Do you think your paycheck is the safe part of your financial plan?

And when you think about the stock market and especially trading options you think about dangerous risk?

You have it completely backward.

I spent nineteen years at LabCorp. Part of my job in management was letting people go.

Not just the underperformers. Good people. People who worked hard, stayed late, and did everything the company asked.

Performance had nothing to do with it. A number came down from three levels above me, and if that number had your name attached, your paycheck stopped right after your severance ran out.

I still remember the last three employees I let go. I remember them taking it personally. When it's not. It's business...

I remember those three because ten minutes after I explained they were no longer employed, my director called me into his office and said the exact same thing to me.

Then they showed me the door. The guy who worked on Christmas day, carried his work phone on every vacation. Fixed other peoples screw ups at all hours of the day.

This is not a sad story. It's a reminder that doing everything right didn't protect them and doing everything right didn’t protect me.

Your paycheck isn’t a floor of stability. It’s somebody else’s decision, and you’re just standing on it.

Somebody asked me this week if I take enough risks.

My answer was simple: I take risks when the reward makes sense and I have a system to work it out if it moves against me. That’s the whole test.

By that test, depending on a paycheck from a company is the riskiest think you can do. You can't even measure it and you have zero control when it ends. You just showed up exchange your hours for pay and hope the next RIF that comes down had someone else's number on it.

Now look at the thing everybody calls dangerous: selling options.

Think about State Farm.

They’ll agree to hand you $400,000 if your house burns down, and all you pay is $150 a month.

Look at one house, and that sounds like an insane bet. Look at the whole book of business, and it’s one of the most reliably profitable models in human history. Warren Buffett built Berkshire Hathaway on it.

They don’t guess which house burns. They price the odds, and they let time do the work.

That’s what selling a cash-secured put is. You sit on the State Farm side of the table.

Someone pays you cash today for the right to sell you shares at a price you chose. If the stock stays above it, you keep the cash. If it drops, you buy a company you wanted to own anyway, at a discount you picked, with money you set aside before you ever placed the trade.

The "bad" outcome is owning an asset cheaper than it trades today.

When I sell a 20 or 30 delta put, collecting 1% to 3% for the month, I have to chuckle when someone tells me I'm the one taking a risk. Especially when I watch my account grow well beyond the average returns of the S&P500.

Now for the honest part.

Done wrong, this will hurt you. Over leveraging in an situation carries risk that can end someone's career.

If you sell puts on junk companies, you’ll get junk. If you sell more contracts than your cash can cover, a market correction will end you. And unlike State Farm, on Wall Street all the houses can catch fire on the same day. When the market drops, every position can go underwater at once.

That’s why the cash gets set aside first. That's why we only trade companies we'd hold for years.

The market drop isn't what takes people out. Greed and overleveraging can ruin a life of freedom.

Done wrong, it’s gambling.

Done right, it’s an insurance business.

You already have the discipline for this. You've spent decades executing someone else’s system correctly.

The only problem is that all your capability is currently pointed at a paycheck that can be erased in a ten-minute meeting decisions made by people who don't know your kids' names.

The math doesn’t care where you work.

The only question is which side of the policy you want to sit on.

Turning knowledge into wealth,
$Maxwell

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📖 This weeks trade Tuesday blog:

​How I Unravel a Put Spread​

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