Can you use a few extra dollars? A Google search for “how to generate more income” produced 11.3 million results. A few sites suggested selling your gear on EBay, craigslist or Etsy. Other sites recommended a part time job, asking your boss for a raise or getting a side hustle. More sites advised flipping homes or renting a room in your house via Airbnb.
I searched EBay for items I might sell from my youth. A 1980s Rawlings baseball glove was selling in a range of $10 to $25. Boogie Boards were listed at prices between $50 to $150. 1975 Schwinn Stingrays’ were offered from $450 to $1,200. Rather than selling your Chia Pets or working a second job, I want to introduce you to two income generating strategies.
If you own individual stocks, you can leverage your holdings to generate more income. The two income producing ideas are writing a covered call and selling a cash covered put.
The covered call is probably the most popular option strategy. A covered call allows you to generate income on stocks you already own. For example, if you own 1,000 shares of Apple (AAPL) you can sell ten $150 June calls for $1.98. What does this mean? It means the 10 calls will generate income in the amount of $1,980 before trading commissions. The math is 10 x 100 x 1.98 = $1,980. This option will expire on June 16, 2017. If AAPL closes at $150 or higher on June 16, you’re obligated to sell your 1,000 shares at $150. If AAPL closes below $150 on June 16, you keep your shares. If it’s not called away, you can write another option on AAPL for July or August.
A cash covered put is like the covered call except you might not own the underlying stock. It’s named cash covered because you’ll need to have cash in your account to purchase the underlying stock position. Let’s say you want to buy 1,000 shares of AAPL at $140 per share. You can sell ten $140 June puts for $1.74. The 10 put contracts will generate income of $1,740 before fees. You’re obligated to purchase 1,000 shares of AAPL at $140 if it closes at or below $140 on June 16, 2017.
A few things to keep in mind when you’re selling options.
- The option premium is what you will receive for selling a call or a put.
- When you sell a call or a put, the money is credited to your account at the time of the trade.
- One option contract equals 100 shares of stock. If you sell 10 contracts, this equates to 1,000 shares of stock.
- Options expire on Fridays and maturities can range from a few days to a few years. My recommendation is to sell options with an expiration from four to six weeks.
- The delta of an option will give you the approximate probability of your option expiring in the money. An option with a delta of 40 means you have about a 40% chance of your option expiring in the money. If your option expires in the money, you’re obligated to buy or sell the stock.
- The more volatile your stock, the more option premium you’ll receive. You can check the implied volatility on most investment websites. The higher the volatility, the greater the risk. The higher the risk, the greater the income.
Options involve risk and aren’t suitable for every investor. As the market continues to scramble higher you can use options to generate income and sell stocks hitting your price target. You can also use options to purchase stocks at lower prices if the stock were to correct. If you want a few extra nickels in your pocket, give these two option strategies a try.
Money won’t create success, the freedom to make it will. ~ Nelson Mandela.
Bill Parrott is the President and CEO of Parrott Wealth Management. For more information on financial planning, investment management, or option writing please visit www.parrottwealth.com.
May 1, 2017
Disclaimer. Options involve risk and are not suitable for every investor. The price and data is for May 1, 2017 only and is subject to change without notice. Your actual trading results may be more or less than those posted in this blog. This blog is not a recommendation to buy or sell securities mentioned in this report. For more information on trading options please visit www.cboe.com.