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The Option Genius Podcast: Options Trading For Income and Growth

Apr 6, 2020

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The famous Baron Rothschild said that the time to buy is when there is blood in the streets. And Warren Buffet has said the time to invest is when others are fearful, to be greedy when others are fearful. But others are fearful for a reason, so is that actually the best advice? When is a good opportunity, and when is it a disaster that just looks like an opportunity? That's what I cover on this episode.

So how do we limit our risk and not do any of the work? That's a totally new way of looking at it, don't you think? I was pretty proud of myself when I came up with that question. How can we have a large upside with a small downside, and none of the work, none of the time? Because in the end, that's the most important and most precious thing we have, right? Time. We have to guard it as best we can.

So that question led us to a third solution. We could bring in somebody else as a partner who would be responsible for day to day operations and running the center. My wife would be there in the beginning to turn things around and to train this person, especially since she has done that before, and she knows the business, while she's training this new partner.

So that is what we did. We offered another woman and a friend of ours 50% of the business and the center to be the working partner. We would train her and support her until the place was running and doing well, and of course we would support her the whole time, because we're involved, but my wife would own 25% and our original partner would own the other 25%. so we're cutting our percentage down, right? We're taking less of the business, we're going to get less of the profits, but if all goes well, we won't have to do the work. Put up less money as well. Have a person in place that will run it, who has been trained by us. And if all goes well, eventually we make $5,000 a month instead of $10,000, but without having to do the work. Now, to me, that one sounds better. We turned a good opportunity into a wonderful opportunity.

Now, let's take a look at this from this new woman's perspective, right? This new partner that we're bringing in, let's call her N. Now, N has never worked in a daycare, but she wants to. She's been looking to buy a daycare or get involved with a daycare for months now. Financially, her family is struggling. Her husband has his own business, but that business is failing. It's going to close soon, so money is tight. Now, N is offered a 50% stake in a business that is currently losing money, right? It's losing anywhere from breaking even some months to losing about $5,000, $6,000 a month. She is required to put up more money than she has right now to take advantage of this situation. She's going to have to borrow that money. Maybe not all of it, but at least some of it.

So let's say she needs to come up with $50,000. Okay, that's 50,000 she doesn't have. The business will not make money for a while, and she's not going to get paid until the business can afford to pay her a salary. So she's looking at probably six months with nothing to show for it, but she's building up her own business, an asset. If she can borrow the $50,000, or however much she needs, and if she borrows it, she's probably going to have to make payments on it. So they're going to have to come up with some way to be able to make the payments, still support the household, while she's doing this. But the upside is that she could make than $10,000 a month eventually, which is more than enough to support the family.

So yeah, there's risk involved. The place might not turn around. It might not be as rosy as I'm making it out to be. That's a risk. She will also have a strong set of partners who are well-capitalized. If we need more money, we're not going to let her drown, right? We're going to put the money in. They have experience and connections, and who are not only willing to work side by side with her until the place is turned around, but they've done it before. Meaning my wife has turned around a failing daycare before.

What should you do? What would you do in this situation? To me, from her point of view, I think the choice is simple. I would take the deal, in a heartbeat. Now, what she does eventually, we haven't gotten an answer yet. We don't know. To me, I think it would be crazy if they say no. They're already in a sinking boat. The boat is sinking. They have no other alternatives. They have no options. They have no lifelines. They have no life preservers. And here you have somebody coming by, throwing you a life jacket. Do you take it or not? I don't know. That's up to them. We'll find out.

How do you know when you are presented with an opportunity if you should take it or not? How do you know if it's a good opportunity or if it's just a disaster dressed up like an opportunity, right? And please don't tell me that you don't have opportunities. They're out there. They're everywhere. I mean, buying a new stock is an opportunity. Looking for a new job is an opportunity. Getting a loan for something, that's an opportunity to do something without money, creative, right? Even deciding to buy a new training course.

I'm sure you get emails from lots of gurus. "Buy this, buy that, buy this. I have courses. I'm emailing you. Dave, you're on my list. Get on my list if you're not, but if you aren't, if you're on the list, then I'm telling you, hey, I got this course that might work for you. I've got this that might work for you." These are all opportunities that can either be beneficial or harmful, but you have to make that decision.

So I have a list of questions that you need to ask. So if you're in the car, or exercising or something while listening to this, you're going to have to go back and actually write these questions down so you can save them and keep them. So next time you have an opportunity, you can go through this exercise and it will help you clarify in your mind and help you decide what to do.

So first of all, you got to know, what are your longterm goals? You got to know, without a doubt. If you don't know what you're trying to do in the longterm, you're going to jump at every single opportunity. If you haven't decided yet that you want to be a passive trader, then the next time you see an opportunity for a real estate workshop, you're going to go. If you see a 4X course, you're going to buy it. If you see a new job offer, "Oh, hey, why don't you drive for Uber?" You're going to go run and drive for Uber. The goal should not be, "I just want to make more money." You have to have it more defined than that.

Right now for my wife, the goal is more income without the work, and that is what led us to the solution that works best for us, right? If we didn't know what our goal was, we would not have tailored it and changed it so that it works best for us. Now, yeah, we can make less money, but our priority was not the money. It was the time. You understand? So that's number one.

Number two, you have to look at the pros and cons. Now, you probably already do this. Common sense. You write these down if you have to. What's all the benefits? What's all the negatives? What could happen? What could go right?

Third, then you look at the probabilities. How probable is each outcome? You know, let's look at the worst case scenario. How probable is that? The best case scenario. How probable is that? And then somewhere in the middle.

Next, what is the risk involved? Right? Normally, if it's an investment of money, you have to put up the money, and that's the risk. The whole money you put up is at risk. How can you minimize the risk? That's a very important question. You still want to keep the benefit. You still want to have the potential as much as possible, but you want to reduce your risk as much as possible as well.

Next, what is the possible reward, and is it worth the risk? What's your risk-reward analysis? Is the reward worth it for the risk? Sometimes that's an easy one. You'll be like, "No, not really." You're going to be giving it up. Okay. If there's a course out there teaching you how to make $100 a day and the course is charging you $1,000, okay, that might be worth it. In 10 days I could get my money back. Yes, but it takes you 12 hours a day to make that $100 bucks. All of a sudden it doesn't make sense. The reward is not worth it, right? You spend 12 hours a day to make $100 bucks, that's not worth the risk, so you would pass on that opportunity, right? Simple concepts.

Number six, I want you to get advice from people that have done the same thing that you're thinking about doing successfully. Not just that they've done it before, but they've actually been successful at it. What do they say? What's the advice? If you ask them and say, "Hey, should I do this or not?" What do they tell you? Most people, most successful people are honored when they're asked for advice, and they will actually give you legitimate, truthful advice, okay? Just like it says in the book, The Richest Man of Babylon. If you haven't read this book, it's a classic. You got to have it. The Richest Man in Babylon. It says, "If you are investing in jewels, you don't send a brick layer or a brick maker to buy your jewels. You ask a brick maker when you're investing in bricks and you ask a jeweler when you're investing in jewels." Okay? So you got to get advice from the right people and people who have actually done it well.

Next, what does your gut tell you? That's what it comes down to, because you are ultimately responsible, and your gut, well, you know that feeling in your stomach, that can tell you one way or the other if you should do it or not. Because if that gut is telling you, "Don't do it," or, "I'm scared," or, "I can't handle it," and you still make the investment, you're going to end up miserable. Even if it works out well, you're going to end up miserable.

A friend of mine, he did a real estate fund recently that I invested in, and I got other people to invest in, and one of the people that came up to me and wanted to invest, and she put the money in, but it was for a one-year term. You had to have your money in there for a year. After six months, she lost confidence, or she freaked out, and she said, "Can I get my money back? I need my money back. I need my money back." And we told her, "No. It's locked up for a year. You can't get your money back." Even though the fund was doing well, we were making money, there wasn't a loss, she was going to get all of her money back, plus she was going to make a nice gain at the end of the year, she still freaked out and she couldn't do it. Now, if she had asked her gut before making the decision, maybe her gut would have been like, "No. We're not very risky people. We don't like taking risks." So she would have sat out of it. That's how important your gut is.

Now, last question, can you live with the worst case scenario? Can you? Only you can decide.

Now, after asking all these questions, you're going to have a much more clear picture of what you should do. So now let's take all this information. Let's do a real life exercise, okay, so that you know what it is. Currently, and I'm recording this March 31, so 2020, right? Currently the stock market has dropped about 30%. Volatility is sky high. The coronavirus has become a pandemic and we're all staying inside and away from people to limit the virus, to try to control the virus, which is still raging out of control. People are still getting sick, people are still dying, and we've already had 3,000 deaths, and they're saying that there might be 200,000 deaths in the US.

Should we invest in the stock market at this point? It's a legitimate question, right? I mean, things have come down 30%. Some stocks that we're trading have done a lot worse than 30%. The travel industry, the food industry, they've all been killed because they've been shut down by this virus. Now, we all know it's temporary, hopefully. I don't know when you're listening to this, but you know better than I do, because you're in the future, but hopefully this thing will shut down. Now, I'm giving this example. Don't be like, "Oh, yeah, I know what happened, and it was either a good idea or bad idea to invest." I don't know, but these types of scenarios will occur over and over throughout history. So this is just one example of how you look at an opportunity, and the opportunity is, "Hey, stocks are down 30%. Do we buy here?"

So what do we ask ourselves? Well, number one, what are our longterm goals? If your longterm goal is to build up your stock portfolio and hold onto these stocks so that you could trade options on them for years and years to come, like we talk about it in our Passive Trading Formula course, then maybe we should start buying now. Or if your goal is to become an options trader only, and only trade options, not own any stocks, well then it doesn't matter how low the stocks go, you shouldn't buy them because that's only going to distract you from your goal, right? So for you, this is an opportunity that you should pass on.

Number two, what are the pros and cons? Well, obviously you can make money. Right? Pro. We could also lose money, because the stocks could drop even more. The virus has not peaked yet. We don't know what's going to happen tomorrow. Things could get worse. What if all the businesses and everybody shut down for the whole year of 2020? That will definitely have the stock market go down a lot more.

Number three, what are the probabilities? Well, worst case, we lose all our money. That's probably not going to happen. I mean, I don't think the stock market is going to zero. Most of the stocks we buy are not going to go out of business. Well, some of them will. If it's worst case, most of them probably will not. Best case is the virus disappears and the stock market rallies 100% percent. That's probably not going to happen either.

What could happen is the market drops another 30% from here. That would be a 60% drop, which in history doesn't happen too often. It's possible. That might be the worst case, actually. 50, if it drops another 30% from here. So if our risk is a 30% drop, how do we minimize that risk? Well, we can wait. Maybe we don't buy stocks now. That's one way. Or maybe we could hedge our position by buying put options. That's another way to do it. Or maybe we can buy some shares now and then we buy a few more every week. So whether the stocks go down or whether they go up, we're just buying a few more every week, every week, every week, because we can't predict the future. We don't know what's going to happen.

The possible reward is that we don't buy at the bottom, right? But we still get stocks at a really cheap price compared to where they've been before, and where they're eventually going to go again. 30 years from now, are we going to have a stock market? Yeah. Are stocks going to be higher than they are now? Probably. Right? So if you look at those probabilities, then yeah, it's a good time to buy now and hold, and you guys are fortunate enough that you know how to sell options on your stock so that you can actually generate an income while you're waiting for the stock to go up.

So what are the people who have made a killing in the stock market, in this same situation, doing right now? People that took advantage when stocks dropped before in bear markets, what are they doing right now? Well, the ones I've been able to investigate and research, most of them are buying small amounts of stocks that they want to own. Not huge quantities. They're not just going out and betting the farm. They're not borrowing money to buy these, but they're buying small amounts. They're not waiting for the bottom, nor are they just sitting on their hands doing nothing. They're actually in the market right now.

The last week or so, we've had a little bit of a rally. The VIX, the volatility index has actually come down a little bit, so some people are a little bit ... The selling has abated. It might happen again, but it seems to have calmed down a little bit. I myself have started buying some shares that I want to own, and I've been selling naked puts way out of the money on stocks that I wouldn't mind owning. These are shots at Coca Cola and Johnson & Johnson, Las Vegas Sands, stocks that have taken a beating, right, and they're much cheaper now than they were before, but in the longterm, by owning them, I think they're going to go back up. They're very strong. They pay good dividends. So I am making 1% to 2% a month income while waiting for these stocks to drop even more, because I'm selling my puts out of the money. So that meaning that I want them to drop even more before I buy them, and I'm getting paid to wait.

So next question. What is your gut telling you? Maybe your gut doesn't know in this situation, which is normal. I don't know. My gut's like, "I don't know. Don't ask me. I can't predict the future." And then lastly, can you live with another 30% drop in stocks? So if you buy now, if you take all your money out and you buy now, can you live with a 30% drop? If you can't, then don't do it, or do something else. Don't buy all right now.

Now, based on this exercise, if you were thinking about investing in stocks right now, I don't think the answer is to buy 100% everything right now. To minimize the risk, I think the answer would be to maybe start with a little bit, right? Maybe sell some naked puts if you know how. Ready yourself if stocks move lower, but buy more shares as they do. So as they go lower, buy more and continue to buy more. If you don't know how to sell naked puts, this would be a great time to take advantage of our Passive Trading Formula course. You can learn more at and we'll show you exactly how to do it.

In our group, our community, I actually share some of the trades I'm doing, some of the stocks that I've been selling options on, and we have a really good community of other traders who are in the same course who are also sharing their trades. So by yourself, yeah, you can probably do well, but when you have a community that thinks the same way and when they're helping each other out and when they're sharing what they're doing and sharing ideas, it helps everybody.

So right now it's a scary time. We're all stuck in our homes. We're walled off from our fellow human beings. So if you haven't, look online, find some groups that think the way you do and not groups that are trying to scare you and tell you how the world's going to end. We don't need more negativity. Let the government handle the business that they're handling. Let them handle the virus and let the health people do that. We just listen to what they're saying. Stay home, stay safe, and prepare for the future. And right now, this is an amazing opportunity for you to take some time and educate yourself about how you can use the stock market to your advantage, okay? So if you want to check it out, it's we have a free training there that you can watch and learn. I hope this helped. Please stay safe and remember to trade with the odds in your favor.




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