It’s Friday, an opportune time to stand back and examine a few overriding investment principles. For today’s Mind Over Markets, I asked my colleague Jim Fink to discuss how he manages to consistently beat the market, in good times or bad. He does it with options trading.

Okay, I know what you’re thinking: “Options? Whoa, I’m outta here!” But the fact is, Jim routinely generates huge returns for his followers, by deploying simple yet powerful options strategies.

Jim Fink [pictured] is chief investment strategist of the premium trading services Options for Income, Velocity Trader, Jim Fink’s Inner Circle, and Seasonal Stock Alert. He also contributes to our flagship publication, Personal Finance and runs Jim Fink’s Options Bootcamp.

Why should you listen to Jim Fink? Well, let’s take a quick glance at his resume.

Jim holds a bachelor’s degree from Yale University, a master’s degree from Harvard’s Kennedy School of Government, a law degree from Columbia University, and an MBA from the University of Virginia’s Darden School of Business. Jim also has been a member of the Illinois and D.C. legal bars.

So yeah, when Jim speaks, the rest of the Investing Daily team listens. You should, too.

I asked Jim to de-mystify options and walk us through his time-proven moneymaking methods. As Jim explains below, if you’re scared away by options, you’re leaving a lot of money on the table. You can still reap investment profits, even during these uncertain times.

John Persinos: Okay, Jim, let’s assume the reader knows nothing about stock options. Introduce him or her to the wonderful world of options.

Jim Fink: Sure! Stock options are derivatives. They derive their value from an underlying “something else” — typically the value of a stock or stock index. Each option contract represents the right to buy or sell 100 shares of that underlying stock at a certain price on or before a certain date. Compared to stock, they are very inexpensive.

Many stock investors are afraid of options and avoid using them because they think they are dangerous and risky — like some sort of mysterious alien creature. This impression is mistaken. What if I were to tell you that options and stocks were closely related? In fact, that call and put options can be combined to mimic stock…exactly. Would you still be afraid? Knowledge is the cure for fear.

In chemistry terms, call and put options are the “atoms” that make up a stock “molecule.” When you buy a stock, you are buying exposure to the full range of a stock’s price movement — up and down — for an unlimited period of time. Stock is a very blunt investment instrument that’s sort of like being forced to buy a telephone package of local, long-distance, call waiting, caller ID, and voicemail when all you really want is a local dial tone.

Options allow you to limit your capital at risk to only those portions of a stock’s price movement that you want — and for only the period of time you think necessary. This provides the trader with virtually unlimited flexibility to tailor his directional and temporal outlook concerning a stock and do so at the lowest possible cost. Options can be used for many different investment objectives, including the reduction of risk.

I’ve often heard you say that the right options strategies can “create dividends out of thin air.” What do you mean by that?

The beauty of options is that they let you profit from someone else’s risky (and often wrong) bets. Let’s say that you own a stock trading at $30 per share. Call options exist that provide the buyer with the right to purchase the stock at $40 per share anytime within the next three months.

The odds of the stock rising more than 33% in three months are low. For argument’s sake, let’s say the probability of such a large price rise is only 15%. Yet, there are always greedy traders out in the marketplace willing to make such a low-probability gamble in exchange for the 100-to-1 chance of striking it rich. Subscribers to my trading services can take advantage of other people’s greed to generate monthly income, even on stocks that don’t pay a dividend!

The options strategy is called “covered calls.” It involves selling a call option at a strike price above the current stock price. You can sell options for cash without owning them first! This amazing fact allows you to generate income month after month on a stock; income that is in addition to whatever dividend the stock may already pay. Furthermore, because you are selling a call with a strike above the current stock price, you continue to benefit from further stock appreciation up to the strike price.

The income generated from selling covered calls can be viewed not only as extra dividends, but also as a risk-reducing cash cushion against a market decline (i.e., lowering the cost basis and breakeven price of your stock). Furthermore, covered calls can be viewed as a way to sell your stock at a price higher than you could get with a limit order.

For example, if you think your stock would be overvalued at $40, rather than set a limit order to sell the stock at $40, sell a $40 call option for, let’s say, $2. Then, if the stock rises above $40 at option expiration, the call option will be exercised and you will be required to sell it to the call owner for $40. Combined with the $2 you initially received for selling the call, your net sales price is $42, 5% higher than you would have received by means of a simple limit order at $40.

I’ve also heard you say that your strategies allow investors to “buy stock at a discount.” Please elaborate.

An investor can also sell puts for income. The main difference between put selling and call selling is that put selling is typically done at strike prices below the current stock price rather than above it. In addition, you don’t need to own the stock beforehand when selling puts as you do when selling covered calls. Lastly, the put seller is capitalizing on the fear of the put buyer as opposed to the greed of the call buyer.

Greed and fear are the two primary emotions of the stock market and option sellers can take advantage of both extremes. The concept of both types of option selling strategies is similar: selling the rights to unlikely price moves in exchange for cash up front. Put selling is another way to create monthly dividend-like income. Furthermore, just as selling calls allows an investor to sell a stock at a premium to a limit order, selling puts allows you to buy a stock at a discount to a limit order.

For example, if you think your stock would be undervalued at $20, rather than set a limit order to buy the stock at $20, sell a $20 put option for, let’s say, $1. Then, if the stock falls below $20 at option expiration, the put option will be exercised and you will be required to buy it from the put owner for $20. Combined with the $1 you initially received for selling the put, your net purchase price is $19, 5% lower than you would have paid by means of a simple limit order at $20.

What about the notion of “stock replacement?” How does that work?

Unlike the two option strategies discussed above which involve selling options for a fixed amount of cash up front, the third main strategy involves buying options for unlimited profit potential.

To make really big returns, you must buy options. Buying a call option promises a higher return than stock because it also carries higher risks than stock. Whereas stock has an unlimited lifespan and always possesses at least some value above zero, a call option has a limited lifespan and will only have value at expiration if the underlying stock closes above a certain strike price.

These limitations (i.e., risk factors) are why call option prices are significantly less than the price of the underlying stock. Lower prices mean that you will receive a much higher return on your initial investment with options than you will with stock — that is, if the stock moves up as anticipated.

Editor’s Note: In the above interview, Jim Fink provided you with invaluable investing advice. But I’ve only scratched the surface of Jim’s money-making acumen.

In a new presentation, Jim can show you how to receive regular payments of $2,950 or more. He calls it his “I.V.L. System” and it generates winners at a mind-boggling clip. His system, offered under the aegis of Options for Income, works for beginners and for seasoned trading experts alike.

Even if you’re still unsure how options trading works…this system is for you. Or if you’re a pro who trades 10 contracts a day…this is for you, too. Jim’s I.V.L. system works in up or down markets, when inflation is elevated or low, and regardless of Federal Reserve monetary policy.

Jim likes to keep it simple. Every week, he’ll send you easy-to-follow instructions that’ll put you on Wall Street’s payment list. You’ll get the money right away, up-front, in your trading account.

Jim Fink made himself rich trading options. Now he gets his kicks helping other people get rich. Want to earn life-changing income? Click here.

---

John Persinos is the editorial director of Investing Daily.

Subscribe to John’s video channel:

This article previously appeared on Investing Daily.