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Guide to Selling Weekly Put Options for Income (Boost Your Returns!)
Options can be a great way to mitigate risk and boost your portfolio income. Let’s review the best way to selling weekly put options for income.
Guide to Selling Weekly Put Options for Income (Boost Your Returns!)
Let’s get into a guide to help you sell weekly put options to earn more income. I recently brought you the best stocks for covered call writing. I’ll highlight why selling weekly put options is the best weekly option trading strategy to learn. Writing puts for income offers the best combination of risk / reward.
With the goal of living off dividends, I can increase my income and reinvestable capital by successfully writing put options for income.
I use Personal Capital to monitor and manage my cash flow activity. I need to continue to find ways to increase my income into perpetuity.
What are put options?
Put options are financial contracts giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.
Put options enable investors to reduce risk by locking in a predefined contract at a specified price to sell.
If you are long puts, these options contracts are often used as hedges for investors to ensure they can sell a stock at a specified price if the stock goes down.
On the contrary… if you are short (selling) puts, you get to buy the stock if it crosses below the strike price. If it doesn’t cross below the strike price, you get to keep the option premium (as income).
With my Robinhood dividend portfolio, I use options since they are completely commission-free on the Robinhood platform. If you join Robinhood, we both get a FREE share of stock.
Check out our Robinhood section for all the latest and greatest updates regarding our dividend portfolio.
What are weekly put options?
Weekly put options are financial contracts that expire in weekly increments. Weekly put options are shorter than regular options (typically monthly or quarterly). Through weekly options you can target / hone in on a more specific date and time period. One consideration with weekly option strategies for income is that they are less expensive, but can be riskier.
People within the industry call weekly options as “Weeklys.” Weekly options are identical to regular options, except they expire every week, typically on Fridays at market close.
Why would you want to consider a weekly option strategy for income?
There are some benefits to consider when deploying a weekly option trading strategy:
- Low premium embedded in the option price because there is not much time value
- Ability to target specific events for a calendar date such as earnings announcements, economic reports or other key events that might help you sell high volatility or buy low volatility
Weekly options strategies for income can be a great way to boost your overall return profile within your dividend growth portfolio. You can potentially mitigate some risk as well. To figure out the best weekly option trading strategy, you must always consider those aforementioned points.
Plan accordingly with your options strategy.
What if I said that you can boost your investment returns by selling weekly put options for income? Let’s review how….
How to Sell Weekly Puts for Income
Investopedia has a good analysis on why you want to consider selling options. Based on a CME study of expiring and exercised options covering a period of three years (1997, 1998 and 1999), an average of 76.5% of all options held to expiration at the Chicago Mercantile Exchange expired worthless (out of the money). You can read more why options sellers have an advantage.
So, how can you sell weekly put options for income effectively? Let’s first discuss writing puts for income.
Writing puts for income has significant advantages due to the following:
- Put writing generates income because the writer of any option contract receives the premium while the buyer obtains the option rights.
- If timed correctly, a put-writing strategy can generate profits for the seller as long as he or she is not forced to buy shares of the underlying stock. Thus, one of the major risks the put-seller faces is the possibility of the stock price falling below the strike price, forcing the put-seller to buy shares at the strike price.
If you are solely writing puts for income, you should point to the underlying stock price to either hold steady or increase. You simply want to stock to stay at it’s current value through expiration of the options contract.
Writing put options is a great mechanism if you like a stock, but you are not sure if it will go up. The best part is that you don’t have to be 100% right to make money.
Okay, so how do weekly options fit into the picture?
So, you want to sell weekly puts for income with stocks that have certain characteristics that fit both the attractive characteristics on the short put side AND the weekly duration.
As an investor and not a speculator, I want to find stocks that have high implied volatility (relative to historical volatility) but no significant event such as earnings release or an economic report on the calendar. You can use a tool like Gurufocus to monitor news on your favorite stocks.
You must plan effectively with your weekly options trading strategies. I like to follow a routine checklist to ensure I am following my criteria that fits my risk tolerance. Also, by having a checklist, I ensure that I am fitting the best risk-adjusted opportunities that have a high probability of success.
Writing Puts for Income Checklist
To have an effective options trading strategy for writing puts for income, I want to hit on the following checklist. Follow this 5 step checklist for selling weekly put options for income and you will be in great shape.
Am I overall bullish on the stock long-term? Am I confident that the overall market will not have an extreme selloff?
With this point, I need to be sure that I love the fundamentals of the stock long-term. In case the stock does fall below the strike price found in our weekly put option contract, I need to be comfortable owning the stock at that specific price for the long haul. Of course, I would only want to own a stock that I think is going to only increase in value over time.
Additionally, I need to consider if the broader market will face an extreme selloff in between the time that I execute the put option sale and expiration. I usually like to look at FINVIZ futures to do so. An extreme selloff in the broader market can ruin a lot of opportunities even with some of the most undervalued stocks.
Does the stock feature the appropriate fundamentals as featured in our undervalued stock criteria?
We have created a set of undervalued dividend stock guidelines to follow. I need to be sure that the stock that I am ultimately writing weekly put options for income meets this criteria. If you want a visualization of this stock criteria, review our screening for undervalued stocks infographic.
If you need a stock screener, I suggest you try using the FINVIZ stock screener for finding stocks that fit your own criteria.
Does the company have any material events happening between now and expiration of the weekly put option?
With this set of criteria, I need to make sure that the stock does not have an upcoming event that could result in an extreme movement in the stock price. These material events typically include earnings releases, economic reports, monthly sales reports, drug release results, etc.
I like to sometimes write weekly puts on stocks that I already own since I know the stock very well and understand the fluctuations on a daily/weekly basis. However, if you don’t know the stock, take a look at the charts to understand how the stock reacts to certain headline events.
Am I happy owning the stock at the exercise price?
You should only write put options on stocks that you are comfortable and happy owning. Remember, if the stock decreases below the exercise price, you can exercise to buy the stock at the exercise price. Back to my point number 2 above, if I like a stock at current prices, I will like it even if it decreases in value.
If you are uncomfortable buying shares of a stock below a certain price than what it is at today, you should not be writing a put option for income on that particular stock.
Does the stock have strong support at a level above the exercise price?
This is where my technical analysis comes into play. I am a fundamental driven investor. However, sometimes you have to evaluate the charts to make a sound decision. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. With technical analysis, there is resistance as well. Resistance is the opposite of support. Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.
If there is strong support in between the current price and the exercise price, I will gladly write a put option for income. To find out the support levels, I like to use Stockcharts or Nasdaq. They have free screeners where you type in the stock ticker and should be able to view the chart on a daily basis. For Nasdaq, I like going into the Stock Consultant section that will show the various levels of support and resistance.
If I can answer yes to all of these questions, I will go ahead and write a weekly put option for income.
Selling Weekly Put Options for Income Conclusion
Selling weekly put options for income is a sound strategy for boosting your investment returns. Overall, writing weekly put options are one of my favorite risk-adjusted ways to earn outstanding returns in the stock market.
Trading weekly options for income is a proven way to boost income if done correctly. The key component to writing weekly puts for income is having a checklist and a predefined method for consistent success.
If you pair this with your dividend growth portfolio, the benefits can be outstanding.
Selling put options for income is the best weekly option trading strategy for me. I am not a trader. I am a fundamental investor. Any chance I get to boost income or potentially own a stock for attractive risk-adjusted rates… I will take it.
This weekly option trading strategy is comfortable for my risk tolerance. Consider these other option strategies for income.
Are you going to try selling weekly put options for income? Please let us know if you have any questions below. We’d love to hear from you.
Selling weekly options for income can improve your financial future
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Do the Buffett: How to Sell Puts Like Warren Buffett
In This Article
Maybe youвЂ™ve already dabbled in the world of options. Maybe options are an entirely new concept to you. No matter who you are, you can benefit from one of the most successful income options trading strategies.
Selling options for income is easier than you might think. ItвЂ™s one of the few strategies where you can be wrong about the direction of the market and still win. Warren Buffett, one of the most successful investors of our time, actually uses this time-tested strategy to generate income.
While this strategy is easy to understand and execute, if you want to learn how to invest like Warren Buffett, you should spend some time learning the basics before you execute your first option trade.
[ DOWNLOAD: Wanna start trading ASAP? Get our free Option-to-Income Guidebook: Strategies of 7-Figure Option Traders today and start trading options in your spare time ]
Learn the Lingo: What is an Option?
Just think of the word option. In our everyday lives, an вЂњoptionвЂќ is a choice. It works similarly when youвЂ™re talking about investments.
An option is a security. When youвЂ™re investing, an option gives you the opportunity to buy or sell a stock at a certain price on or before a specific date. Basically, youвЂ™re buying the option to buy or sell an underlying stock at a certain price.
There are two types of options: call options and put options. Depending on which you choose, youвЂ™ll have the right to either buy or sell an underlying stock at the set strike price.
Wait. Strike price? The strike price is the determined price that you can buy or sell the underlying stock for, regardless of how much the stocks appreciate or depreciate in value.
Call options allow you to buy shares of stock at a certain price. If you buy a call option, you are expecting that the underlying stock is going to increase in price. That way you can use your option to buy the stock at the lower вЂњstrike priceвЂќ even though itвЂ™s worth more.
Put options allow you to sell shares of stock at a certain price. If you buy a put option, youвЂ™re expecting that the underlying stock is going to decrease in price. This way you can sell the stock at a higher вЂњstrike priceвЂќ even though it is worth less.
But options donвЂ™t last forever. If they did, you could just wait for the market to turn in your favor. The date your option runs out is called the expiration date, and it could be days or years after you purchase the option. You need to exercise your option before or on this date, or else it will expire.
When you buy an option, the price you pay for that option is called the premium. Option contracts give the buyer the right to buy or sell 100 shares of the underlying stock. Therefore, when you calculate the cost for an option you need to multiply the premium price by 100.
Reading Option Contracts
When you first look at an option contract, it might be straightforward or it might be a little confusing.
You might get lucky and see this:
AAPL (Apple) is the ticker, 06/21/2020 is the expiration date, 210 is the strike price, and P stands for вЂњputвЂќ.
Or you might need to decipher a code, like this:
If you see the latter, hereвЂ™s how you read it: Ticker – Expiration date – Call or put – Strike price
This option lists the tickerвЂ”or underlying stockвЂ”as AAPL (Apple). The expiration date is ordered as year-month-day. For this option, the expiration date is 200619 (2020, June 19). The next is Put or Call, and in this case, itвЂ™s Put (P). Finally, the strike price is 0021000 ($210).
This means the buyer can sell Apple shares at $210 on or before June 21, 2020.
Remember, each option contract allows you to purchase or sell 100 shares.
Your AAPL200619P0021000 might trade at $20 per share. Because the premium is $20 per share and there are 100 shares, the overall cost is $2,000 = ($20 x 100)
Warren Buffet Uses Option Income Strategies
A put-selling strategy is one of the most effective options income strategies. The most famous investor in the world, Warren Buffett, uses a put-selling strategy. Buffett made huge sums in the wake of the 2008 financial crisis using options to generate income.
Instead of just buying a stock that he likes when it’s undervalued, Buffett sells options when the stock is overvalued. Selling overvalued puts allows Buffett to rake in large premiums from his buyers.
Buffett determines the value of an option based on implied volatility. Implied volatility measures the amount of fear and greed priced into an option. When implied volatility is high, option prices become overvalued. This attracts investors like Buffett.
So, how do you know when an option is overvalued?
One way to determine if implied volatility is high is to look at the VIX. The VIX is a volatility index created by the Chicago Board of Options Exchange. Implied volatility is high when the VIX is elevated. When the VIX is depressed, implied volatility is low.
Looking at a chart of the VIX can help you determine for yourself if implied volatility is high or low.
How to Invest Using this Simple Options Strategy
Trading options for income is a relatively simple strategy. Note: You should only execute this strategy if youвЂ™re ready to own the shares of underlying stock youвЂ™re buying the option for.
LetвЂ™s say Buffett is interested in buying shares of Apple. He would buy the shares if the price was $180, but share prices are currently selling at $222. HeвЂ™s not going to buy for that price.
Instead, when volatility is high, Buffett would sell an Apple put with a strike price of $180 that expires in January 2021 for $12 a share.
If the price falls below $180, BuffettвЂ™s already established that heвЂ™s happy to purchase shares at $180. If the price is $180 or above on January 2021, Buffett will get to keep that $12 per share premium.
This means Apple could remain unchanged or even drop 19% ($42 per share = $222-180) and Buffett would still make money. The key to the strategy is that Buffett wants to own the shares when theyвЂ™re less expensive, but he is also willing to receive income if the price does not drop to his entry level.
The best part of the strategy? ItвЂ™s a win-win. Whether he buys the stocks at a reasonable price or keeps the premium from his buyer, he gets something he wants.
Risks: They Exist in Any Trading Strategy
Despite the simplicity of this strategy, it does come with risks. If the price of Apple tumbles below $180 per share, youвЂ™re still on the hook to buy it at $180. Since each option contract is 100-shares, your losses can add up if you arenвЂ™t careful. You need to set risk parameters when you sell options, just as you would with buying stocks. Understanding how much you stand to earnвЂ”and how much you could loseвЂ”will help you weigh out your risks.
When you sell a put, your payoff is straightforward:
If the strike price is $180 and the price drops below $180 per share on or before the expiration date, you must purchase the shares at $180. В
Your breakeven price is $168, which is the $180 strike price minus the premium you receive ($12 per share). В If the price of the option is above $168 at expiration, youвЂ™ll make money on the trade.
If the price of Apple never dips, the most you can gain on the trade is $12 per share.
How to Make Money Selling Puts
Selling puts allows you to set the strike price of a stock at what you would like to buy it for. Selling puts is even more attractive than selling covered calls, as you do not have to post the capital needed to purchase shares.
There are a few steps you should take before selling puts:
- Find a stock that you actually want to buy
- Decide on an entry price that you would be comfortable buying those shares for
- Evaluate the implied volatility
- Set your risk parameters
Once you have completed these steps you are ready to sell a put.
You Know Your Options
Selling puts allows you to win whether the market moves up, down, or sideways. There are some risks associated with options trading. However, if you trade options using specific strategies, they can be even less risky than trading stocks. В
According to the Chicago Board of Options Exchange, selling options is one of the few strategies that outperforms a buy and hold strategy over time. So what are you waiting for? Do the Buffett and sell some puts.
Cash Lambert is WealthFit’s Managing Editor. He is the author of Waves of Healing: How Surfing Changes the Lives of Children with Autism.
The Power of Selling Options on Futures
It’s no secret that selling far out of the money options, as opposed to buying them, is a trading strategy with a high probability of success. Low-delta options have a proclivity to expire worthless. The dramatic downward moves required to make low-delta options profitable don’t happen all of the time.
This is not to say however, that selling options is more profitable than buying options, because it is largely dependent on trading preferences and risk tolerance.
Are there a lot of options that expire worthless? Sure. But there are also a lot of options that exponentially increase in value and expire in the money. The point is, as a well-rounded trader, you need to be capable and willing to take both sides of the market.
The Problem with Selling Stock Options
When the time is right, the best traders are those who sell options that are expensive and buy options that are cheap. It’s as simple as that.
Having said that, the most common problem traders run into when looking to sell options on individual stocks is margin requirements. Buying options is never a problem because the margin requirements are equivalent to the price of the premium. Unless you have portfolio margin approval (which typically requires anywhere from $125,000 to $175,000), the margin requirements to sell options are going to be high, especially if you are selling naked options and not spreads.
The Beauty of Selling Futures Options
But what about the trader who has a high risk-tolerance, a lot of market experience, and around $50,000 in trading capital? Should he never experience the perks of selling options?
Not so! Options on futures open up an entirely new world to options sellers. This is because futures options work under what’s called SPAN margin. Exchange algorithms for all futures and futures options traded in the US calculate and determine the worst possible one-day move and price the margin requirements for holding short futures options, and the underlying, accordingly.
Far More Reasonable Requirements
Essentially, SPAN margining brings the requirements to sell options on futures indices, currencies, and commodities to requirements that are similar for portfolio margin accounts. To put it simply, you can sell more options when the underlying asset is a futures contract.
This doesn’t mean you should apply for futures options approval with your broker and sell as many E-mini S&P 500 puts as your account will allow. What it does mean, however, is that options on futures allow for a better return on your trading capital.
Futures Options Trade almost 24/6
Besides low margin requirements, futures options offer better trading hours. Not only can you can sell options and not tie up all of your trading capital, but you can also trade a different set of instruments nearly 24 hours a day, 6 days a week Most futures open on Sunday at 6:00 PM EST.
For example, if you are short SPY puts on a Monday night, there is no way to close out that position if you had to, like if every market around the world starting crashing. The only option would be to hedge with E-mini S&P 500 futures or volatility itself, but this would likely cause slippage.
However, if you are short ES puts, you could close them out at anytime! The spreads are often worse when liquidity is scarce in the middle of the night, but at least it’s possible to close the position; this is comforting to many options sellers.
Tips on Selling Futures Options
When sized properly, selling futures options is an incredibly powerful strategy. As long as you have a reasonable futures commission rate and are mindful of exchange fees, futures options are a fantastic asset class.
As for everything with trading, strictly trading one asset class with only one strategy, like selling futures options, should probably not be a trader’s sole method of generating alpha. Nevertheless, writing options on futures is a paramount tool to have in your trading toolbox.
More information on options trading strategies and tips, like finding the best options brokers or learning the nuances of the option straddle , can be found at The Options Bro .
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