Options Talk With His & Her Money

I sat down with Talaat and Tai of His and Her Money to talk about how I got started in investing and to answer some important questions about options trading. 

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I grew up poor in Detroit, Michigan. We were never without the necessities or the support we needed. But we also grew up with bars on the windows because we were afraid someone was going to take the TV. When I was about 7 or 8 years old, I spent the night at a friend's house and I was amazed he actually had a bed in his room... because we slept on the floor in sleeping bags.

That was the first time I noticed the difference between how we lived and how others did. Why didn't we have the things they have?

I heard a lot about people making money in the stock market, but I didn't know anything about it. When I was 18, I went to the bank with $2000.

Two years later, my $2000 investment was now $700. 

I thought you went to the professionals because they didn't lose money. When I realized they lose money too, I took my $700 and decided it was time I did it myself.

I was working for Sprint Mobile making about $8 an hour. What motivated me was thinking if I can make $50 a week, I don't have to work weekends anymore.

I took about $500 and invested into Sprint that was selling at $5 a share. After my initial investment, I watched as the shares went from $5... to $4, then back to $5. I just needed it to reach $5.50 to make my $50 goal. 

But it wasn't happening. I got out at my $5 break even price and went back and bought when the stock was at $4... earning me $100 in profit. 

This started my journey in learning about different stock patterns and I spent the next 2-3 years studying patterns.

After those few years, I received a financial aid refund. I took that $10,000 refund and over time, grew my account to $20,000. 

Once I discovered options and how I could control higher price and quality stocks and get a better multiple on my money, I eventually grew that initial $10,000 to $120,000. 

At each stage of my investment journey, I had a different mindset to go along with it.

During the first stage, I hated my lifestyle. 

I was so worried about what would happen if I didn't take a calculated risk. I was worried I would end up like everyone else.

So many people think the stock market is just about making money. It's also about learning how to take a calculated low risk with a high payout. You want to work on recognizing the market conditions and the changes, and seeing when those low risks become high risks.

Once you realize that, the money will follow. 

During the second stage, after I made $120,000, I grew my account to around $500,000. I risked $250,000 trying to make another $500,000 so I could purchase a condo in a nice suburb of Detroit. 

I lost all of my money in two trades... I had to move back home with my mom and went back to working a regular job. 

At 24 years old, I already experienced losing it all. 

It took me about five years to build it back up and get back into investing. 

A lot of people fear this. I've been there. It's about managing your risks and putting things in place so you don't blow up your account. 

One of the things people don't consider is using options as an account insurance policy. 

Think about the insurance you pay on a vehicle. If you get into an accident, the insurance company will evaluate the damage, and then cut you a check for the amount for the vehicle. 

We can use options to protect our portfolio the exact same way. 

If you have a $100,000 portfolio, you can buy a $90,000 put. No matter what happens in the market, if your account drops to $50,000... someone will come and pay you the other $40,000 you lost. 

You minimize your risk utilizing options this way.

For those of you that maybe only have $1,000-$2,000 to trade but can't afford higher priced stocks like Tesla or Amazon, you can look into long term options that expire in a year. This still gives you the ability to control these stocks but at a fraction of the cost. 

Options trading should be for everybody. 

With the exception of shorting stock, the only way to make money when the market is going down or sideways is to use options.

Most people only have a 33% chance of making money if they only know how to when the market is going up... why are you leaving the other 67% on the table?

Why would you not want to understand that 67%? So yes, options is for everyone, but all of the methods of trading options is not.

When you can understand how to use options for stocks going sideways or down, it gives your account an extra level of comfort that you won't destroy your account.

A put option is a contract that says you can "force" someone to buy your stock at a certain a price...  as we say, you can "put it" to 'em. 

For example, if I own Tesla at $1,000 a share, and I can buy a $900 put.  If Tesla falls to $500, I can exercise that put and force someone to buy it from me at $900, even though it's trading at $500. 

Instead of losing $500 from the fall, I'm only losing $100 using this method. 

I call it an insurance policy because if the stock goes down and you have that protection against losing all of your money.  

To set up the trade, I was watching the market because it was around earnings time. At this time, we were all still working from home due to Covid. Zoom had done really well on their earnings report, and Docusign was about to release their earnings. 

I put $190,000 in call options on Docusign, meaning I believed the stock was going to go up. 

To put the power of options into perspective, to get the same result I did from options in normal investing, I would have needed to invest around $2.3 million dollars.

Once the pre-earnings were released, the stock went up and I closed it out for $400,000 in profit. 

First, you need to be curious. You need to be ready to learn or sit through a 30-60 minute training. 

Second, you'll want to start learning put options and relate them to other areas of your life. 

We encounter this type of trade all of the time, you just aren't realizing it. Think about buying a house. You may only initially put down a $2,000 deposit, but you get to control an asset worth $200,000. It works the same way with put options. 

Third, apply this mentality to the market. 

How do I find a stock in the market in a sector that I believe is going to appreciate so I can sell that stock to someone else? Or how can I put insurance on my portfolio?

Fourth, always practice with a virtual account

You don't have to start trading with real money. Especially if you find out you really didn't understand the strategy you were using. Once you practice and understand what you are doing, you can then look at the trade and see what would happen if you had $1,000 or $10,000 in it. 

Some great places to check out for practice (paper/virtual trading) is TD Ameritrade Think or Swim or TradeStation. 

You want to master the two human emotions we experience when investing or trading: fear and greed. 

What does fear look like?  Fear looks like being afraid to place a trade or being afraid of missing out.

Greed can encourage us to stay in a trade, making us think, "how high can it go?" We stay in a trade trying to push it as far as it can... only for it to change course and we lose it all. 

We have to fight the greed of wanting it all and focus on taking what we can. 

There is no one trade that is going to change your family tree. 

Discipline is about mastering your fear and greed. It's about sticking to a plan and knowing when to take a profit or loss. 

The best thing is start practicing without putting money at risk.

Once you do put money at risk, options are there to help you - not hurt you. 

As an example, if you have $100,000 portfolio and a block of 100 stocks, you can actually sell options against your stock.

Say you have 100 shares of Apple at $100 each. I can sell my stock at a $115 strike price. Someone will first pay me upfront a premium to "reserve" these shares. If the stock hits that $115 price, that person can buy my shares at that $115 price. 

If the stock hits that $115 price, not only do I make $15 per share (so $15,000), but I also get to keep the premium they originally paid. If Apple doesn't hit a $115 price, I get to keep my stock and I keep the premium that was paid.

We can't think about the what if's in this situation... what if it goes to $130? We have to control our greed and be happy with the $15,000 we made. 

It all depends on your goals.

If you want to have some protection if the market sells off against you? Then learning put options is a great methods for you. This could take you two weeks to a month.

But if the market changes, you may need a different strategy to stay in the game. 

A lot of the trades we do are 30-60-90-day trades so there isn't something to do every single day which allows you to keep your job. 

You don't have to day trade or swing trade which requires a bigger time investment.

We specifically look for those mid-length trade times so we can essentially set it and forget it. You want to set your alerts for resistance and support values and just check on it when you can.

I think the biggest change is I have the confidence now that I will never be broke.

I could lose everything and I can get back in the game and gain it back. 

When you have that confidence, you don't worry about being broke, or poor.

The things I worry about now are totally different. I worry about my eyesight, not losing all of my money.

Did you learn something new about Jason or options trading? Let us know your thoughts and send us an email at info@thebrownreport.com.