How I Make Money Trading Options
Financial independence is all about having options. 🙂 And that’s the topic of today’s post. I’ll explain what they are, and how I plan to make the most of my new options income strategy.
In April I made over $700 trading options. My goal is to continue writing options every month, and collect the option premiums as income.
An option is a contract to buy and sell 100 shares of a stock. The buyer of an option has the choice (or option) to trade a stock in the future at a pre-determined price. But this choice comes at a price. So the option’s buyer must pay the seller to have the privilege to exercise this option.
Here’s an example of an option I sold a couple of weeks ago on one of my favourite companies, Apple. 🍎 This is the transaction summary.
So to break down this put option, here’s what it means.
- The option buyer paid me $209 for selling this option. Yay money. 🙂
- Any time before July 16th this year, the buyer can choose to sell me 100 Apple shares at $115/share.
Apple stock is trading at $131 now. That’s 14% higher than the option’s strike price. There’s no way the option will be exercised today. Why sell their asset to me for $115, when they can sell it at a higher price on the open market for $131?
So between now and July 16th, if Apple shares fall below $115 there’s a chance the option will be exercised. That’s fine with me. If I can buy AAPL at a 14% discount from today’s price I’m happy. 🙂 And if AAPL continues to stay above $115/share, then the option will expire and nothing will happen.
My option results from April
Last month I earned $721 selling options. Woot! I sold mostly put options. But also wrote some covered calls.
One mistake I made was selling a TD call option without setting a limit price. I chose market price instead and got taken advantage of. I’ve marked it on the chart below with a sad face. I only received $2 in premiums. And the trade commission ate up 75% of my earnings, lol.
Total income made: $721 CAD
Overall I am quite pleased with the outcome. I spent about 6 hours on research and executing the trades. That works out to over $100/hour for my efforts. 🙂 My plan for this month (May) is to make another $700 or more from option premiums.
Why target $700/month? I currently have a $270,000 portfolio with my discount broker IB. From what I’ve researched, making a 3% yield using an options income strategy is safe and sustainable. $700 a month, or $8,400 a year roughly gets me to that 3% target.
Investment website Seeking Alpha even advocates consistently earning 10% a year from trading options. That would actually be fantastic, but it seems almost too good to be true doesn’t it?
I must refrain from being greedy, especially in the beginning. Biting off more than one can chew is precisely how so many novice option traders lose a lot of money.😮
You should learn to swim by slowly exposing yourself to deeper and deeper water. If you immediately dive right into the deep end then don’t be surprised if you can’t handle it. That’s why I will start off with a 3% annual target, track my progress, and then gradually tackle higher levels of uncertainty after I’ve gained some experience.
“Beware of unearned wisdom.”
-Psychiatrist Carl Jung
Jung probably meant this in a psycho-analytical context. But the analogy applies aptly to investing as well.
Making full use of my assets
The reason I started to trade options is to see if I can make some easy money. 🙂
Trading options allows me to leverage the dormant capital of my existing stocks. I can capitalize on my $270,000 portfolio by earning regular income via option premiums without investing any new money. In the rare case that I’m assigned a new stock, I can simply pay for it with a margin loan.
Most option contracts expire worthless, especially way out of the money contracts like the ones I’m selling. But even if a stock crosses the option’s strike price, I don’t have to get assigned the stock. For example if my put option is about to expire in 3 weeks and it falls in the money, I can place a buy to close order. This way, I may lose a bit of money, but I won’t be obligated to buy the underlying stock if the option is exercised. Although there are risks that come with trading options, there are ways to mitigate them. 🙂
More to come later
Once I become more comfortable selling puts and calls I plan to use more sophisticated options strategies such as spreads or butterflies. And I will eventually try to increase my options income to (5%) of my overall portfolio value. Along with dividends (3%) and long term capital appreciation (4%), it’s reasonable to expect a 12% annualized total portfolio return.
That’s my plan for now. I started last month. Let’s see how this plays out. If you have a large stock portfolio (over $100,000) maybe you can learn from my experience and consider generating some options income as well. Just make sure to use a broker with reasonably low fees.
“I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.”
-Journalist Jason Zweig
Going forward I’ll continue to post my trades, and explain my decision process. The purpose is to hold myself accountable, and to help you make better investment decisions with your own portfolio. Do not mirror my trades unless you’ve done your own research. I am learning as well. 😅
Wisdom comes from experience. You might be given insight from someone with wisdom. But if you have not earned that wisdom, as Carl Jung would say, then you cannot fully put that information to practical use.
Anyway, I’ll give an update next month to share what I’ve learned. Thanks for reading!
Random Useless Fact:
Just out of curiosity do you trade options in a registered account?
I’ve been reading on this topic for a while, but what stops me is the tax and the all the ugly parts of tracking the specific parts of the transactions in order to report (for non-registered accounts).
Hey Alex. I am doing this in a non-registered account.
It does take some time to set up a spreadsheet. I got use to it though.
I have to track my stock purchases anyway, transaction date, price, etc.
Tracking my options transactions is just another layer on top.
It is more work, so I don’t think it’s worth the hassle or fees for someone with a smaller portfolio.
Here are some of the things I track when I make an options trade:
In terms of taxes, there’s one advantage I really like about options. 🙂
As long as I’m not trading options as a career, any premiums I earn from selling options is taxed as capital gains (not earned income.) Half of my option earnings will be taxed instead of all of it.
If you want to make tracking simpler for tax purposes, one tip I heard is to close your positions out early. This way you only have to track your option gain/losses, and not worry about any underlying stocks that could be assigned to or away from you.
Interesting stuff, haven’t really touched option trading myself but should look into that. 🙂
I think selling options is useful to know for people who have relatively high net worths. Imagine you have a $1 million portfolio. Using that to generate a conservative 3% return from trading options, which is currently my target, would create $30,000 of extra income a year. 🙂 It will certainly take time to execute trades and keep track of them. But it may not be a bad side hustle for those inclined.
excellent as always, I think it’s absolutely critical to have multiple income streams whether you’re FIRE or not; who doesn’t like extra income eh… I have never really looked into options very deep but it’s very very interesting, happy trading!
Thanks dude. I appreciate the support in this experiment I’m doing. Hopefully it turns out well.
You’re correct about multiple income streams. It’s important to constantly be on the lookout for new income opportunities.
Btw, I think people would be interested see what you’ve been up to lately. 🙂 Maybe you can post a blog update if you have time.
Hey liquid, interesting post. If you’re selling naked puts, are you holding the cash elsewhere or using margin in case your put is exercised? I guess if you are, what would be the benefit of that vs selling cover calls on owned stocks? And are you timing the strike month around ex dividend dates?
Hey Lee. Great questions. In the event that my put is exercised I’ll buy the stocks with margin debt. For example, if my AAPL put with a strike price of $115 is exercised, I’ll use a margin loan at 1.5% interest rate to buy 100 shares of AAPL which will pay me a 3.0% dividend. At that point I will just hold onto the shares and sell covered calls on it until it get exercised again. Sounds good in theory, I’ll have to see how it goes in reality once it happens, lol. 😅 The benefit of selling puts over selling covered calls is…well, none that I can think of, haha. That’s why I’m doing both. Selling puts on stocks I don’t own yet, and selling calls on stocks I do own already like TD. If your question is why sell puts instead of buying a stock first and then selling covered calls on that, the reason is selling puts makes me money right away, but buying a stock to write a call against requires me to purchase shares today at what I think is over priced. Not trying to time the strike month around ex dividend dates. But thanks… Read more »
Nice. I also use options to supplement my passive income strategy. I find that trading options takes quite a bit of effort, monitoring my options contracts and looking out for new trades, so I sometimes wonder if it’s worth it. I pretty much only sell contracts unless the strike price is high, then I might use a spread. I see that you have some contracts with expiration dates that are really far away. When selling contracts, I think it’s best use expiration dates no further than 3 months out so that time decay works in your favor. My strategy so far has been to sell put contracts on solid businesses that are beaten down. The share price of these businesses won’t go down to 0. And if I’m wrong about the strike price in one month, I’ll roll to the next month or two months for a net credit and potentially at a lower strike price. Eventually I’ll be right. Right before pandemic lockdowns, I sold options on UAL at $75. I chased it all the way down to $47 and closed it out this March for a profit of $2.2k (22% annualized return). It took quite a bit of… Read more »
Thanks for your insights. This was really helpful. I agree that choosing a shorter expiration is a good idea. I’ll try to limit mine to 3 months out when I trade this month.
I think one factor when determining if options trading is worthwhile is the amount of capital someone has to use. If someone can get a 10% consistent annualized return, and have the capital apply that return on $1,000,000 then maybe that’s worth spending the time and effort to pursue. I’m still far away from a 7 figure margin portfolio though.
Congrats on that major UAL win. I hope you reach your 20% goal this year. 🙂 It sounds like a high target but I don’t know much about options yet. It’s certainly a learning curve.
Excellent post Liquid. How did you produce that report in IBKR? I sold some SIL (Silvercrest) May 21 $11 calls that now are ITM – collected a nice $.65 premium. Debating whether to buy to close or let them get assigned.
Thanks. The report can be generated via the Trade Confirmation statement on the reports page. You can also see all your activities, including the trades, by using the Activities statement. I would probably buy to close the SIL call, and then roll the trade forward with a higher strike price. But it’s up to you. 🙂
Thanks Liquid – I see the report now. I opened an account at IKBR just for options trading and am still getting familarized with the platform. Questrade options commissions are prohibitive.
Thanks for sharing your strategy to earn income from options, Liquid. It’s so interesting how there are so many different ways to make money from investing. This is something I might consider down the read when my portfolio is larger. It sounds like you are targeting a very reasonable goal of 3%. I look forward to more of your trades in the future. 🙂
I just read about a strategy using credit swaps that’s suppose to make a lot of money. I’m not familiar with that whole process yet. Like you say, there are so many different ways to profit from investing. 🙂 There’s always something new to learn.
Very impressive stuff Liquid. Maybe I should give it a try in near future when my trading portfolio grows. I am looking forward to reading your Options trading post every month. I guess it makes you unique in the FI community.
I think a more people in the FI community can benefit from trading options. It’s obviously not for everyone. But just like picking individual stocks, some people just have a natural knack for it. And if you never try it, you’ll never know if it’s a good strategy for you. 🙂
very informative. I also sold my first covered call for Nokia and Open Door stock via my questrade a/c . This may be a silly question but is there options available for canadian stocks. I am asking this because yahoo finance don’t show option detail for TD bank listed in TSX but only shows option detail for TD bank listed in NYSE. i have over 100 TD.To shares in TD direct investing . I am unable to find instruction on how to sell covered call in TD Direct investing platform. Online information only shows option instruction for TD Ameritade. Any information on this will be greatly appreciated.
Hi Dipu. Yes, you can sell call options for Canadian TSX listed companies. 🙂
If you are using TD Direct Investing you can search for the company, and then click on the Options tab to see the options chain. Then click on the symbol beside the strike price you want, and choose to buy or sell that option.
In my examples in the post above I have sold 2 TD call options with a $90 CAD strike price. But I used IBKR because they have cheaper commissions.
Thanks Liquid. I appreciate it very much
Excellent blog post! I found it clear, easy-to-read and informative. Hope you make much more money with options (though you’re doing great so far)! Wishing you all the best 🙂
Thank you. I’m glad you found the post informative. 🙂
🙂 It’s Mother’s Day in the US. A happy Mother’s Day if you celebrate it with your mom 🙂
The 700 CAD is not actually your income in one month. It is the total income for the whole maturity actually.
That’s a good distinction to make. The $700 is my income if all the options expire worthless, but if I close any positions I’ll probably need to spend money. 🙂 Some of those April options will expire soon. I’ll post an update at the end of this month.
Yes. It is actually like bonds. You get interest accrual every day. If you want to close the position before maturity, you need to pay back a portion.
Yup. That’s an excellent way to think about. You accrue value over time. As a seller of options I guess Theta is my best friend lol.
yes. It is one of theta positive strategies
Very interesting read. I‘ve never considered establishing option income. I like your illustrations and might give it a try.
Thanks for sharing and all the best.
It’s certainly an opportunity to look into for those who have the time and capital. Thanks for dropping by. 🙂
My husband used to do options but I think he hasn’t had the time recently. I haven’t dabbled in it yet it seems quite complicated. Looking forward to reading your experience/ updates.
I’m still trying to wrap my head around it. There’s certainly a learning curve to it. 🙂 I’ll keep you all updated.
This is quite interesting to make money like this. I never experienced the options calls, but still you made 721$ that you can reinvest into dividends stocks ✓ Smart move my friend ! 👍💲😃💰
That’s true. Just like taking earned income from a job to invest and turn into passive income, I can take earned option premiums to buy dividend stocks. It’s all about changing income streams from higher risk to lower risk and more stable income. 🙂
[…] May I received $820 in premiums from trading options. That’s $100 more than what I made in April. Yay. […]
A Gamestop Put? You are a brave man…
That was either brave or stupid, lol.
Volatility is an opportunity. But at the same time it can cause a lot of stress.
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[…] At least, I found some material for the blog. The guy recently started an income losing strategy: selling options. Actually, selling puts is a losing strategy, covered calls are fine and I might touch on this in a […]