How to Generate Monthly Income From Options Selling Author: Alex has served in the financial industry for over 20 years, assisting with client portfolios in addition to his personal investments.
When we purchase an option, we can only realize a profit when our market direction bias is correctly aligned with the direction at which the market is moving.
Furthermore, not only does the direction of the market need to be correct, our prediction of the direction has to be accurate within a predetermined time frame, or it will similarly result in an overall loss, due to the expiry of the purchased option before any profit could be realized. As a result of the above, you can see the argument for shifting one's mentality to that of a seller's position, in the expectation that the majority of all options written would expire out-of-the-money.
This is why the process of selling puts, followed by call options, remains as a consistent option strategy in providing monthly cash flow. The Strategy of Selling Put and Call Options Through recent developments in technology constant income from options for the entry of retail traders, we have started to grasp the power and consistency of selling options, and their position in a retail trader's investment portfolio.
The Strategy The strategy revolves around selling monthly put options on shares of companies with good fundamentals which we would look to own.
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These put options consistently provide a cash return immediately into our constant income from options each time the options expire out-of-the-money, which essentially creates a stream of income without having ownership of these stocks.
Times of constant income from options volatility in the markets would be looked favorably as it often signals a correction in the price of the general markets.
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This provides for an increase in the option premium income, together with good purchasing opportunities. These opportunities can be realized when the initial put option finally is exercised at the predetermined strike price at which we would be comfortable with purchasing the underlying stock.
Furthermore, the premiums generated from the initial option selling further decreases the cost basis of each unit of stock that would ultimately be purchased. Following the acquisition of the stocks at discounted prices, the strategy is then followed by the selling of out-of-the-money call options. In the worst-case scenario, should these call options remain out-of-the-money and expire worthless, the seller would be entitled to keep the full premium generated and then proceed constant income from options write a further call option.
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In the best-case scenario, the constant income from options of the underlying share may begin to rally past the strike price. In this scenario, the shares would be called away at a profit while similarly pocketing the premiums generated from the original writing constant income from options the call option itself. Case Study: Nike, Inc.
As discussed in the strategy section, companies with good fundamentals would first need to be identified.
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This is then followed by identifying a suitable purchase price through the selection of the option's strike prices. Step 1: Selling cash-secured naked puts This first step allows the purchase of shares in companies with strong fundamentals at discounted prices compared to the current trading price.
Whether you are interested in acquiring an equity position, already own equities, or simply do not wish to own any equities, there are option strategies that are suitable to generate income. In this post, we will explore the top 3 income generating strategies and how to add yield to various portfolios.
Simultaneously, the premium income generated aids in lowering the cost basis of each share. We will use some historical numbers to look into this. This thereby increases the margin of safety and possibility of purchasing NKE shares at an even larger discount compared to the current constant income from options.
As demonstrated, selling cash secured put options can be a strategy that allows for the opportunity to purchase stock at discounted entry prices, while being able to generate high monthly income comparable to other riskier high-interest investment methods. Live trade on Nike shares - Cash secured put option selling. It is called a covered call as the seller retains the underlying shares which may be be called away, and therefore the seller's exposure is considered "covered".
Looking at the possible scenarios that may follow, the worst-case scenario would see the call option expires worthless and out-of-the-money. This would be followed by a subsequent write order to sell another covered call option, while retaining the full premium from the first sale.
This is the best-case scenario as the seller would be able to profit from this trade twice through the crystallisation of the capital appreciation in the share price, in addition to retaining the full premium income.
Once these shares are called away, the option seller can then look to return back to Step 1 and repeat the process by selling out-of-the-money put options on strong companies at discounted strike prices. Copyright Dr.
Poeta Diablo - Live trade of a covered call option sale. The wide margin of safety is available for inherent errors: As an option seller, option premium is received every time. This premium is received via a cash transaction into the seller's account the moment the option was sold.
The Strategy of Selling Put and Call Options
The cash collected is able to provide for a margin of safety by lowering the cost price of the underlying share purchase once exercised. The option seller is also in a position to make money without depositing money the strike price of the options prior to the sale.
Through this, we are able to effectively create an opportunity to purchase quality companies at discounted prices. Along the same lines, the seller of a call option can similarly predetermine the strike price of the call options allowing for the opportunity to sell the shares at a price above the original purchase price.
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A high probability of profit: The strike price of the put and call options sold would be considered deep out-of-the-money and therefore carry a high probability of profit.
Less time commitment required to monitor portfolio positions: The example above revolved around a 33 days-to-expiry time frame.
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This suggests that there would not be an active requirement to monitor this trade for the following 33 days until it nears expiry.
This is fully attributable to the fact that the predetermined strike prices allow the option seller to preempt the purchase price put options and sale price call options ahead of time.
Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.