’s no point taking on the obligation of writing an option unless you’re going to be suitably rewarded.

Writing options to generate income doesn’t only apply to call options. That’s the beauty of options, there’s always another strategy we can use. Tomorrow I’m going to show you another strategy — one that you mightn’t be familiar with — which can also help you generate income.

Please tune in tomorrow and I’ll show you how.


Matt Hibbard,
Editor, Options Trader