My options income strategy. A new revenue stream.

How I Make Money Trading Options

Financial independence is all about having options. ๐Ÿ™‚ 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.

Selling options can be a great income producing strategy

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. ๐ŸŽ This is the transaction summary.

So to break down this put option, here’s what it means.

  1. The option buyer paid me $209 for selling this option. Yay money. ๐Ÿ™‚
  2. 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. ๐Ÿ™‚ 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. ๐Ÿ™‚ 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.๐Ÿ˜ฎ

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. ๐Ÿ™‚

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. ๐Ÿ™‚

 

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.

โ€œI put two children through Harvard by trading options. Unfortunately, they were my brokerโ€™s children.โ€

-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. ๐Ÿ˜…

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!

 

โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€”โ€“
Random Useless Fact:

 

 

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AlexOntario
AlexOntario
05/03/2021 10:30 am

Nice article!

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).

Thanks.

tawcan
05/03/2021 12:45 pm

Interesting stuff, haven’t really touched option trading myself but should look into that. ๐Ÿ™‚

maplethrift
05/03/2021 5:23 pm

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!

Lee
Lee
05/03/2021 5:47 pm

Hey liquid, interesting post. If youโ€™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?

DreamingOfDividends
05/03/2021 5:52 pm

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 ยป

jambr403
jambr403
05/04/2021 5:23 am

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.

JamesB
JamesB
05/04/2021 12:39 pm

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.

Graham @ Reverse the Crush
05/04/2021 8:31 am

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. ๐Ÿ™‚

Mr. Dreamer
05/04/2021 8:45 am

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.

Dipu
Dipu
05/04/2021 4:25 pm

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.

Dipu
Dipu
05/04/2021 5:55 pm

Thanks Liquid. I appreciate it very much

Into the FIRE
05/05/2021 2:51 am

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 ๐Ÿ™‚

Into the FIRE
05/09/2021 4:39 am

๐Ÿ™‚ It’s Mother’s Day in the US. A happy Mother’s Day if you celebrate it with your mom ๐Ÿ™‚

Tony
Tony
05/05/2021 10:42 am

Hi boss,
The 700 CAD is not actually your income in one month. It is the total income for the whole maturity actually.

Tony
Tony
05/05/2021 1:22 pm

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.

Tony
Tony
05/06/2021 9:10 am

yes. It is one of theta positive strategies

MyFinancialShape
05/06/2021 11:01 am

Very interesting read. Iโ€˜ve never considered establishing option income. I like your illustrations and might give it a try.
Thanks for sharing and all the best.

GYM
05/08/2021 9:28 pm

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.