John Dobosz is the editor for two widely-read investment newsletters: Forbes Dividend Investor and Forbes Premium Income Report.
Before working at Forbes, Dobosz gained experience working with CNN Financial News and Bloomberg TV. He is an investment expert who focuses on options-selling trades on dividend-paying stocks which generate superior levels of income and total returns.
Dobosz gave a presentation at the San Francisco MoneyShow entitled, “Spotting Real-Time Opportunities for Selling Covered Calls and Writing Puts.” While there, Dobosz granted an interview and shared with readers his knowledge on options trading.
Dobosz’s responses can be seen below.
- What is your best advice for an investor starting out in options trading?
“Before you do any trade, you should know exactly how much you could make, how much you could lose, and what’s the potential return. Options are versatile and volatile financial instruments that can be used for speculating, hedging, or generating income, but you need to understand all possible outcomes of the positions you take. There is a buyer and a seller for each options transaction, and because options expire, they decay in value the closer you get to expiration. This works against you if you’ve bought options, but it works for you if you’ve sold them. In fact, I find selling options to be a great way to generate additional portfolio income from stocks.”
- What is your favorite options trading strategy? What are the major risks associated with this strategy and how do you minimize those risks?
“My focus is on equity income investing, so my favorite options strategies are selling covered calls and writing puts. “Writing” means selling. If you sell a put, you literally “put” yourself on the hook to buy the stock at the strike price anytime until expiration, and if the stock stays above the strike price, you just keep the premium you earned from selling the puts. If you sell calls on a stock you own, you earn money for agreeing to sell the stock at the strike price if called upon to do so anytime until expiration.
We typically sell options expiring in 20 to 60 days and require the premium to be 2%-5% of the capital at risk. The goal, which we’ve achieved, is to earn about 2.5% per month. This does not mean that there are not interim casualties on the road to consistent gains. When you sell puts or own a stock on which you’ve sold covered calls, you’re exposed to company-specific and market risk that results in a substantial decline in the price of the underlying stock. To mitigate risk, I select holding periods that do not encompass an earnings release date, an event that can cause some stocks to trade extremely higher or lower afterwards. To put a floor on your potential loss, you can purchase a protective put at a strike price 10% or so below the current market price, or whatever decline would make you comfortable. The downside of buying puts is that it eats into your proceeds from selling options, but when the market environment turns inhospitable, this strategy acts as insurance against losses beyond certain levels. Like insurance, most of the time your house doesn’t burn, and you don’t crash your car, but when a nasty surprise does come along, you’re glad you have it, and it can save you from catastrophe.”
- What is your current day-to-day role with options? Do you favor option trading over stock trading? Why or why not?
“I find value in trading options and stocks together. Twice a week in Forbes Premium Income Report, I recommend two options-selling trades stocks every Tuesday and Thursday. The underlying stocks are all dividend-payers that meet the same value and cash flow criteria I created to select stocks in Forbes Dividend Investor. We establish positions in these stocks in two ways: buy writes in which we buy the stock and sell call options against it—often with an eye on an upcoming dividend—and put writes, which is selling a slightly out of the money put. If we end up owning the stock after the options expire, we write covered calls to generate additional income. Ahead of an earnings report when the price of the stock could take a big hit, we sometimes purchase protective puts with a strike price about 10% below the current market price of the stock. These puts are like insurance, they often expire worthless, but they can bail you out of bad situations, either by giving you the right to sell a stock at the strike price, or earning a profit selling the puts before expiration.”
- How did you first become involved in options? What was your background that led you to that point?
“I’ve been following financial markets since I was a young kid, and in college I majored in finance at the University of Florida, so I got a good education in stocks, fixed-income securities, and derivatives like options and futures. I was a field producer for CNN and reported from the Chicago Board Options Exchange, Chicago Board of Trade, and Chicago Mercantile exchange, where I learned the basics as well as the exotics strategies that can be executed with options. At Forbes, I got to know some of the big names in options like Larry McMillan and Bernie Schaeffer. In March 2014, I launched the options advisory service, Forbes Premium Income Report. Average annualized return since I started the letter is 30% annualized. To annualize returns, I multiply by 365 and divide by the number of days in the holding period. Basically this helps tell you if you’re being efficient in deploying your capital.”
- Is there anything else you want our readers to know?
“The best way to learn and master options trading is to get going with some real-world experience. I invite anybody who wants to learn about selling options on dividend-paying stocks with four new recommendations per week to try the newsletter. For $1, you can get both Forbes Premium Income Report and Forbes Dividend Investor for six weeks at www.forbesmagazine.com/trials. If you have other questions, you can email me at email@example.com.”
Mr. Dobosz offers readers invaluable information on the world of options trading and his expertise is greatly appreciated.