Income while waiting for share price to move

[bdsjp]

Hello, I want to share a common but effective options strategy with you. Don’t let the word “options” scare you off. This strategy is simple and easy to pick up, best of all, it gives you a consistent flow of income every 30 to 45 days.

Take Apple Inc. (APPL) as an example, this stock is trading at around $149/- today. Let say we want to buy the shares of Apple but not sure will it drop in the next 1-2 months. If it drops to $145/-, we will definitely be interested. So, most people will either buy the shares at $149/- or wait for the share price to fall but not us! We will get paid while waiting for the share price to drop to $145/-.

We will sell a Put option at $145/- strike price with expiration date 20 Aug’21, we will collect a premium of $330/- (100 shares X $3.30).

If by end of 20 Aug’21, Apple share stays above $145/-, we don’t get to buy the share but will keep the premium of $330/-. Not bad, $330/- just for waiting!

If Apple share say drop to $144/-, we will still buy the share at $145/- and keep the premium, effectively reducing the cost of the purchase to $141.70.

The real risk here is when Apple shares drop to zero and we still have to buy the shares at $145/-. So, choosing a good company where the share price is stable is important here.

So, if we are more keen to collect premiums than buying the shares, what should we do?
Well, we can sell the Put at a lower strike price of say $135/- and collect a premium of $106/- ($100 shares X $1.06), assuming that Apple share price don’t drop below $135/-.

Important: Please note that you need to have enough cash to buy the shares. In our example, it will be $14,500/- (100 shares X $145/-)

Now, let say Apple share price drop to $144/- and we brought the shares at $145/-, what should we do? We can sell a Call option at a higher strike price and continue collecting premium while waiting for the shares price to move up.

You can just use this 2 steps strategy to generate consistent monthly income.

 

[biggles]

Awesome

 

[troycoleman]

@bdsjp Let us try and use the 2 steps strategy to check if a consistent income is generated or not.

 

[bdsjp]

Hallo troy, do a back testing and you will see that it works. Read and find out more before you use real money on the trade, the above is just a summary of the book.

Also, you need to be aware of the risk, please sell Put options only on those fundamentally strong companies, this is very important.

I see lot of people forget about this rule, after making consistent profits for a few months, they sell Put options on those mediocre companies just to earn higher premium. It is inevitable that market will pull back from time to time, you don't want to be struck with a mediocre company. Remember, the 2nd part of the strategy is to sell covered call on the stock if you get assigned the shares, so you really need fundamentally strong companies in order to sell for a decent premium.

Please share here after you make you first profit using this strategy so that others can benefit.

 

[bdsjp]

Hello L&G

I would like to share a trade that I took this week. The setups are as per listed in the kindle book (Turning The Wheel) but I choose a speculative stock instead of a fundamentally strong company. This is a stock that I don’t mind owing for speculative purposes.

The stock is SKLZ, a technology company that provides monetization services to game developers, which is listed in the NYSE.

The company recently released its earnings, which is worse than expected, and the share price dropped from $14+ and seem to find support around $10. The stock is trading at $11.10 when I entered the trade and is moving upward toward $12, which may act as a strong support if the price move above it.

With the setups and intentions defined, I have sold a cash secured put (1 contract) on SKLZ at strike $10 (9% discount to current price), expire on 1st Oct’21 (market closed) and collected a premium of $68.

By expiration date (1 Oct’21),

- If share price stays above $10, I will not be assigned the shares but will keep the $68.

- If share price drops below $10, I will get to buy 100 shares at $10 and at the same time, keep the premium of $68. Which effectively reduce my purchase cost to $9.32 per share, which is a 16% discount to current stock price. (1 options contract is 100 shares)

As this trade is intended to be a cash secured put, I have set aside $1,000/-in the trading a/c, in case I get assigned the shares.

Wish everyone making money on whatever you are trading!


PS. The above post is not to promote speculating in options trading but just to show that there are other possibilities other than the traditional straight buy, hold and sell to trade a stock.