Portfolio Income Strategies To Make Money Routinely

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Option Income Strategies: Put Selling

You don’t need to already own a portfolio of stocks to generate options income.

Put selling is an options income strategy that pays you for agreeing to buy shares at prices below where they are currently trading.

Some traders think about selling puts as a way to get paid to buy a stock “on sale”, meaning at a lower price in the future.

Maybe you think the share price of a stock you would like to own is too high today but you would be happy to purchase it at a lower price in the future.

That’s when a put selling strategy can be useful.

You can sell puts that obligate you to buy stock if it dips below a specific price, the strike price, by a certain date.

By agreeing to buy stock if it is below the strike price upon the expiration date, you get paid a premium.

But what if the stock never falls and instead meanders sideways or rises?

That’s good news for you because you pocket the premium and can repeat the process next month.

Put Selling Example

Say a company on your stock watchlist is close to a price level where you would be happy to own it but ideally you would like to purchase it a bit lower, what can you do?

A “put selling for income” strategy would be ideal because you get paid to sell puts while waiting for the share price to dip lower.

Imagine the stock is trading at $68 per share and you would be happy to own it at $65 per share, you could sell 1 put contract for every 100 shares you are willing to own.

We’ll assume that you get paid $2 per share, or $200 per contract, for each put option you sell.

Fast forward in time and, if the stock is above $65 upon the expiration date, you keep the $2 per share option premium.

But what if the stock falls to $60 by expiration?

Then you have to fulfill on your obligation to buy the stock at $65 per share.

For each put contract you sold, you must pony up $6,500!

So, you can see that put selling can be expensive when you need to buy stock and is usually only appropriate if you can afford to buy the stock and want to own it.

Naked Put Selling

You already know that selling puts obligates you to buy stock when the share price of the company falls below an option’s strike price.

But did you know there is a way to lower your risk?

The put selling example above describes the process of naked put selling.

You can think of naked as meaning highly exposed to risk if the stock plummets.

In a worst case scenario when a company goes bankrupt and its share price crashes to zero, you would still be obligated to buy shares at the agreed upon strike price.

In the example above that means paying $65 per share for a stock worth zero!

If that seems scary, then other put selling strategies, like the put credit spread, may be more appropriate for you.

In the put credit spread, a put option is purchased at a strike price below the price at which you sold the original put in order to limit risk.

In reality, the chances of a blue chip company like Boeing going bankrupt are low but your capacity for risk may be a good barometer on whether naked put selling or put credit spreads are a better fit.

Using Stock Options To Generate Income: The Bottom Line

If you are looking for portfolio income strategies to make money regularly, put selling and covered call writing are among the best.

All the best online options trading brokers cater to these option income strategies.

Covered call writing is ideal when you already own stocks and want to generate income from them.

Put selling is also lucrative but requires you to have cash reserves on hand in order to buy stock if and when it dips below a certain price level.

Naked put selling is a good strategy for income-oriented investors who want to purchase stock at lower price levels and get paid in the interim.

The bottom line is if you want to make extra income regularly, options are a valuable tool to help you reach your financial goals but assess the risks before dipping your toes into options trading.

This article has been republished with permission from Investor Mint.