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How to Beat The Market

How to Beat The Market
Written by
Dawson Ignatieff
Dawson Ignatieff
Published on
November 14, 2023
Read time
3
 min read

How to beat the market.

Everyone has their theory on this, and it is subject to everyone. There is one way with no ifs, and, or buts to consistently see a return despite the trend.

Write (sell) Options- Collect Premiums. If you are completely green on the world of options, maybe research the topic as well. We will have a series on YouTube coming soon due to high demand. Or read along and take in what you can. It isn’t exactly one of the high-adrenaline strategies traders get a fix from, but once you master juicing premiums and seeking Implied Volatility you’ll never look back.

There are many strategies to collect premiums but before you dive into the world of options strategies you must understand the basic two ways to collect premiums- Covered Calls and Writing Puts.

The Covered Call - You won't lose (not financial advice) if you write covered calls in a conservative matter. However, the only risk is; that you may be forced to sell your equity… at a gain.

There are really only three outcomes of a covered call - let’s say you own 100 of $XYZ @ a cost of $50 and you sell a 30-day to expiry (DTE) contract at $60 and collect a $200 premium.

Outcome #1 It’s been 30 days and the stock is $65. Your contract expired ITM which means you get exercised (at $60) you have now sold your position for a $1000 gain and managed another $200 on top of the options premium - not bad, but still not the most optimal outcome.

Outcome #2 It’s been 30 days and the stock has stayed neutral/bearish and is now at $48. Your contract has expired OTM, you keep the $200 in premium and keep your shares. You have suffered a 2% ($200) decline but it has been weighed out by the options premium. You have suffered no loss and have actually managed to bring the cost basis of your shares to $48. Now you repeat for next month. Still not optimal but you have decreased the DCA of your shares by 2%, with only the risk of holding the underlying equity (what if you did this every month? Could I bring my DCA to $0 - yes you can)

Outcome #3 It’s been 30 days and the stock has stayed neutral/bullish and is now at $52. Your contract has expired OTM and you keep your $200 dollar premium and have seen a 2% increase in the underlying. Rinse and repeat next month.

In all 3 situations, you have seen some sort of advantages gain with absolutely ZERO risk capital, besides the cost of your underlying (make it a stock you love and wish to own). If you sold a call every month of the year for $200 on $5000 of risk capital ($200 is %4 of $5000 now x 4% a month by 12 months = 48% annualized return on your risk capital (ARORC).

That 48% can easily be achieved every year with little to no margin for loss if it is done methodically.

Writing a Put - This strategy is capital intensive. It is exactly like selling a covered call but you don’t need to own the underlying - you are collecting a premium by locking into an obligation to BUY stock at the strike price. So if your option expires ITM you get assigned 100 shares of the underlying at the strike price. This is golden because you are getting paid to buy the stock at a price YOU like, especially if you sell a put at your buy price; it’s a no-brainer. Your fucking getting paid money to agree to buy a stock you like at a price you like.

Okay now here is how here is how you actually bank; what if you could combine both to generate less risk and a higher return? Here is how you do it.

This strategy is called wheeling, you can choose any length of expiry you want but I like to use equities that have weeklies I trade this strategy with 7-30 day expiry dates. The expiry date isn’t as important as your RORC (return on risk capital)= % of the money you’re risking that you’re making in premiums. Say if you sold a $10 contract and you make $100 in premium that is a 10% RORC ($100 is 10% of $1000) simple. Most importantly you must annualize that return to find the true value. Ask yourself how many times you can repeat that trade in one year. Say it’s a one-month trade and you have a 10% RORC every time you do that trade, you could do that trade 12 times a year 30 days x 12 months = 1 year- 10% RORC times 12 trades = 120% ARORC- which is fucking killer- and can be achieved in the right market.

However, 48% is the golden number for me - anything way over 48% you are probably taking on too much risk by trading close-to-the-money options on risky volatile stocks with a high chance of assignment. Anything under 48% you are not sufficiently using your capital.

Okay, now what the fucking is wheeling- simple. Sell a put; stock expires ITM and you get assigned shares? Now sell a call at the price you got assigned at (your cost basis)- reap the premiums- repeat. Risk-free (ish) constant cash flow. Don’t get assigned stock? Keep the premiums and sell another put- rinse repeat.

You must do this on a stock that you like and is at a price you like so if the stock crashes and you are stuck holding it; you can sleep at night knowing that you have faith in the stock. It happens, I have had to wait 6 months before my call got exercised to exit my position. The whole time I was still selling calls making premiums though. Not bad.

In order to achieve a worthwhile ARORC like 40% you must chase IV (implied volatility). Volatility Is what makes option premiums worth more. I could write an essay on IV so just know this “Stock move a lot = options premium worth more“. Volatility is the name of the game.

There are so many ways to tweak this strategy to perfect it and you could take a year course on how to sell options, but if I could give the reader one takeaway: get out there and learn how to sell options. Stop paying them and start making them pay you. 

Not financial advice. Full disclaimer here - https://www.vhlamedia.com/terms-disclaimer

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