I recently had the opportunity to pick up a copy of Lee Lowell’s 2009 book Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor.
Lee wrote an excellent primer on options trading, but the publisher probably should have put a little more thought into the title. Get Rich With Options has very little to do with getting rich with options. Instead, it is a level-headed explanation of various low-risk options trading strategies that generate small, consistent profits over time.
(Though to be fair, “Generate Small, Consistent Over Time With Options” doesn’t look quite as good in print.)
For readers who are accustomed to thinking of options trading as a high-risk/high-return endeavor, Lee’s book will be a real eye-opener.
Most of what Lee does revolves around selling options rather than buying them. Yet interestingly, his first strategy is buying deep-in-the-money options as a substitute for stocks.
This is the polar opposite of how most options speculators operate. Most tend to buy cheap out-of-the-money options with something of a lottery-ticket mentality. The returns to buying out-of-the-money options are potentially much higher. Of course, there is also the high likelihood that the option expires worthless and you lose your entire investment.
When an option is deep in the money, it moves in virtual lockstep with the underlying stock. (For the experienced options traders out there, Lee generally recommends buying the deepest in-the-money options available with a delta of at least 90 percent.) But, you initial investment is significantly lower. So, you get the same potential upside on a much smaller investment with lower downside. For a short-term stock trade, that makes all the sense in the world.
Lee’s next strategy is my personal favorite: selling naked put options. Though I rarely sell puts personally, I regularly use outside managers that do. It’s a fantastic strategy for generating consistent income and functions, in principle, like an insurance company. Like an insurance company, the seller collects consistent premiums, though once in a while, disaster (i.e. a market decline) will strike, and you have to pay out a “claim.” (Note: The insurance analogy is mine, not Lee’s. I don’t want to put words in his mouth.)
