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How to Sell Put Options for Income

Let’s walk through an example of how to sell a put. After careful selection of the right stock, you decide you would like to create a monthly income stream by selling puts each month on this stock. Let’s say the stock is currently trading at $70 in the market. After reviewing the option chain, you decide to sell the 67.5 put option on this stock that expires in one month. The 67.5 strike price is out of the money and will obligate you to buy the stock at $67.50 only if the put buyer decides to exercise the option on or before the expiration date. The put buyer will only exercise the option if they make money or if the stock price is below $67.50.

As the put seller (writer), you get to collect the cash premium for the option. In this case, let’s assume it is $200 per option contract or 100 shares of stock. The investor now has a risk of $67.50 – $200 = $65.50 per option contract sold. If this amount of $6550 per contract is in the investors brokerage account, this is a cash-secured put. The potential return is $200 which the put seller will keep regardless of the trade outcome.

The investors return is calculated as $200/$6550 or 3.05%. This is a nice return on a one month put option. On an annual basis, this is a return of 36.6%! This is why I sell put options for monthly income.

Here are the details of the trade:

1 Option = 100 Shares of Stock: In this example, we sold 1 put option. In other words, we sold someone the right, but not the obligation, to sell 100 shares of stock to us for $67.50 on or before the option’s one-month expiration date (usually the 3rd Friday of the month).

$ 2 = Our Options Premium: In exchange for giving someone (the put buyer) the right to sell us 100 shares of stock at $67.50, we get paid in cold-hard cash! In options lingo, we get paid in the form of a premium. In this example, our premium is $ 2 per share. Because each options contract equals 100 shares of stock, here our premium is $ 200. This $ 200 is deposited in our account at the time of the transactions. It is ours to keep no matter what transpires before expiration (the end of the contract).

There are 2 potential trade outcomes:

  1. The stock prices stays above the 67.5 option strike price so the put option expires worthless. Put yourself in the position of the options holder (the person that buys the put option from us). The put holder purchased the right, but not the obligation, to sell 100 shares of stock at $67.50 per share. Assume this put option expires in one month. If, at the end of that one-month expiration time period, the stock is trading at a price above $67.50, why would the put holder exercise his right to sell the stock at $67.50 when he can sell at a price above $67.50? They would not exercise the put option! The investor keeps the $200 premium and has a 3.05% return in one month.
  2. The stock declines in price and is below the 67.5 option strike price. The option will be exercised and the shares of stock will be sold to us at the strike price ($ 72.50 per share). Again, put yourself in the position of the put holder for a moment. If, at the time the put option is set to expire, the stock is trading at $65, and the put holder has the right to sell shares of stock at $67.50, why wouldn’t the put holder exercise his right to sell the stock at $67.50 per share? They would. So in this scenario, the cash we previously deposited into our brokerage account ($6750) is used to purchase the underlying shares that were “put” or sold to us. Our break-even point, also referred to as our “cost basis,” is now $65.50 ($67.50 per share we paid for the stock less the $ 2 per share put premium we received from the original sale of the put option). At this point, we own 100 shares of stock and can sell them or write a covered call trade.

This is a simple example of how to sell (write) a put option for monthly income. Once we do this each month we create a stream of cash flow to help us achieve financial independence.

Last month, we were successful on all put trades and averaged 3.5% return for the month.  Imagine making $3000 or more in income each month!   Start making more income each month by subscribing to the Monthly Income Plan.

Dividends Are Losing Their Allure

Investors have long looked to dividend stocks as a means to generating investment income.  For decades this has been an effective strategy to increase cash from investing. However, in today’s market investors are more uncomfortable on how to identify new income opportunities.  They should consider allocating a portion of their portfolio to selling options for premium income.  The returns can be as high as 5% or more in a single month using the stock breakout strategy.

In a recent article published in the Wall Street Journal, “Dividends are losing their allure due to rising rates”, there is a case that yields are too low in today’s market. Here is an excerpt:

A heated stock market rally combined with a sharp climb in benchmark interest rates this year is eroding the relative value of companies that pay out chunky dividends to their shareholders.

Low interest rates over the past few years have boosted the attractiveness of high-dividend stocks that offer up income at a time when bond investors were earning next to nothing. For some sectors, that was a key reason to invest. But recently that’s reversed.

As the S&P 500 has climbed, the share of investment gains coming from collecting those dividends has been falling. The S&P 500′s so-called dividend yield over the last 12 months was at 1.73% Tuesday, its lowest since 2011. 

Let’s exam what a 1.73% yield means to an investor.  This means an investor will earn 0.4325% each quarter or 0.144% each month.  Based on having $10,000, an investor would earn $173 per year or $14 per month. What can one do with $14 per month or $144 if you invest $100,000? Not MUCH!

For investors seeking monthly income, there is a better way to create cash with your investment portfolio.  At Get Rich Investments, we have produced returns of 5% or more in a month which is an annualized return of 60%.  You may ask if this is a risky investment to achieve such a great return.  While all investments have some level of risk, this investment rewards the investor with a significantly higher return.

We achieve these returns by selling PUT options (cash-secured) or CSPs on stocks trending higher due to stock breakouts.  By selecting stocks with upward movement, it decreases the risk in the investment. This is the secret sauce to high returns using option selling strategies. When the stock moves higher, investors can exit the trade to lock in profits. Then, compound their capital weekly or monthly. This is how investors can create a monthly income far greater than dividend stocks without the risk of chasing penny stocks.

Here are some recent trades producing high returns for monthly income:

We have a fast winner in $FINL as the stock had a big pop today – up over 12%. I suggest investors to buy-to-close this trade at ~$0.20 per option or less.  This gives us a nice 9% profit in 4 days or over 800% on an annualized return!

We have a another winner in $BEAT as the stock has moved higher to $31.75. I suggest investors to buy-to-close the 29 PUT trade at ~$0.20 per option or less.  This gives us a nice 3% profit in 5 days or over 200% on an annualized return!  There will be more trades moving into next week after the holiday.

The market was in a blast mode last month as it ran to record highs again. We had all winners this month with max income trades. And how about the monthly returns on the PUT trades – 4.8% on ARRY; 8.8% on TLRD; 9.6% on NL; and 8.7% on MDXG!!! This is a yearly return on some buy and hold stock investments in a monthly trade for us. We will look for more stock breakouts for PUT trades in our next newsletter.

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Factors Affecting Option Prices

While there are many factors that determine option prices, stock option premiums move in unison with the underlying stock price.  The most popular method for determining option value is the Black-Scholes Model.  There are six factors in this model:

  1. Stock price is the most important factor in an options price as changes in stock price affect the price of options on the stock;
  2. Strike price has an affect on option price through intrinsic value, time value, delta and other factors;
  3. Time to expiration is the time remaining before an option expires.  Due to time decay, option values can decrease at a faster rate when the option is closer to expiration;
  4. Stock volatility is the standard deviation of a stocks price variations over a fixed period of time.  The more volatile the stock, the more likely its price will move and the option price will increase with high volatility;
  5. Interest rates have little affect on option prices but they are part of the Black-Scholes model;
  6. Stock dividends also have little affect on option prices since they are already included in the stocks price by market forces.

There are other forces that can affect the price of options that are not included in the Black-Sholes model such as:

    • Supply and demand for the stock
    • Liquidity or volume of the option
    • Markets expectation of future events such as earnings, etc.
    • Markets expectation of future price direction of the stock

I have created an investment that achieves higher monthly returns while managing stock risks in the trade. You may be skeptical of this concept and should be when you hear something like this introduced into your trading plan. To explain, let’s look at what must happen to a stock price for a successful PUT selling trade. To keep the premium from the PUT sell, the stock price must be above the PUT option strike price at expiration. To increase my percent of winning PUT trades, I invest in stocks with price momentum moving higher. This increases the probability of the stock price closing above the strike price – giving us more winning trades.

How do I identify these winning trades? I combine the fundamentals of a stock with its price performance on its stock chart. I find securities that have a positive change in price that creates upward price momentum. You may have heard about price breakouts and other upward biased chart patterns. This introduces a concept of technical analysis into our trading plan.

Technical analysis uses stock price movements and trading activity as the basis for drawing a conclusion about where the price may be headed. It is based on the premise that prices move in trends that tend to continue until something changes to affect the balance of supply and demand for the stock. These changes can be detected by analyzing prior changes, looking for recurring patterns that indicate a price trend, or indicate areas of support and resistance that may influence the price direction.

We continue to identify winning option trades to generate income and to exit early as the stock bullish patterns moves prices higher.

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