After spending some time on the stock market, you’ll understand the epp and flow of the world’s greatest wealth creator.
You will undoubtedly be a buy-and-hold investor if you are a dividend investor. Receiving dividends is my favorite moment of my day, outside of seeing my family.
Luckily, we can extract even more passive income from the stock market outside of dividends and capital appreciation. We can leverage options to create additional month cash flow safely (keyword safely).
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Options can be risky. Trading options can be risky if you don’t understand them or become emotional. However, brokerages put safeguards in place to ensure you stay at the proper trading level compared to your experience.
The key to safely trading options is to sell them to others. When you sell options, you give someone else insurance while collecting the premiums (you always keep).
Two types of safe low-level options. The two safe option trades I recommend selling are covered calls and cash-secured puts.
With a covered call, you give someone the option to purchase your stocks at a higher price in the future. You own the underlying stocks, which makes the trade safe.
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With cash-secured puts, you give someone the option to sell you their stocks at a lower price in the future. You must have the total cost of the strike price times 100 in cash.
Why would someone buy cash-secured puts? As an options seller, it is good to understand why someone would want to purchase a cash-secured put.
Imagine if someone owns 100 shares of AT&T (T) with a cost basis of $10. The stock now trades at $20. Someone would buy a cash-secured put from you at $17 to protect their capital gains in case of a massive price drop.
The good part is that you keep the options premium, regardless of whether someone exercises the option. Most options expire without being exercised.
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Getting started with cash-secured puts. The first step to trading cash-secured puts is picking your platform.
Cash-secured puts are relatively simple trades, so you can use a standard brokerage like Well Fargo or Charles Schwab (which I use).
Then you must apply to become an options trader. Brokerages have different tiers of options traders, and I can sell covered calls and cash-secured puts on Charles Schwab as a Tier 1 trader (with level 4 as the highest).
Selling your first cash-secured put. Now for the fun part. Pick the stock you want to trade. I like AT&T (T) because it has a high volume of trades, and the price currently hovers around $13-$17.
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Remember, each option contract consists of 100 shares of the underlying stock. If AT&T trades at $15, one option contract would cost $1,500.
Therefore, to sell a cash-secured put, you would need to have at least $1,500 cash in your brokerage account.
After your brokerage gives you access to options and you have your cash in place, it’s time to look at your options chain.
The options chain. The options chain can look confusing initially; however, you will get used to it. Look at the puts. You want to find an out-of-the-money (OTM) put.
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An OTM put has a lower strike price than the current share price. You want to choose your strike price and the expiration date.
You can be as aggressive as you want. If you want to avoid exercising your puts, you want a lower strike price.
If you understand how to balance covered calls and cash-secured puts, you may want the highest premium.
Remember, the premium is for one share. To get the total value of the premium for one contract, multiply it by 100.
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You want to Sell a Put to Open. This means that you are selling a cash-secured put to open your options. If you want to close the option early (before expiration), you will Sell a Put to Close.
Running through a scenario. Okay, let’s look at our option chain for AT&T with an expiration date of July 28, 2023.
AT&T currently trades at $14.58. I want a low chance of it being exercised, so I choose a strike price of $14. This earns me a premium of $0.18 or $18 total.
After selling a put to open, the brokerage withholds my $1,400 until the option expires or the buyer exercises it. Now we wait.
Long-term options strategy. This pretty much sums up selling cash-secured puts for passive income. It can be boring if you are a thrill seeker.
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However, this can be a powerful way to earn passive income when used in tandem with selling covered calls.
In the above scenario, we earned an $18 premium for selling one cash-secured put contract. But what if we sold ten contracts? That would be $180 in premiums.
What if we staggered ten contracts a week for the month? It would require us to have $140,000 in cash. But that would earn us $720/month in passive income.
As you get more attuned to selling cash-secured puts, you can find stocks much more lucrative than AT&T. To name a few at the moment: Apple (AAPL), Tesla (TSLA), and Palantir (PLTR).
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The worst that can happen is you get shares of the underlying stock at a low price. You can then sell a covered call for a higher price and get your money back, plus appreciation.
Adding cash-secured puts to your dividend portfolio. I added an options play to my Charles Schwab dividend portfolio.
It’s incredible to wake up and create more money because you understand how to trade options safely.
In reality, you are extracting more yield from the stock market safely. As income investors, we want more money for less work.
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Conclusion. Selling cash-secured puts is a great way to create money from money. You can generate significant returns once you understand the relationship between covered calls and cash-secured puts.
The real play is increasing the number of options contracts you can trade at once. In this case, if you want to increase your pile of cash, you can sell more puts at once.
Some great books on options are “Make Your Family Rich,” “The Options Playbooks,” and “Covered Calls for Beginners.”
One $40 premium doesn’t sound like much, but $400 sounds much better. We should all seek passive income through covered calls and cash-secured puts to generate returns safely. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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