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This primer will give you an extensive introduction to the world of stock options. By the time you are done reading, you'll have a much better understanding of how they work and be able to take advantage of the opportunities here at HX Income.

If this is your first time buying or selling an option, don't worry... Many people think that options are complicated.

Well, everything is complicated when you first learn how to do it!

Remember when you were a kid, learning to ride a bike? There were many different things to think about, and it was scary. Now, it's as easy as... riding a bike!

It's the same with trading options. The concept of options is often met with trepidation. But once you learn the basics, it becomes straightforward... and it becomes a powerful tool at your disposal.

When executed correctly, options are a great way to increase your returns.

When I began trading options, a friend warned me about what I was getting into. But trading can be as safe or risky as you want it to be...

I've had great successes with options and failures, too. A big part of investing is knowing that only some things will make money. That means we have to create a trading plan that works. It needs to keep your risk low and your potential rewards high.

The trades need structure and simplicity, and my rule for trading stocks also applies here: PLAN THE TRADE, TRADE THE PLAN!

You must pre-plan every trade and know your maximum risks, rewards, and breakeven points for each trade.

Professional investors know this better than anybody. While most of their reputation is made from investing in good old-fashioned common stocks, a much more significant portion of their money comes from using options to enhance returns.

Top of the list: legendary investor Warren Buffett.

This old-school, traditional "value investor" has made billions of dollars for himself and his investors trading options.

In fact, during the financial crisis, Buffett bought and sold $5 billion worth of options... and he still uses them to this day.

But you don't have to be a famous investor like Buffett or a hedge-fund manager to trade options... You could also buy and sell options yourself – just like you do with most other asset classes – right from your brokerage account. In this primer, I'll walk you through everything you need to know to get started.

In this primer, we will walk you through the basics and everything you need to know to execute the options strategy based on our recommendations at HX Income.

First, let’s discuss the goal of HX Income.

We focus on a very particular options strategy – selling put options – to earn YOU income.

This is not a riskless strategy, but if done correctly, it can earn you a steady income with very high success rates.

Even when the strategy doesn't work, you wind up owning the stocks of some of the highest-quality companies.

This strategy is a potential way to earn income while focusing on some of the best companies in the stock market.

Next, we want to discuss how we develop our option recommendations.

To understand our "core" strategy, we recommend you read the HX Trader primer. You can access it here…

Our HX Income strategy uses the same "raw material" as HX Trader.

We are looking for the same combination of opportunities that we seek in that strategy.

As we say in that primer, we are looking for “winning” companies and stocks where the stock has – for whatever reason – become materially oversold and has begun to recover.

We go further through the process of identifying these types of opportunities in great detail in that document.

What is the difference between the opportunities we identify in HX Trader and HX Income?

The ideas we identify here are particularly selected to work best with the options strategy.

This means that we are generally looking for bigger and even more liquid stocks that give our readers an even greater degree of safety.

We also consider the particular volatility of a situation and how it is better as an options opportunity versus just buying the stock.

The core underlying method of picking the companies is the same. It is based on strategies we successfully developed over the last 30 years.

The key is finding the RIGHT ideas to execute via options and earn you solid income!

Options are powerful because they can enhance your portfolio's returns. But as everybody knows, there's no such thing as a free lunch. Options increase returns by adding risk to a portfolio.

Risk is a good thing – it's the other side of reward!

But risk needs to be used sensibly to your advantage in trading options.

That's where option strategies come in.

One classic strategy is to use options as a hedge. This means they are intended to reduce potential losses for an investor. In another case, they can be used to generate income, enhancing the returns of a portfolio. Sometimes, they are used for pure speculation.

Any of these cases can be immensely profitable – if implemented correctly. But people have misconceptions about options.

They think options are risky and could wipe you out in a few bad trades. Of course, there's a grain of truth here. But there's also a lack of good common sense.

If done right, options can be less risky than buying stocks outright.

The option strategy focused on in HX Income can achieve just that.

It's an income-generating strategy that takes what you already want to do with your portfolio and gets you paid for it – upfront.

It's used by some of the world's best investors, but it remains largely unknown to most Americans.

The strategy is known as selling an option.

Selling options allows you to collect a large amount of cash upfront without having to own a single stock.

You can sell calls and puts on thousands of companies daily and collect cash, or "premium," as soon as you sell the option.

What makes options selling appealing to many investors is that you can make money selling options in any market condition.

While investors can use several strategies when trading options, we'll mainly focus on selling put options in HX Income.

An option belongs to a class of financial instruments known as "derivatives." A derivative is something whose value comes from – or is "derived" from – another underlying financial instrument. So, for example, iPhone maker Apple has shares of common stock that trade freely. Any other financial instrument whose value is based on the price of Apple stock itself would be classified as a derivative.

An option is a derivative that gives you the right, but not the obligation, to buy or sell an asset from or to another party at a predetermined price on or before a particular date.

An option is simply a contractual agreement between two parties: the buyer and the seller.

The seller doesn't have to own the asset to sell an option, and the buyer doesn't have to buy the asset to buy the option.

Unlike buying shares outright, where you can hold onto them for as long as you like, options have an expiration date.

You can buy or sell short-dated options that expire within a few days, even one day. But you can also buy options that expire after a month, three months, or up to five, 10, or 20 years.

Monthly options expire on the third Friday of the month. In contrast, weekly options expire every Friday except for the third Friday of the month. On Fridays, when the markets are closed, options expire on the preceding Thursday instead.

When buying a call option, the buyer is purchasing a contract that gives the right, but not the obligation, to buy an asset at a predetermined price on or before an expiration date.

That predetermined price is the strike price – the amount at which the buyer can "exercise" his option to buy the asset.

You can buy options on a particular stock, an exchange-traded fund ("ETF"), or an index. The underlying asset is the stock, ETF, or index the options contract refers to. Remember that a single option contract represents 100 shares of the underlying stock.

In addition to these three concepts, let's briefly look at other terms investors use regarding options...

Say you walk into a clothing store and see a nice sweater on the rack. It costs $50.

You love buying great-quality sweaters at reasonable prices, but you think you can get them for an even better price.

Retail in that area hasn't been doing so well, and there's a chance that the prices of the store items could continue to come down.

You go to the store owner and say, "If that sweater goes on sale, I'll buy it for $40 two months from now."

You assure him that your offer is good any time over the next two months, no matter what happens... even if the sweater's price falls below the $40 that you offer him.

The store owner agrees to your offer and hands you a $5 bill. He's grateful that he'll be able to sell it to you for at least $40 over those next two months.

Not bad, right? You're getting paid to do something you'd be willing to do anyhow.

And that means you've effectively sold the cashier a put option.

You (the put seller) decided to enter into a contract with the store owner (the put buyer) that gave him the right, but not the obligation, to sell you the sweater for $40 sometime in the next two months. In return for this agreement, he paid you $5 – which you keep no matter what happens.

There are two ways your agreement with the store owner could work out:

If the price of the sweater gets discounted to $45, you still get to keep the $5. If the store owner can sell it on the market to someone else for $45, he surely won't sell it to you for $40.

Even if the sweater's price falls to $39, you get to keep the $5 the store owner paid you... but you have to buy it for $40. In this case, you still get to keep $4.

In fact, you make money on this contract down to $35, which is the breakeven price for you on this transaction.

It's important to point out that both parties are satisfied by this transaction. It's not a zero-sum game... It's not that one person loses everything, and the other wins everything.

The store owner is content because whatever happened, he can sell his sweater for at least $40.

And he was happy to pay you the $5 as "insurance" in case the prices of clothing in his store took a hit and had to be deeply discounted.

You, on the other hand, walk away happy because you collected $5 in exchange for agreeing to buy a sweater that you were already willing to buy at $40 and entered into a contract allowing you to buy it for that price should the store owner want to sell it for that much.

You don't shop for clothes in this way... But this example shows how you can use this strategy to buy stocks you would be willing to own at even more beaten-down prices while getting paid cash.

We have two goals when selling put options...

One way to use put options is if you believe that the underlying asset will increase in price so that the put option expires worthless. You get to keep the premium you received.

Of course, selling puts involves risk, although your maximum potential loss is limited because an asset cannot decline below zero.

On the other hand, with a longer-term perspective, you might be interested in buying a stock but at a lower price than where shares are currently trading.

Selling put options on companies that you're willing to buy gives you an option to collect cash up front and then purchase shares of the company if the price drops. Selling the puts lowers your cost basis per share (remember, the strike price minus the premium you collected) if you're obligated to buy shares because you get to keep the premium received for selling the contract.