Income with options trading

3 Options Trades for $1,000 in Monthly Income.

Selling naked puts for a standard monthly return.

By Lawrence Meyers, InvestorPlace Contributor.

A few years back, I decided to aim for a goal of generating about $1,000 per month in options income.

Sure, that particular number was selected because it’s a nice, round number — but it’s one that I considered achievable based on the amount of risk I was willing to tolerate, and the capital available to execute trades should they occur.

Originally, my strategy centered around selling covered calls against a part of a few core positions. Then I realized a more efficient play was to sell naked puts against stocks I either held and felt were undervalued, stocks I was considering purchasing, or stocks that were good trading vehicles. That way, if the stock price was below the strike, the stock would be put to me, and I’d be happy to have it.

So here are three such stocks that I’ve used options on to help generate my monthly goal:

DirecTV (DTV)

I had been very bullish on the long-term prospects for DirecTV (DTV). DTV stock had performed decently over the past few years, but never delivered the blockbuster returns I’d hoped for. Instead, it morphed into a great trading vehicle and a stock perfect to sell naked puts against.

DTV carries a lot more debt than it used to, its growth rate has slowed, but it still generates enormous cash flow. So it’s a safe company, and having shares put to me would not be any great tragedy.

In selling the Jan 70 Puts for $1.40, I pick up a 2% return for just a two-week holding period, and if the shares get put to me, I’d probably turn around and sell calls against those DTV shares for February. I sold two of the puts contracts for $280 in income.

Bed Bath & Beyond (BBBY)

Retail is a dicey place to be in this economy, so if I sell naked puts against retail, it had better be a solid stock.

Bed Bath & Beyond (BBBY) is in really good shape. For one, BBBY stock has $900 million in cash and no debt. It is growing at a nice 12% clip, and free cash flow is routinely in the $800 million range annually.

Like DirecTV, BBBY stock has not been an explosive performer, but has the kind of volatility that makes it a good trading and options vehicle. The Jan 80 Puts recently went for $2.75 (though have since fallen to around $2.65). I sold two of the put contracts for $550 in income, bringing the total thus far to $830.

Note: BBBY does report earnings Wednesday, so the potential for volatility in the stock is extremely high.

Amgen (AMGN)

The final selection is Amgen (AMGN). The biotech firm has beefed up earnings growth a bit, now slated to grow at 12%-15%, has $22.5 billion in cash, and solid free cash flow in the $5 billion range annually.

It’s a perfectly safe company, even if the stock is a bit overvalued for my taste. Still, AMGN stock has always sold at a premium to its price/earnings-to-growth ratio, and the 2.1% dividend is a reason why its price remains a bit lofty compared to what I’d like.

When selling naked puts, I like to choose world-class companies like this that have been around a long time. Even if shares get put to me and the stock declines, I know that sooner or later, I’ll make that loss back.

In this case, Amgen is one of the stocks with weekly expiration dates, so by selling the Jan 112 Put (Jan. 30) for $1.70 (for a contract total of $170), I hit my exact target total of $1,000 in income.

As of this writing, Lawrence Meyers held options in all of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66gmail and follow his tweets ichabodscranium .

Article printed from InvestorPlace Media, investorplace/2014/01/options-trades-amgn-dtv-bbby/.

©2017 InvestorPlace Media, LLC.

More from InvestorPlace.

More On InvestorPlace:

Financial Market Data powered by FinancialContent Services, Inc. All rights reserved. Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.

Copyright © 2017 InvestorPlace Media, LLC. All rights reserved. 9201 Corporate Blvd, Rockville, MD 20850.

One of the Best Income Strategies in the World.

It started out as a challenge to find a winning trading system. It turned out to be one of the best income strategies in the world.

From July 2012 to January 2013, I put my "Instant Income" strategy through a beta test as the folks over at ProfitableTrading looked over my shoulder. The results were even better than I expected. I helped readers generate thousands of dollars in income on my way to an 84% win rate.

Here's how I did it.

My "Instant Income" strategy allows investors to do one of two things: either earn large amounts of income. or buy high-quality stocks at a deep discount. Either way, it's usually a win-win.

It's not for everyone, but I think it's one of the smartest, highest-percentage, winning strategies in the financial world. It involves selling puts on undervalued , high-quality stocks.

To recap, "put" options give investors the right -- but not the obligation -- to sell a stock at a specified price before a specified date. Selling a put obligates us to purchase that stock from the put buyer if it falls below a specified price (the option 's " strike price "). When we accept that obligation, we receive cash , or "Instant Income," upfront (known as a "premium").

My "Instant Income" strategy is no longer being tested. Six weeks ago, I started sending one "Instant Income" trade every Wednesday to a group of investors. We've already closed out two trades, and in both cases, we generated income without buying a single share of stock.

Even better, every single trade I've recommended is currently trading above their strike price. I expect most, if not all, of the options I've recommended to expire worthless, which means we keep the premium as pure profit. Worst case, I might be required to buy shares of a stock I'd like to own anyway. and at a deep discount. Remember, for every put contract you sell, you may be required to purchase 100 shares of the underlying stock.

To show you how investors are taking advantage of my "Instant Income" strategy, here's an example of an open trade in my portfolio.

On March 6, I recommended readers sell April 26 puts on Questcor Pharmaceuticals (Nadaq: QCOR) for a premium of $1.30. That's a put that expires on April 20 and pays sellers a $1.30 per-share premium, or $130 per contract (a contract is for 100 shares). If shares of QCOR trade below $26 on April 20, we'll be shareholders at a cost basis of $24.70 a share ($26 - $1.30).

To initiate this trade, most brokers require a small deposit in your account, much like a down payment on a house. It usually runs about 20% of the amount it would cost you to buy 100 shares at the strike price, which in this case would be $26. This QCOR trade would require a margin deposit of about $520 per contract sold ($26*100*20%). That money will be returned if the option expires worthless, or will go towards purchasing shares.

When I sold the put, shares were trading at about $30, so our $24.70 cost basis represented a 17.7% discount. QCOR also sported an attractive forward price-to-earnings ( P/E ) ratio below 6. I'm more than comfortable owning the stock, but by selling puts, I collect "Instant Income" without having to purchase shares outright.

Action to Take --> It's been three weeks since I recommended that trade, and it's doing well. QCOR would need to fall 18.6% in the next 17 trading days before we would have to buy, or "be put," the shares.

If the option expires worthless, we'd collect $130 in "Instant Income" for every $520 set aside. That's a 25% return on a trade that lasted 44 days. If we can repeat a similar trade every 44 days, we'd earn a 207% return on our capital in 12 months.

© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.

Option Trading Strategies That Produce Income.

In this section, I will cover some of my favorite option trading strategies. I primarily use what are referred to as advanced options strategies. That means usually a combination of options that will form a spread. I do this for two key reasons.

Limited risk, which I’ll talk about more in a minute. Better odds of success. By that I mean that in many cases, I may be a little wrong in my assessment and still make money. In fact, I've had a few trades where I've been quite wrong and still broken even or made a little.

Most of the option trading strategies I use are also income generating strategies, which to me means that they take advantage of the erosion of the time value of the option. That means the stock could go nowhere and I still make my money. If you are unfamiliar with option greeks, have a look before going on. These components pay a big factor in how and why I select the strategies I'm going to discuss.

These strategies include short vertical spreads (credit spreads), calendar spreads, diagonal spreads and iron condor spreads. Once I've covered some basic concepts, I’ll go into more detail on each of these strategies.

What is a Spread?

Spreads are constructed by buying one option and selling a different option on the same underlying.

A short vertical spread or credit spread is created by selling an option at one strike, usually in the current option month and buying an option at a further out-of-the-money (OTM) strike in the same month. In the following example, I am bearish on JP Morgan(JPM) so I might sell a $27.50 call and at the same time buy a $30 call in the same month. This chart illustrates that concept.

A calendar spread is created by buying an option at a specific strike in a farther out month and then selling the same strike option on the same stock in a closer month. This is sometimes referred to as a time spread or horizontal spread. This makes sense if you look at an options chain and notice the prices and strikes organized vertically.

In this trade, the most I can lose is the initial debit, thereby allowing me to size my position accordingly.

With these two basic spreads as building blocks, many other spreads can be created.

A long vertical spread is the opposite of a short vertical spread – meaning that you would buy an option in-the-money (ITM) or even at-the - money (ATM) and sell an option out-of the-money (OTM).

A diagonal spread can be thought of as a combination of a calendar spread and a vertical spread.

An iron condor is a combination of a short put vertical spread and a short call vertical spread.

If this seems overwhelming, hang on because I will be going into much more detail on each of the strategies. I just wanted to lay some groundwork before moving on. If any of the basic options concepts are unfamiliar to you, make sure you visit the options basics section to learn more.

My Favorite Option Trading Strategies.

OK. I'm finally ready to talk about my favorite option trading strategies. These are my four basic strategies that I use. You'll see a brief description of each one here with more detail provided by the links.

These are obviously not the only option trading strategies that exist. In fact there are enough strategies to make your head swim. Most people will settle on only a few. Other popular strategies include butterfly spreads, straddles and strangles, double diagonals… and the list goes on. There are plenty of resources out there that explain the basics of these strategies. I will focus on the above strategies and how to develop a trading plan around them.

In addition to knowing about the actual option trading strategies, it can also be helpful to understand how to make a trade adjustment to one of the above strategies. I've recent added a page specifically designed to address this topic.

Options Trading.

Related Topics.

Keeping in Touch.

Newsletter Subscription.

Video Store.

Check out these full length videos that contain lots of specific information about trading spread strategies at an excellent value.

Free video tutorials.

I set up and discuss the trades and then follow them up with periodic reviews until they close. For more detail go to the Options Trading Videos page.

Vertical spread tutorial.

Calendar spread tutorial.

Iron Condor tutorial.

Diagonal Spread Tutorial.

Other videos.

Copyright 2008-2014 success-with-options.

All Rights Reserved.

Information on this site is for educational purposes only.

How to Trade Options for Income.

A few weeks ago I wrote an article about one way to trade options instead of stocks, ETF's and Futures markets. Many traders ed after I wrote this article and asked me how to trade options to generate income.

Before I begin discussing the different income producing techniques that work when used correctly, I want to make sure you avoid one particular technique which is selling naked options.

Why is selling naked options is not an ideal technique to generate options income?

Selling naked options is the opposite of what options speculators do daily. Instead of being on the side that speculates on the direction of the market, the option seller needs to worry about time decay and where the market will not go instead.

To most beginners, especially those who've had little success trading stocks or other assets, selling options may appear like a worthwhile technique, the trader assumes that if the position goes against them, they can just quickly liquidate the trade and walk away from the loss, similarly to how it works with stock trading or with any type of market trading.

Options selling is very different in theory then in reality!

Unfortunately, anyone who's had substantial experience with options, especially on the side of the seller will tell you that options are very different than stocks and many beginners don't understand what GAMMA is or why it's so important to understand, especially if you are the one who's selling the options.

To put in simple terms, GAMMA is the measure of the change of the options Delta. The Delta is the amount or the percentage the Option moves for every dollar the stock moves, and the GAMMA tells the DELTA how fast to increase or decrease. The option's gamma is a measure of the rate of change of its delta.

For example, lets say stock ABC is trading at $42 dollars and the $45 dollar call options is selling for $3.00 and assume the DELTA is 0.5 and the GAMMA is 0.4.

If the stock moves up by about 10 percent, the delta will increase by about 15 % and will go from 0.65, the amount it's increased is determined by the GAMMA. If the GAMMA is low, the DELTA may only increase by 8% and if the GAMMA is high, then the DELTA can increase by 20%.

So the GAMMA is what tells the DELTA how much to go up or down and GAMMA can REALLY move up really fast when the markets are moving up or volatility is strongly increasing.

Let me give you an example of something that actually happened to me while I was a futures broker several years ago. I had a client who was a beginner and was selling Natural Gas calls, they were very far out of the money and the odds of the market reaching that level was extremely unlikely. I would usually let clients write naked calls or puts if they were realistically going really far out of the money and this was the case here.

These options were being sold for about $300.00 premium per contract and to the best of my memory, the seller had only about 5 contracts that he was short, so the risk did not appear very large.

One day, the natural gas market exploded and AT the opening that day, each option that was sold for $300.00 premium was worth roughly $17,000 to $18,500 per contract (on average).

There was no time to get out of these options at night time and basically there was no way to mitigate risk on the position and this is something that could happen to stocks if earning are bad or to practically any commodity. So don't feel that you can avoid what happened to me by using different assets or markets.

The options were still very far away from being in the money, so the increase was mostly time value, nonetheless, the GAMMA on the option increased several hundred times so before the move when Natural Gas would have a 1% move the option would increase by about .1% and after the move and increase the volatility, each 1% move increase by natural gas would increase the option by .9%. That's the power of GAMMA and something you should be mindful of.

If you want to know what happened to the client? He declared Bankruptcy and I left holding the bag for about $80,000 when it was all said and done.

I remember taking my wife to the doctor who was pregnant with our second child later that day and thinking to myself that I could have bought her brand new Porsche with the money I lost today. (This was about 11 years ago)

That's a true story and this is why selling options naked is described by professional traders as walking up the stairs and falling down, because what typically happens is the trader wins about 8 out of 10 times and breaks even on the 9th time and on the 10th time the trader loses everything he earned the first 9 times.

So remember when your selling options that the Delta doesn't stay constant, it increases based on the GAMMA and that's what you have to focus on.

Can I Sell Options to Generate Income Safely?

Now that I got that story out of my system, let me introduce to you a few ways professional traders actually trade options for income.

The first and the basis for all of these strategies is a Credit Spread which is a simple method of selling one call and buying a cheaper one in the same calendar month, one with a LOWER strike price and keeping the difference or the credit or alternatively, buying a put and selling a cheaper put, one with a LOWER strike price and keeping the difference between the two.

The reason why you buy the cheaper option is to protect yourself from what happened a few paragraphs above with the Natural Gas example I provided.

When selling credit spreads to generate consistent income, it's best to sell an option that fairly close to the money and buy one that's more out of the money, this way, the option that you sell will a higher premium, but at the same time will still have mostly time value.

There are dozens of characteristics that you have to consider when initiating credit spreads to generate consistent income trading options and in the next article I will discuss some of those factors or characteristics! and if you enjoyed this article, us and let us know! [ protected]

If you want to become an Options Ninja, check out Options Geeks 101 and 102 today.

Have a great day.

Popular posts.

Day Trading And Swing Trading Tips For Beginners.

Swing Trading Strategies.

Gold Trading Strategies For Stock Traders.

Day Trading Strategies That Work - Intraday Pullback Tactics.

1976 South La Cienega Blvd #270.

Los Angeles, California 90034.

Connect With Us.

Past performance is no guarantee of future results. This site is for educational and general information use only. Please contact your financial adviser for specific financial advice. Nothing on this site constitutes advice or recommendation to buy or sell a particular stock, option, futures or any other financial asset. Copyright © Market Geeks, LLC. All Rights Reserved.