Wealth Building Options Trading

Buying put options provides a form of insurance on stocks you own from a fall in price. You pay a premium of course, in much the same way as you buy insurance on any other significant asset such as a home, and this cost must be offset against the benefit you receive should you need to make a "claim" on your "insurance policy". But the benefits are well worthwhile, particularly in view of what I am about to reveal.

But first, let's set a couple of parameters for our wealth building options trading discussion.

Dollar Cost Averaging

Dollar cost averaging is a share purchasing strategy which, over time, is designed to lower the average cost of your overall portfolio of a given stock. For example, you might buy 1,000 shares of XYZ when it is trading at $20. The price subsequently falls to $18 and you purchase another 1,000 shares. You now own 2,000 shares but at an average cost of $19 (1,000 x 20 + 1,000 x 18)/2.

If you repeat this process regularly, then the idea is that, in the longer term, the average cost of your portfolio will be less than the current market value of the share price, allowing you to take a profit after having received the benefit of dividend income in the meanwhile.

If you have enough capital to invest in shares and your focus is wealth building option trading can make a sufficient difference to your portfolio value over time. It will not only protect you from losses, but using this strategy will also increase the ultimate number of shares of a given stock that you own.

Let's say you have $100,000 to invest in the stock market. You purchase 5,000 shares in XYZ trading at $20 per share.

You also purchase 50 put option contracts for next month expiry at a strike price of $19.50. You'll notice there is a 50 cents difference here, which means you are prepared to accept a risk of 50 cents times 5,000 or $2,500 paper loss on your $100,000 investment.

If the share price rises before option expiry, you will make a gain on the shares, offset against the cost of the put options.

If the share price plummets to say $15 then without put options you would now be in a loss situation of $25,000 (5000 x $5). But at expiry date your $19.50 put options would now be worth $4.50 x 5,000 which is $22,500.

So you cash in your put options and USE THAT MONEY to BUY MORE SHARES of the same stock, but now trading at $15. Can you see what you have done here? You have not only lowered your average share entry price, but now own more shares in the process. Your wealth is increasing along with the volume of shares you own. This is wealth building options trading.

You could use this strategy to purchase shares at the very peak of an uptrend before a price crash and over time, when the share price returns to its former level, your portfolio will be worth many thousands more than if you had only relied on dollar cost averaging.

Options are the only derivative that you can do this with. CFDs and futures have unlimited downside risk which will offset any potential profits from share price rises. While they are a perfect hedging instrument, for wealth building options trading is the only way.

If you would like to know more about this strategy and have all your questions answered, the people at Tradology have a series of downloadable videos called the TradingPro System which, although primarily focussed on safe option trading using iron condors and double calendar spreads, include a series of bonus videos (module 11) which walk you through this wealth building options trading strategy in great detail.

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