In 1688, a young man named Edward Lloyd decided to open a coffee shop near the London docks, simultaneously giving him the ability to track incoming and outgoing ships. His proximity to the docks gave him the ideal location and ability to offer insurance policies on these vessels.
This is where Lloyd formulated a plan. He would offer these insurance policies against ships that were possibly looted or even lost at sea and use the docks to diversify the risk.
The business eventually evolved into Lloyd’s of London, which is still a business operating today.
Offering insurance may seem like a risky business to some, as you’re offering guaranteed reimbursement in case of disaster. Even so, companies continue to make record-breaking profits year after year.
The secret to success in the insurance game is to make sure you only offer insurance to those who are least likely to use it. This means you have to be a good insurer.
Anyone Can Do It
Traders can do something similar by using options strategies to insure an underlying stock. But just like with any insurance business, you have to be a good insurer, picking the right stocks, and executing the right strategy.
Each option trade involves two sides. One side is the buyer, and the other is the seller. In many cases, the person buying a put option owns a stock and wants protection if the price drops. That put acts as their insurance policy.
This is where option traders come in. They sell those puts. They then collect the premium and provide that protection. If the stock doesn’t fall, they keep the premium as profit. If the stock does fall, they step in and buy the shares at the agreed-upon price.
Real Life Example
To understand this more clearly, imagine you own a house valued at $250,000. If it burns down and you don’t have insurance, that loss would be crushing. So you buy coverage. Maybe it costs $1,200 per year. If your house stays safe, that money is gone. But if something terrible happens, the insurance company pays you the full $250,000.
In that scenario, you’ve essentially bought a put on your home. The strike price is $250,000. The premium is $1,200. And the insurer is the put seller.
Using the Options Market
That’s exactly how you can approach options trading. You take in the premium, and more often than not, nothing goes wrong. But if it does, you don’t just hand over cash. You take ownership of a quality stock, often at a price you’ve been waiting for.
This is where the insurance comparison changes a little. If a house burns to the ground, the insurer pays out and gets nothing in return. But when a stock drops and you’re assigned, you still receive a valuable asset. And that asset can grow in value.
People often say options are too dangerous. Usually, it’s because they’ve only heard stories or never learned how they actually work. But with the right system, it’s far from reckless. It’s calculated and controlled.
Insurance companies make their money by knowing the odds and managing risk. If only a small percentage of policies result in a claim, they can still generate steady profits by spreading that risk across a wide base of customers.
Getting Started
Sites like Option Strategies Insider use the same mindset. They diversify their positions and only take trades that make sense for the level of risk involved. That’s how they stay consistent.
Starting a real insurance company isn’t something most people would want to do. It takes money, licenses, employees, and a ton of regulation. But selling insurance on stocks through a trading account? That’s something nearly anyone can do.
Once you understand how insurance principles apply to options, it becomes a lot clearer. This isn’t about guessing. It’s about being smart, managing risk, and building income over time, just like the best insurers have done for centuries.
