Forward Guidance: Karim Rahemtulla on Options and Income Generation
Samuel Taube: Joining us today is Karim Rahemtulla, The Oxford Club’s Options Strategist, a contributor to Wealthy Retirement, and the head of Automatic Trading Millionaire. And today we are talking about alternative income and option strategies. Karim, thanks for joining us.
Karim Rahemtulla: Thanks, Sam, glad to be here.
ST: So what are some common misconceptions that you’ve encountered about option strategies? And how would you correct them?
KR: Yeah, the most common misconception is that all options are risky. That’s just not true. What’s risky is if you don’t know what you’re doing.
What we do is teach you how to invest with options in a way that reduces risk substantially. For example, we show you how to buy stocks for up to 50% less than what they’re trading for – how to make Wall Street take on the risk, not you.
These are not things that your broker is going to show you or that you’re going to learn from some kind of option seminar. They’re only interested in propagating this “go long, speculate and try to make a bundle of money with a little bit of money at risk.” And that just doesn’t work.
Now, if you speculate with options, you’re going to lose. Let me say that again. You’re going to lose. We don’t speculate. We make money. So far this year, we haven’t had a losing trade, and our readers have pulled in almost $3 million in cash from the market.
Trading options is like any other investment. You have to know what you’re doing, and that’s why we’re here.
ST: I see. So you just touched on the fact that sometimes options trades really don’t have the riskiness that they’re known for.
Could you give an example of a situation where an option play would be less risky than buying the underlying asset conventionally?
KR: Yes. Yeah, I will. On the long side, for example – if you want to go long, which is not the best way to use an option, although there are ways even on the long side where you can reduce risk – you can use something like a long-term option. That’s referred to as a “LEAPS” (long-term equity anticipation security).
These options cost you 10% to 20% of what you would have to invest in the underlying stock, and you have even better upside. However, the downside is that if the price of the stock doesn’t go up and you own the stock, you’ll still have the stock. If you own the option, after a while the option is worthless unless the stock moves higher.
Imagine a portfolio where 80% of your assets are now in cash, and you still have the same or better upside versus investing 100% in the stock market. So that’s one way that you can use an option trade to reduce your risk substantially, bringing your cash invested down to 20% or less from 100%.
There’s another way – and this is what I specialize in – where you can actually bid on your favorite stock at your price. So this could be 20%, 30% or even 50% under where it is right now. So you would get your stock at your price, or you would get paid cash upfront just for trying.
So it’s a win-win situation – trying to buy something you already want to own. You have total control, not the market. So this year, we haven’t lost once making this type of deal. And as I said earlier, we’ve taken in millions in cash from the stock market.
ST: Yeah, that’s really something.
I think another misconception about options that I wanted to address with you is this: Many people think of them as, again, a high-risk play, while also focusing on making a big capital gain. Can option strategies also be used as an income strategy? And how does that work?
KR: Definitely. When the options market was created, it was created for professionals to use as hedges against moves in stocks, moves in the market.
But what happened was Wall Street decided that if you have an option as a hedge, you have to have two parties. You can’t just have one party.
So who’s going to be the other party? Well, the other party is going to be the sucker. And the sucker is the retail investor. And that’s why we focus on the option strategies that the professionals use.
So, for example, for income, these are ones you can even use in your retirement account. And that’s the big secret of the options market. Most people – probably 99.9% of people – think the only way to make money is to buy options and hope the stock goes up.
That’s dead wrong. You may win. You may win 20% of the time if you’re very lucky.
The real secret is how the options market can generate income for you – thousands of dollars every year – and sometimes with very little money in your account to start with. It doesn’t come from buying options. It comes from selling options.
Think about it. There are studies from the option exchanges… the people who actually run the exchanges. They show that almost 80% of options expire worthless.
KR: So you want to be on the other side of the trade, where each time an option expires worthless, it’s income in your pocket.
So when it comes to investing in or investing with options, it’s all about knowing exactly what your risks are and not just focusing on what your returns might be.
And that’s what we do. We focus on questions like, what’s our downside? What’s our upside? How can we take the risk out of the market and still make a ton of money in income from the options market and the stock market every year?
ST: I see, and that makes sense. You’ve certainly cleared up a lot of stereotypes and misconceptions about the options market.
If you’re interested in the kind of strategies Karim is describing, check out the live training event he’s hosting in just a few days on this. Karim, thanks so much for joining us.
KR: Great. Thanks, Sam.