In LA last summer, I bumped into a Hollywood screenwriter.
The guy is seriously good. He wrote the story on which the Oscar winner for Best Picture, Argo, was based. He spends his time hanging out in the east side of Los Angeles writing real-life adventure stories along the lines of Argo and his other hit, The King of Kong.
And would you believe it, ordinary Brit investors could take a leaf from his book.
That’s because, like almost all Hollywood screenwriters, he makes money using a financial product called an option.
Options sound obscure, but they’re really very simple. And you don’t have to be a talented, well-connected showbiz type to make money with them.
Here’s how they work:
A screenwriter sits by the pool of his east LA home and writes a story…
They email the story to their movie producer buddies…
One of the producers offers them, say, $10,000 cash for the right to develop the script into a movie within one year.
If the producer doesn’t make the movie, they keeps the cash. If the producers do make the movie, the screenwriter gets more money. All the screenwriter has to do is promise not to sell his script to anyone else.
Selling an option means selling the right (but not the obligation) to buy or sell at a specific point in the future. In the case of the screenwriter, they’re selling the right to buy their script. That’s what’s called a call option. The other type of option is the right to sell – that one is called a put option.
Options are a way of locking in cash right now, by taking a position on how prices are going to move in the future.
Got it? Good. Now you understand options!
How to “side hustle” hundreds of pounds
Here’s an example as explained by my colleague, the options trader Greg Robinson…
Corning is an American glass company that was established in 1851 and now generates billions in annual revenue.
It’s most famous for making the glass used in iPhones, Gorilla Glass, but it has even better plans for the future.
It’s aiming to improve technology for TVs, and expand the use of its Gorilla Glass to buildings and cars.
But these are just some of the areas in which Corning is innovating.
The simple fact is Corning is exposed to several trends that look like great bets for the future.
So let’s assume you think Corning is a sound investment opportunity, and let’s say Corning is trading at $29.60 per share (this is just a hypothetical figure).
On the day you decide to trade, you can sell a put option on Corning that obligates you to buy shares for $29.00 a share.
That’s 60c lower than it’s trading at now.
This contract is priced at 73c per share right now, and because one option contract represents 100 shares, you could receive $73 per put contract.
So, by selling one put contract, you’re going to buy 100 Corning shares at $29 a share if the buyer of the put option exercises the option before it expires.
So let’s say we’d be happy to buy 400 shares of Corning at $29 a share.
Because we’re prepared to buy 400 shares of Corning, we enter the market and sell FOUR put contracts.
This obligates us to buy 400 Corning shares for $29 each if the option is exercised.
Since each contract represents 100 shares, we receive 73c per share per contract.
So with four contracts that equates to $292 less our brokerage fees.
It’s basically four times $73.
How selling puts works out.
What could happen if we take this trade?
What possibility is it that the Corning stock price chugs along and advances from $29.60 per share to, say, $30 per share?
Since no Corning shareholder will sell their shares for $29 when they can sell them on the open market for $30, we won’t be assigned the shares.
We simply pocket the $292 we received for selling the four put contracts.
Now, the second possibility is that Corning goes down to say $28.80 per share.
We’re obligated by 400 shares of Corning at $29 per share. That’s an $11,600 outlay.
But remember, we were paid 73c per share to enter into the put contract, therefore our net cost per share is $28.27 (the $29 per share we’re obligated to pay minus the 73c we received upfront for selling the put).
That is the beauty of selling put options: by only selling puts on companies we’d be happy to own, we’re still happy when we end up buying the shares.
Of course if Corning sunk below $28.27 we’d end up losing money on the initial purchase, but we’d still own a good company.
Not bad, right?
Check your mailbox on Thursday
Now I know what some of you are thinking…
“Only yesterday you said you’re all about investing for growth. Swinging for the fences and all that. Isn’t that the opposite of income investing?”
You’re right! This isn’t normally my thing.
But I still want to bring this idea to your attention. Because I know from your emails that a lot of you do think about how to make extra income on the side. You want tricks and tips for making cash right here, in the present.
Here at Agora we’ve listened to your feedback, and we’ve done something about it.
On Thursday – that’s the day after tomorrow – we’re launching a brand new service. The service is dedicated to simple, proven strategies – like the screenwriter strategy above – which can make you extra cash right away.
At 11:30am on Thursday Glenn will be unveiling all the details and will reveal how you can pick up your very own “Guaranteed Income Starter Kit”.
This “starter kit” will include:
– A simple technique that will pocket you £100-£400 in just 24 hours…
– A second extra income strategy that could add £500 to your account in the next 30 days
– The “passive income” secret Warren Buffet uses to make £49.5 million a year!
This starter kit will be seriously handy for anyone looking to make a few quid out of the markets.
To get yours, keep an eye on your inbox on Thursday at 11.30am.