Until recently, I had never purchased any stock options. Of course, I was familiar with the concept, especially because having a large share of options in a company I worked for going public allowed me to amass enough wealth to be financially independent.
That said, most financial advice is to buy stocks and hold them. You also get the tax benefit of long-term gains if you have them for more than a year. There is, however, another side of the stock market—the side where you can place bets on how well a stock will perform in the future. While the stock market can be seen as gambling, options trading is seen by many as degenerate gambling.
Simple Options Examples
You think TSLA is going to fail miserably. The stock is at $298.19 (this data is accurate as of exactly March 3, 2025, at ~9:12 a.m. CST). You fear it will fall below $200 by the end of the year. So you buy one PUT option that expires on December 19, 2025, for $15.75. This gives you the option to sell 100 shares of TSLA at $200.
- If TSLA exceeds $200, you lose 100 X $15.75 = $1,575 (ignoring fees).
- If TSLA is $184.25, you break even.
- If TSLA is $100, you make 100 X $84.75 = $8,475
- The most you can possibly make is if TSLA goes to $0 and you make $18,475
If you think TSLA will be amazing by the end of the year and go over $400, you can buy one CALL option for $34.25.
- If TSLA is under $400, you lose 100 X $34.25 = $3,425 (plus fees).
- If TSLA is $434.25, you break even.
- If TSLA is $600, you make 100 X $165.75 = $16,575
- You can make no maximum, as the stock could go over $10,000.
You don’t have to hold the options until maturity (December 19, 2025). Most people don’t, as you need cash to purchase the shares at the agreed-upon price.
You can choose from many possibilities with different expiration dates and strike prices. For example, the TSLA $400 call expiring on March 7, 2025, is only $0.09 because a stock increasing 30% in a week is highly unlikely.
The key takeaway on the difference between buying stocks and options is that you can quickly lose all the money you are wagering. If TSLA stays the same price today, you will not see any change in your net worth. However, our example PUT and CALL options would be out-of-the-money, and you would lose everything you wagered.
Leveraging Options
Over the last ~15 years, the market has performed insanely well. The S&P 500 closed at $900 in 2008, and in 2024, it closed at $5800. Individual stocks have outperformed the 7X return. However, the current economic and political climate, as well as general valuations, can make investors feel uneasy about future performance.
One option is to sell your stocks and move into bonds or cash. You may face tax implications, but you can also earn 4% on your money. The other choice is to use options to help protect your assets.
Let’s say you were lucky enough to buy 100 TSLA before 2020 at $20. You know you missed out on the high at $480, but you don’t want to see it fall below $200 or, even worse, closer to your purchase price.
You can buy the PUT option we discussed above. You are betting against the stock you own, but as you can see in the table below, you are sacrificing a relatively small portion of your total investment to ensure you don’t lose a significant portion.
| TSLA | Net Worth | % +/- |
| 500 | $48,425 | -3% |
| 400 | $38,425 | -4% |
| 300 | $28,425 | -5% |
| 250 | $23,425 | -6% |
| 200 | $18,425 | -8% |
| 150 | $18,425 | 23% |
| 100 | $18,425 | 84% |
| 50 | $18,425 | 269% |
| 1 | $18,425 | 18325% |
This is one very specific example, and it may not be the best example for your scenario, but it does show that in the worst-case scenario, you can only lose $1,575 because your PUT option will cover anything else you lose. And if the stock climbs back to its previous high, you will only be missing out on 3% of your possible gains.
The Collar
Now, imagine that you truly want to protect your investment and don’t care if you miss out on some potential gains. You can buy a PUT and sell a CALL option. Selling a CALL takes the opposite side of the previous CALL example. So, instead of paying $3,425 for the CALL, someone else is paying you $3,425. Now, this can be extremely dangerous if you do not own the underlying stock, as if the stock goes up, you have no way to pay the person making unlimited gains. But since we own the stock, we can sell shares to cover our potential losses.
Here is a table for when we buy a PUT @$200 and sell a CALL @$400.
| TSLA | Net Worth | % +/- |
| 500 | $41,850 | -16% |
| 400 | $41,850 | 5% |
| 300 | $31,850 | 6% |
| 250 | $23,425 | -6% |
| 200 | $21,900 | 10% |
| 150 | $21,900 | 46% |
| 100 | $21,900 | 119% |
| 50 | $21,900 | 338% |
| 1 | $21,900 | 21800% |
Your gains are capped; you cannot have more than $41,850 at the end of the year. Your net worth will still decline if the stock finishes under $282, but you cannot have less than $21,900.
Again, these are arbitrary dates and strike prices. It all depends on your outlook for the stock and how much you want to protect or risk. Each stock is unique as well. For our TSLA example, $300 PUT = $330 CALL, meaning you guarantee your shares will be worth at least $300 at the end of the year and no more than $330.
Taxes
The collar strategy works best for retirement accounts where short-term gains do not affect you.
In our TSLA example, if the stock finishes at $150, You lose $15,000 in long-term gains. However, you realized $3,475 in short-term gains from selling your $400 CALL option, and another $3,425 from buying your $200 PUT option.
Your net worth went down $8,100, but the government will tax you on $6,900 of income.
Is It Worth It?
A key to successful money management is knowing all your options.
I have a negative view of the 2025 stock market. It is far more likely that a stock will fall 20% than increase 40%. If you are retired, you should be more concerned with preserving your wealth than growing your wealth.
*I have none and have never had any financial investments in TSLA.
