Smart Options Trading: How to Generate Income and Reduce Risk Like a Pro
Options trading can be a powerful tool when used correctly. There are two main types of options: puts and calls. In Rule #1 investing, we typically focus on selling options rather than buying them. This strategy allows us to generate returns without necessarily owning the stock.
When we sell a put option, we are obligating ourselves to buy a stock at a predetermined price if it drops to that level. The key is to choose a company we already want to own at a price we find attractive. By taking on this obligation, we receive a premium upfront, generating income even if we don’t end up purchasing the stock.
Similarly, when we sell a call option, we obligate ourselves to sell a stock we already own if its price rises to a specified level. Again, we receive a premium for taking on this obligation, providing additional returns in our portfolio regardless of whether the stock reaches that price or not.
How Activision Blizzard Provided a Unique Options Opportunity
A great example of how options trading can be leveraged strategically occurred with Activision Blizzard. Microsoft had announced plans to acquire the company, but the Federal Trade Commission (FTC) attempted to block the deal. From a legal standpoint, the FTC had little ground to stand on, as the merger did not harm competition, reduce consumer access, or increase prices.
By closely following the court hearings, we could see that the judge was skeptical of the FTC’s case. With the judge’s ruling expected soon and the deal deadline approaching, Activision’s stock was trading at around $82, while the acquisition price was set at $95. This provided a clear opportunity: if the deal closed, there was a nearly guaranteed $13 upside per share.
The Strategy: Leveraging Call Options for Maximum Returns
We had already been invested in Activision for a long time, but this situation created a time-sensitive opportunity. Instead of our typical Rule #1 approach of selling options, we decided to buy a call option—an exception due to the high probability of success.
By purchasing a two-week-long call option, we paid $0.50 per share. When the deal was confirmed, the value of these options skyrocketed to $2.50 per share—a 5x return in just two weeks. This was an extraordinary case where understanding the mechanics of options and having confidence in the outcome led to significant gains. Personally, this strategy resulted in over $100,000 in gains within two weeks.
Rule #1 Options Trading Guide
Learn the Fundamentals of Stock Options - The Rule #1 Way
Why Rule #1 Options Trading Works
Many traders use options as a form of gambling, similar to playing at a casino. The "Reddit crowd" and Wall Street Bets traders often take high-risk bets, hoping for huge returns with little regard for probabilities.
Rule #1 investing takes the opposite approach—we aim to be the house rather than the gambler. By selling options on great companies at prices we are happy to buy or sell at, we tilt the odds in our favor. This approach allows us to generate steady returns, just like a casino profits from favorable probabilities.
Final Thoughts: Understanding Options to Create Wealth
While opportunities like the Activision trade are rare, understanding options trading provides investors with powerful tools to generate wealth. Whether through selling puts and calls or selectively buying options in high-confidence situations, Rule #1 investing ensures that we make calculated decisions rather than speculative bets.
By following proven strategies, investors can take advantage of market inefficiencies, generate consistent returns, and create financial independence. The key is to always invest with knowledge, patience, and discipline—maximizing gains while minimizing unnecessary risk. Let us teach you how!
