Here are some portfolio income strategies to make money routinely.
For a decade after the 2008-9 stock market crash, savers earned little interest on their nest-eggs because interest rates were at rock bottom levels.
When bank savings accounts don’t pay much and bond yields are low, you can wait for the tide to turn towards a higher interest rate environment.
Or alternatively, you can proactively apply portfolio income strategies to make money routinely.
Trading options for income is a common method used by equity investors who are looking to create more cash flow.
Among the best options strategies for income are covered call writing and put selling.
Writing covered calls is perhaps the best options strategy for income while put selling is an options income strategy designed to buy stocks at a lower cost basis.
Below we explore how to trade options for income when writing puts and calls.
How To Trade Options For Income: The Basics
In order to use options strategies to make money, you first need to know options trading basics.
Unlike stocks, options have a fixed expiration date after which they can no longer be traded.
Each option has a fixed strike price too. It is the price level at which call writers agree to sell shares and put sellers agree to buy shares.
Traders who write call options and sell put options are paid an amount called a premium to agree to a contract.
The only reason that call writers agree to sell their shares at a strike price upon a certain date is because the earn income from premiums paid to them.
Similarly, put sellers agree to buy shares at a fixed price upon a certain date only because they are paid to do so.
You might be wondering who pays these traders using options for income?
The short answer is either another trader betting against them or a market marker whose job it is to provide a liquid market.
How To Earn Income From Options: Covered Call Writing
When you sell a call option, you are effectively betting that a stock won’t rise above a certain price level.
On the other side of the trade is the call buyer, who believes the stock will rise higher than the strike price by the option’s expiration date.
They pay a premium for the option which gives them the right to buy the stock at the agreed upon strike price if they end up right.
And you receive that premium which obligates you to sell the stock to them if they turn out to be right.
As a covered call writer, the deal is a pretty good one because even if you end up wrong and the stock rallies much higher, you still get paid the premium.
And if the stock were to fall lower, you also keep the premium, generate income, and lower your overall cost basis.
Covered Call Writing Example
Imagine you own 100 shares of stock. It could be Netflix, Alphabet, or Facebook, or any of thousands of other optionable stocks.
To keep things simple, let’s assume the stock you own is trading at a price of $90 and you don’t believe it will rise above $95 anytime soon.
You could write a covered call at strike 95 and get paid a premium.
We’ll assume you get paid $3 per share, or $300 per contact, for selling a single call option contract.
Now, if the stock is below $95 upon the expiration of the call option contract, you keep the $300 and still own your stock.
However, if you bet wrong and the stock rises to $100 per share by expiration, you are obligated to sell your stock at $95.
The silver lining is you still get to keep the $300.
In the short term, it looks like you are worse off for having sold the call option. After all, had you simply held onto your stock and not written the call, you would own stock that is now priced at $100 per share.
So why write calls at all?
If you are trading options for income, writing covered calls is among the very best options strategies.
On the months that you are not obligated to sell your stock, you generate income from the option premiums.
And on the months when you are required to sell your stock, you can always re-purchase shares after the expiration date on the next trading day and repeat the process.
Either way, you get to keep the options premiums month after month.