The best way to make a significant amount of money in the stock market is to combine stock trading with options to improve your returns greatly.
By having a watch list consisting of SPY, SPX, QQQ and stocks like Amazon, JP Morgan, and Microsoft, and then selling options on those specific stocks/ETFs, you can achieve gains that far exceed the S&P.
By selling options on these stocks and ETFs, you'll collect option premium. Then, you can wait for these stocks and ETFs to pull back by 10-20%, take ownership of these stocks or ETFs, and then participate in the upside.
By combining this long stock strategy, with a solid options trading strategy, you can significantly outperform the market and you can even protect your portfolio to reduce portfolio volatility.
I discuss this in my education course where you can learn how to use numerous trading strategies to be consistently profitable.
Combining stock trading with options is the best strategy - especially when using portfolio margin since portfolio margin allows you to leverage off the long stock without significantly decreasing your available buying power.
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When you sell options your maximum profit is going to be the amount of premium that you collect.
The problem is that during market pullbacks, or bear markets, you're going to experience significant sequence risk, or correlation risk, where a lot of your positions are going to end up getting challenged.
If you're trading too large then you could be forced to close out that position at the most inopportune time.
So instead, your best choice is to sell options, stay small, and take ownership of the stocks (or ETF) after the option strike price has been penetrated, then you can participate in the upside of the stock.
Additionally, you can buy options during periods of market extremes to reduce portfolio volatility.
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Conclusion: Combining Stocks with Options
Combining stocks with options is a great way to beat the market.
You can sell options using portfolio margin and take ownership of stocks, or ETFs, at a reduced price and participate in the upside of the stocks - you can then sell covered calls against that position to further improve your cost basis.
Then, you can buy options during periods of market extremes to act as a hedge against future market volatility.
Buying protective puts during periods of complacency, when the market is overextended, will allow you to profit from future volatility increases and reduce overall portfolio volatility.
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Frequently Asked Questions (FAQs)
Can I combine stocks and options?
Yes, and it's worthwhile to combine stocks and options because it can reduce portfolio volatility while increasing your returns.
Is there a Combining Stocks and Options Guide?
An investor who believes a stock will be range-bound may sell a straddle to increase returns on a stock that is otherwise trading sideways. Covered calls or covered puts are examples of strategies that combine stocks and options. Covered positions are when options contracts are backed by shares underlying the option.
Selling calls on stocks can limit your upside potential. Also, straddles frequently get tested and necessitate many adjustments.
However, I do prefer to sell OTM calls to collect some additional premium.
When to combine stocks and options?
When you feel that the stock market is oversold, then you can take assignment of the option and participate in the upside of the stock.
During periods of complacency and euphoria, when the market is overbought, you have purchased protective puts so that you can profit from future volatility spikes.
How Can I Learn More About Options Trading?
Should I Trade Options During a Bear Market?
Yes, if done correctly, then trading options will enhance your returns and allow you to beat the market.
Should I buy call options?
While I previously wasn't a fan of buying call options, I believe that there are times where it makes sense to buy call options.
Specifically during periods of high volatility, when VIX is trading around 35, and after the market has already pulled back by ~25%.
While buying a call in this situation will still possess a probability of profit of below 50%, the real-world trading results of buying long-dated calls after a major sell-off will likely far exceed the overall returns of the S&P.
What other combo option strategies are there?
I like selling ratio spreads, preferably in the 1 1 2 style, either bullish or bearish.
This is discussed in my options trading education course.
Ratio spreads allow me to profit, almost dollar for dollar, on a directional bias.