The casino industry is a multibillion dollar industry. In the United States alone the revenue that was acquired by legal gaming entities was 92 billion in 2007. For an industry where you can strike it rich its pretty apparent that the consistent winner over time is the casino.
Let’s think about where else can you go and get ”complimentaries”, for free?!
- Free hotel rooms
- Free meals (breakfasts, lunches, or dinners)
- Free tickets to shows
- Free drinks
But let’s get real Casinos offer comps for basically one reason:
They offer comps to lure you into their casinos because once you are in the door you will gamble and the odds are forever in the favor of the house.
So how can someone like me tap into this lucrative business model.
Easy! Sell options in the stock market.
I’m going to keep this very simple, the concept does not need to be over complicated. As I pointed out in my previous article buying options is for suckers!
Only one outcome is favorable when you buy options
The true value of an option is recognized the day of expiration. The value is determined by whether or not the option is “in the money” or “out of the money” at expiration. Basically this means:
- A call option is only profitable if the price of the underlying stock is above the strike price plus the option premium you paid for the option.
- A put option is only profitable if the price of the underlying stock is below the strike price in addition to the option premium you paid for the option.
Example: For educational purposes these option prices are fictional. Back in November I predicted that the price of Coca Cola (KO) was going up at the time the share price was trading around $36.5 and I was fairly confident that by January’s expiration date the stock would be well over $37/share. I made the decision to buy the January $37 call for $.50/option contract. If you take a look at the chart below you will see that the price of Coca Cola at the January expiration date was $37.05.
- In this example I would have lost money. The true value of the option I purchased was $.05. In order for me to make money the stock had to be trading above $37.50.
- Now let’s imagine that the price of Coca Cola was trading for $36.75/share at expiration date. The true value of the option I purchased would have been worthless because the share price was less than the $37 call option I initially reserved the option to exercise.
- Let’s take this example one step further. If the share price was $38.25/share at the expiration date, I would have made $.75 per option contract. Remember I was agreeing to pay $37/share for Coca Cola but now it is worth $1.25 more but I must subtract the $.50 I initially paid the seller for the options contract.
So from these 3 examples you can conclude the following:
- If the price of Coca Cola dropped in value; I lose money
- If the price of Coca Cola increased slightly;I lose money
- If the price of the house increased substantially; I make money
That is a potential success rate of 1 out of 3, better known as a 33% chance. Yes you just read that right, my best odds at turning a profit is 1 out of 3, that’s absolutely horrendous!
Two outcomes are favorable when you sell options
One of the neat things about the options market is there is always a buyer and seller in an option contract. In short, when you buy an option someone has to sell it to you. So based on the example provided above you can conclude that the seller of the option was profitable 2 out of 3 times. That is a 66% success rate, talk about house odds.
With odds like this coupled with a sound financial education you are almost guaranteed to make money in the long run! This week I will show you how I sell options.
Here’s to our Wealth!