Basics

Options Trading for Passive Income

Written by Sakshi Jain
Thu May 05 2022
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In our fast-pacing world, time is money. We all have our set ways to generate a daily stream of income for a livelihood. While our source of livelihood consumes the majority of our time, commitment, and energy, a few extra bucks on the side never hurt. Options trading is a great source of passive income for investors and beginners in the trading world. 

On one hand, Active trading deems our entire attention, options trading serves to earn passive income without constant indulgence. Let’s move on to a few strategies of options trading that we can use as a source of passive income.

 

Covered Calls

The most basic technique for options trading is the covered call. It involves minimum risk and consistent gains without having to invest your energy on a daily basis to maintain your portfolio.

When a person buys a few stocks in his/her name, they can further go ahead and sell the calls against the stock they bought. One option comprises 100 shares; hence, it is advised to buy stocks in multiples of hundreds if you want to sell multiple calls. Based on the number of stocks you buy; you can sell calls for a premium (which will be your difference between the value of the stock at the time of buying and selling) with a strike price that is slightly higher than the price you anticipate for these shares at option expiration. Your profit per option will be one hundred (the number of shares per option) multiplied by the premium of the call.

Image Credit: www.investopedia.com

 

This strategy involves minimal risk as you will always at least make a profit on the premium value of your call. Whereas, there is a slight setback to the covered call strategy in cases where the price of the stock dramatically rises. In this scenario, the buyer will exercise the options and you will end up making less profit on the premium value as compared to the value of the stock if you sold it in the open market.

Covered calls require limited attention as the most you need to do is monitor the value of the stock on a daily basis without investing too much energy. They are free of stock price fluctuation-related risks. Another great benefit of the covered call strategy as a source of passive income is its flexibility. If the buyer does not exercise his calls before the expiration date, you still own the share of the stock which is resalable in the open market as new calls and you can generate additional passive income with no additional effort on your hand.

 

Selling Put Options

If you’re an active investor who is looking for a side hustle via options trading, you can arrange to buy new stocks in the future at a lower price by selling put options. CEO of Berkshire Hathaway, Warren Buffet is well-renowned to make huge gains out of selling put options. While this strategy bears out of a desire to buy shares in the future, let’s take a deeper look at its utility in options trading for a passive income.

Selling put options is a light-hearted options trading strategy that can be utilized to generate a good amount of passive income. Make sure to choose the stock you want to purchase and set the strike price of the option equal to the price you are looking forward to buying the stock for. Once you do that, you only need to sell a put option for the stock.

Image Credit: www.investopedia.com

 

This will not only help you to generate income through the premium at which you sold the put option but also allows you time till the buyer chooses to exercise the stock. As soon as the buyer exercises the option, you need to buy the new stocks you chose to purchase in the first place to have both the premium made by selling the put option and the additional stocks bought with limited effort. 

Another added advantage of this technique is that you can still keep the premium even if the put option remains not exercised at expiration. It also allows you to sell new put options for an additional premium without any additional input to generate a passive income. 

 

The Bottom Line

While covered calls and selling put options serve as safe option trading techniques to generate a passive income. We can also look at Iron Condors and defined risk spreads to determine how we can sell time to make a monthly passive income. These techniques are a little more complicated and would require pre-learning before diving with full force into options trading with them. 

Selling and buying options provide an excellent opportunity for people with tight schedules to sell yearly or bi-yearly on calls and maintain an influx of cashflow with no extra hard work and downside risk.

To further ease out your job with options trading, we suggest you use MarketXLS templates for your portfolio management which will provide you with extended excel functionalities to fetch real-time options data into your excel sheet.

We have specific templates created just to cater to the covered call and selling put option strategies.

Head to the website for more info on the various screeners and templates we have with us at MarketXLS: https://marketxls.com/

Refer to this link, for a demo session with MarketXLS: https://calendly.com/marketxls-sales/marketxls-demo-clone

Also, find the Pricing link attached: https://marketxls.com/pricing

 

References

https://tradeveda.com/

www.investopedia.com

 

 

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