Option Trading Strategies for Value Investors

This is Part 2 of a 3 part series on option strategies for different investors:

Option Strategies for High Yield Income Investors
Option Strategies for Value Investors (You Are Here!)
Option Strategies for Dividend Growth Investors

High Yield Without High Risk

In Option Strategies for High Yield Income Investors, we talked about the solution I discovered and developed to solve the high yield income dilemma, which is how do you generate true high yield income without assuming a lot of dumb risks to get it?

I shared with you the details of my Sleep at Night High Yield Option Income Strategy where I see and structure myself as "The Insurance Company from Hell."

As such, my objective is very clear - I want to collect lots of premium from writing or selling puts (similar to how an insurance company writes or sells insurance policies), but unlike a traditional insurance company, I'm going to do everything in my power to avoid paying out any claims.

(I'm pretty ruthless when I play Monopoly, too.)

For the sake of the analogy, I define "paying out a claim" as either buying back my puts for a loss or allowing myself to be assigned the shares against my will.

Oh, Sure - I'm Always Right (Wink-Wink)

Now, I have very specific and strict "underwriting standards."

In other words, I go to great lengths to ensure that I'm "right" about a trade before ever setting it up.

But, of course, no one is ever 100% right on what a stock or the market in general is going to do.

(I guarantee that those who claim or imply that they're always right have an unmarked mass grave of other trades they're not telling you about.)

But the absolute best thing about writing puts the way I've learned to approach the strategy is that, even when I'm wrong, I can almost always "renegotiate" the original contract and adjust it in my favor.

And repeatedly, if necessary.

No smoke and mirrors here - I don't deny having trades where I'm underwater on them for a while.

But at the end of the day, I almost always still walk away with good to decent returns.

I use the Sleep at Night Strategy in The Leveraged Investing Club's model portfolio and I also document the trading history of the portfolio here.

(I recommend you check out the footnotes on the PDF to see for yourself how I'm able to take "losing" trades and rework them until they're back in the winning category - and unlike most footnotes, mine are exciting and riveting and intended to clarify rather than obscure or confuse.)

Common Sense Disclaimer

Please note - I'm not saying this is possible with generic put writing, or the way a lot of people sell puts.

Again, the Sleep at Night High Yield Option Income Strategy is a customized put writing approach with very specific criteria.

But What if You're a Value Investor?

That's all cool and everything, but what if you don't need or necessarily want high yield current income?

What if you're more interested in using options-based value investing to acquire shares of high quality stocks at steep discounts?

The good news is that the underlying strategy itself is still the same - viewing yourself and functioning as your own personal put writing insurance operation.

To reiterate, my "insurance operations" tend to spin off a lot of cash.

So, here's where it gets interesting - and lucrative.

That cash can be used three different ways:

As current income
Retained as capital used to expand my put writing operations
As a separate funding source for open market stock purchases

My Secret Weapon: Adjusted Cost Basis

The realized cash from my put writing insurance operations (I call it "booked option income") can be accumulated and used to buy shares on the open market.

Say, for example, you accumulated $1,000 worth of booked option income from writing or selling puts on high quality stocks at opportune times.

You could then purchase on the open market $1K worth of any stock you desire and it would have what I would argue is an adjusted cost basis of zero.

Your original capital remains intact and unspent.

The funds came entirely from your option trading operations.

Likewise, you could buy $2K worth of stock and essentially give yourself a 50% discount on your purchase.

Or any other combination - ultimately, it's up to you to determine what price and discount you want to pay for your stocks.

How many stock-only value investors can say that?

That's a rhetorical question, of course. Their only choice is to pay what Mr. Market dictates now, or what he dictates in the future.

(Note - my "adjusted cost basis" concept is not an official IRS sanctioned designation but rather is based on the pragmatic, common sense principle I call, "The less you pay, the more you get").

And this is how, in the Zero Cost Basis Model Portfolio, I'm able to pay half price of less for my investments - even as I acquire them on the open market.

You can see the current equity holdings and the portfolio's overall cost basis here.

Selling Puts - Generic vs. Specialized

This approach is obviously only as effective as the option trading strategy on which it's built.

Generic put writing, especially the way most individuals are encouraged to employ the strategy, just isn't going to cut it.

That's why I've put together comprehensive, quality, and user-friendly training to show you the right way to launch and then run your own personal put writing insurance operations - regardless of your experience level and, for the most part, your portfolio size.

I know what works and what doesn't (and more importantly, why) and I've been successfully teaching individual investors this way of setting up and managing their trades for more than 8 years now.

We really are options-based value investing pioneers in The Leveraged Investing Club.

Simply put, no one else even teaches this approach, let alone at this level, at this reasonable of a price, or with as many ongoing supporting perks and resources included for free.

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