14% a Year with ZERO Risk Using Options

Hello again everyone! I hope you’re enjoying the long weekend for Easter. More specifically, I hope you’re celebrating what Jesus did for us at the cross some 2000 years ago. For those that don’t know, He gave up his life for each of us! In short, Jesus received what He did not deserve so that we did not receive what we deserve. Thank you Jesus.

That said, I want to share with you tonight a strategy that will guarantee a return with zero risk using options. That’s right, absolutely zero risk using options! I realize that’s a bold claim but this is exactly why options were created. Long before we started trading, “Jade Lizards“, “112’s“, or the wonderous “Christmas tree” options were designed to hedge risk and it’s well past time we get back to doing that.

In this post, I’ll walk you through a hypothetical example using the strategy to illustrate how this could be done by even a relatively new options trader.

Strategy Overview

For those that don’t prefer to review the hypothetical example, here is the strategy in it’s entirety. Start by purchasing any number of shares in 100 share increments. That way every share can be hedged with the options strategy. Next, purchase an ATM or ITM put above your cost to enter the shares. Finally, finance the put purchase by selling a covered call above the put strike price. To further simplify, here are the requirements in bullet format.

1. Buy 100 (or any number of shares in 100 lot increments)
2. Buy equal number of put options above cost basis
3. Sell equal number of call options at a further expiry above put cost

Hypothetical Example

For example, Pfizer has been in an ugly downtrend as of this writing. However, using this strategy I could safely enter the market without concerns about Pfizer continuing its decline. To do so, I would;

1. Buy 100 shares @ $27.75
2. Buy 1 Put Option @ $28 Strike for $1.01 ($101) expiring May 3, 2024
3. Sell 1 Call Option @ $29 Strike for $1.14 ($114) expiring Aug 16, 2024

This effectively caps my upside at $29 per share but it also guarantees I don’t lose money prior to May 3. In the meantime, Pfizer will pay a dividend coming up in April of $.42 cents per share.

Possible Outcomes on May 3rd, 2024 (Put Expiration)

1. Pfizer stays below $28 per share
   • Exercise put option for profit on shares
   • Close short call for profit
   • Lose put cost
   • Receive the dividend
2. Pfizer trades slightly higher between $28 & $29
   • Open another put option
   • Receive the $42 dividend
   • In this instance, I generally continue with the strategy
   • Profit or loss may result depending on the underlying price
3. Pfizer trades higher above $29 – Preferred Outcome
   • Call loses extrinsic value but gains intrinsic value with rising share price
   • Shares gain value with the rising price faster than the OTM call loses
   • Receive the dividend
   • Put expires worthless

As you can see, if the share price moves above $29 or below $28, I’m almost always guaranteed a profit. When the share price settles between the two strike prices or the move was small but unfavorable the strategy should continue.

In the next section, I’ll detail this strategy in action since it’s impossible to know from the above example at what price Pfizer would have concluded when the put expired. Thus, it’s impossible to know what the final return would have been if the share price increased.

Zero Risk Using Options – Pfizer (PFE) Real Example

Opening Date – June 1st, 2023

Stock Detail

Long Put Option

Short Call Option

Put Expiration – June 30th, 2023

Closing Thoughts

First, you may have noticed in the real example documented above that I didn’t collect a dividend during the period. Had I been able to the return would have been better. However, I wasn’t forced to close this trade. I could have easily opened another put and continued on.

You may have also noticed that in this instance price traded down sharply to around $35. As such, I was protected by having the put but the preferred outcome would have been to have the share price rise. In doing so, I would have had to open another put but I would also be experiencing a share price increase on my 100 shares.

Further, had the share price increased by more than the put cost I would be earning more while my higher strike short call lags behind. Said another way, as the share price climbs past my put cost I’d be earning a little more than the short call loses. Ultimately leading to a larger profit. It’s true my upside is capped at the expiration of that short call but if a large move occurred before then there wouldn’t be anything stopping me from closing the entire position early and realizing the gain.

In all, the strategy is a winner for me. The returns aren’t extraordinary but they can be consistent and with zero risk using options, it sure beats the alternative.

God bless,

Jeff