A 90% win rate may sound impossible to some traders.
That’s because most are focused on trading options only for those huge triple-digit opportunities in just days or weeks.
They’re comfortable with lots of losses because they believe that one big win will make up for them. But that means that they lose … often.
But there’s another side of options that can prove just as profitable and you don’t have to suffer through chasing down any big triple-digit return.
I’m talking about selling put options.
It’s the perfect complement to any investing approach and allows you to create a consistent string of gains. It’s so consistent that many traders simply use it as extra income.
In the last lesson, I explained how you could get access to selling covered options at the very first level – “Level 1.”
That means that many of you, even if you don’t have access to buying options just yet, are ready right out of the gate to start selling options like this.
Selling put options is my favorite way to not only generate income from the stocks I track, but to do so with a 90% win rate — that means I generate a profit on 9 out of every 10 trades.
I’ve achieved this incredible win rate in my Pure Income service by simply selling put options for the last seven years.
So you can believe me when I say a 90% win rate is possible.
Cash Secured Put Options
Last week, the exact language my walk-through mentioned was: “cash secured put options.” This is the same as the put options I described above.
This was available at Level 1 and is an extremely profitable way to trade and to learn about options — it’s just not finding the triple-digit gains in days, weeks, or months that gets people excited.
Instead, you can lock in anywhere from 5% to 10% in just a couple of months and do so with a 90%-plus win rate.
Alone, these numbers don’t sound that great. But, together, it’s extremely impressive.
I’m telling you that you can basically grab 25% to 40% a year in income, 9 times out of 10.
The average return for the S&P 500 Index is around 10% a year.
This approach easily trumps the stock markets performance and yet many traders still ignore it because of the lower returns per trade. They completely forget about the most important part — a 90% win rate.
We are able to achieve such a high success with these trades because of how selling put options works. It’s also helps create a win-win scenario when we place these trades.
Here’s what I mean…
A Win-Win Scenario
When you sell a put option, you are telling the market that you are willing to buy shares of the underlying stock at the strike price at any point on or before the expiration date.
By making this agreement, you get paid. The price of the option that you end up selling it at is the income you get to keep as long as you hold the option to expiration.
Since your risk is that you may end up purchasing shares of the stock at the strike price, your broker will tie up the cash you would need to buy the stock and hold it in your brokerage account.
Once the option expires, there are only two possible outcomes.
Outcome No. 1 — the stock is above the strike price. This is the easiest outcome. You keep the income you wanted to collect, and the capital tied up is placed back into your account. Essentially, you got exactly what you wanted — a profitable trade by keeping the income.
Outcome No. 2 — the stock is below the strike price. In this case, your broker will use the funds they already set aside to purchase 100 shares for every contract you sold at the strike price. But you still get paid. The price you sold the option for is yours as long as you don’t exit the option early.
Two possible outcomes. And the best part is that both of these scenarios can be great news to you as long as this is a stock you wanted to own to begin with.
That’s why I made it the first rule of my “Triple-Check Method” — only sell a put option on a stock you already want to own.
Then this whole process becomes what I call a no-brainer win-win scenario.
So while I enjoy finding those triple-digit returns, I always come back to this win-win strategy.
Chad Shoop, CMT
Editor, Pure Income