Using Options For Additional Passive Income
Not All Options Need to Be The Risky Trades You See On r/WallStreetBets!
In their simplest form, there are two forms of options trading - buying and selling options.
By buying an option you are often speculating whether an asset will increase in price during a set period of time, so that you can make a profit (call). OR you are attempting to short a position, or limit your downside risk in an already purchased position (put).
Buying Calls and Puts are risky to me and I rarely execute these trades unless I see a great upside opportunity for a cheap price. But most of the time these options expire worthless.
Where I do participate in the options space is selling covered calls (and eventually hope to do more cash-secured puts). A covered call is when you already own 100 shares of stock and are using that position as collateral to generate income.
A call is the obligation to provide someone with 100 shares at an agreed strike price at an agreed date if the strike price is met or exceeded. The seller of the call provides the shares if the strike price is met, the buyer of the option receives them. As the seller you collect a premium for selling the option. That's where the income comes in.
Here is an example of where I sold a $94 call on ABBVIE for $0.20. ($0.20 x 100 shares = $20). I later bought this option back for $0.05 ($0.05 x 100 = $5) and was able to keep the $15 difference.
This is an example of selling a $57.5 C option on Realty Income Corp expiring on June 19th, 2020 for $0.40. Walking away with $40 of premium and potential to make $500 on the shares alone if the option is executed! If the option expires worthless, I keep my $40 and can continue to write options on my 100 shares of $O.
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