Now that you have prepared yourself mentally (#1) and saved a nest egg (#2), it’s time to jump into the options market. First, you must decide which technique you want to try.
An excellent place to start is selling covered calls for passive income. This strategy presents little risk, but does require a lot of money to get started.
Selling covered calls is the process of giving someone else the ability to purchase 100 shares of your stocks if the stock price crosses a certain level (going up). For your trouble, you earn a premium (income).
Selling Cash-Secured Puts vs. Treasury Bills
I want to walk you through creating your account, picking the right stocks, and setting the stages for success. Let’s begin.
Preparing your brokerage account for options trading. Although you opened a brokerage account and funded your money market fund, you still won’t be able to trade options.
This situation happens because you must ask permission to trade options on your brokerage account’s platform. Asking for permission consists of answering some questions about your finances and knowledge level.
You will become a level one options trader when applying to sell covered calls. This level usually entails selling covered calls and cash-secured puts.
Both of these strategies require you to own shares (covered calls) or the money to purchase shares (cash-secured puts). Therefore, you can’t get yourself into too much financial trouble. Level one traders usually do not have access to margin trading either.
Cash-Secured Puts vs. Dividends
Picking the right stocks. Once you’re an approved level-one trader, it’s time to purchase your stocks. Picking your stocks can be tricky as your account size will determine your stocks.
Introducing the rule of 40. This is a rule I created to assist you in determining the size of your portfolio. For my rule of 40, you multiply your desired monthly options income by 40.
For example, if you want to earn $500 monthly by selling covered calls—you would need $20,000 in your options trading account.
Let’s run with this example for the rest of the article. With $20,000, we need to purchase stocks that fit into this account.
You want to purchase volatile stocks with a share price between $10 to $20. How do you know if they are volatile?
First they are young stocks; they have IPO’d less than five years ago. Also, their earnings dates should have massive spikes of volatility.
Selling Covered Calls vs. High Yield Savings
You can check to see if they made the top 20 volatile stocks by searching Trading Options Volume by Options Clearing House.
Currently, two stocks come to mind: SoFi (SOFI) and Rivian (RIVN). Formerly, Palantir (PLTR) and Draftkings (DKNG) were good picks but have grown in price.
Let’s take RIVN for this example. Today, RIVN has a shape price of $12.23. Armed with this information, we must learn to read an Options Chain.
I first select my RIVN options chain from the menu. I immediately scroll to options that expire in one month. Today’s date is Nov. 30th, 2024, so I pulled options for Dec. 27th, 2024.
The chart shows the left side is “calls,” and the right is “puts.” We are concerned with calls. For this exercise, our cost basis for RIVN shares is $12.
Covered Calls vs. Dividends
Knowing your cost basis is the most critical part of selling covered calls. Knowing that the cost basis is $12 allows us to pick a strike price that will keep us safe.
In this case, we will pick the $13 strike price. When selling covered calls, we look at the “bid” price. If you ever get confused over “bid” or “ask,” simply Google it.
Looking at our Options Chain, we see that a $13 strike price gives us $0.63. But what does that mean?
This means we will receive $0.63 per share. Each option contract consists of 100 shares, so we can multiply it by 100 to get our premium per contract. In this case, it is $63.
Should You Take a Home Equity Loan?
Doing the math and playing the game. Now, we have enough information to formulate our strategy. We know that we will receive $63 per covered call contract. We are aiming for $500, therefore we must sell eight (8) contracts.
Eight contracts equal 800 shares. At $12 per share, it would cost us $9,600 to collect 800 shares of Rivian (RIVN).
Congratulations, you just did the math to sell your first covered call. It’s time to make the trade and see how it goes.
Because you positioned yourself wisely, you have the power to wait out the expiration process. You win if the share price ($12.23) crosses the strike price ($13).
Secondary Mortgages for Everyone!
Let’s say the share price increases to $14. On Dec. 28th, you will wake up with $10,400 ($13 x 800) in your account, plus the $504 premium you collected on the day of the transaction.
However, you don’t always have to wait until the expiration date passes. During the month of your trade, if the share price reverses, your options contract will increase in value.
You will never be able to earn more than your premium, but many times it is wise to repurchase your shares. Let’s examine.
Let’s say the stock price drops from $12.23 to $9. No one wants to purchase you $13 strike price contracts—they become cheap.
Therefore, your $63 contracts may be selling for $10. At this point, you purchase them back for $50. You received $504 on day one and repurchased them at $50; your profit is $454.
Find Happiness Inside of a Budget
Now, you can purchase more RIVN shares if you believe the stock will recover. Or you can sell cash-secured puts against RIVN at a $8 strike price.
I always find it’s better to get out of the market quickly. The longer you stay in, the more madness will ensue.
Long-term covered call strategy. Things will get messy; I promise you that. The fun part is that you have many techniques at your disposal.
Reject the 40-40-40 Plan
You can repurchase your calls early, wait until expiration, or hedge your bets with other options techniques. You will find yourself learning more each time you trade.
I only trade one stock at a time, in this case, RIVN. You will want a backup stock or two to avoid getting stuck.
Being stuck means your cost basis is higher than the strike price. For example, if our cost basis is $12 and our strike price is $10. Do not trade into these scenarios.
If you find yourself in this scenario, you may have to wait for the price to recover. However, you still have the other $10,000 to make plays.
No Freakin’ Way I Am Working Another 25 Years Part 4
Conclusion. It is vital that you don’t trade with all of your capital. Your goal is to keep your money train rolling.
It’s a good idea to write down all of your trades. My most important metric is determining the yield of the trade.
For example, earning $504 against $9,600 is an annual yield of 63%. It’s always good to see how ridiculous (amazing) these numbers are when making trades.
That’s selling covered calls in a nutshell. The only way to learn is to toss yourself in the fire. The good part is that you can sell one contract and learn the ropes—no need to go “all in” at the beginning. Good Luck!
- PDF of the Month: Don’t Gamble with Retirement 13 (Free 460-Page PDF)
- Free PDF Downloads: Download FREE PDF LIST here
- Financial Mindset: Become CEO of Yourself 2 (Free 196-Page PDF)
- Retirement Planning: Your Retirement Planning Guide 2 (Free 255-Page PDF)
- Investing: How We Plan to Retire on Dividends 4 (Free 139-Page PDF)
- Cryptocurrencies: Counting on Crypto 2 (Free 159-Page PDF)
- Real Estate: Financial Independence through Real Estate 4 (Free 112-Page PDF)
- Business: Retire Rich, Retire Comfortable with a Business 4 (Free 149-Page PDF)
- Latest DGWR: Don’t Gamble with Retirement 11 (Free 410-Page PDF)
- Everything!: The Biggest Book on Passive Income Ever 4! (book)(Web Edition)(Art Edition)
- Writer’s Comparison: M1 Macbook Air vs. GalaxyBook3 Pro 360
- Read My Books for Free: Free Kindle Books Schedule
- Book Design: Design Tips on YouTube
- Kindle Unlimited: Why I Finally Subscribed Kindle Unlimited (learn more)
- Book Reviews: 505 Takeaways from 101 Books (pdf)
- Writing: The Publishing Chronicles (Part 1, Part 2, Part 3, Part 4, Part 5)
- Best REIT- Fundrise: Fundrise vs. US Treasuries (Join Fundrise)
- Follow us: On our Facebook Page and Join our Facebook Group
- Support the Channel on Cash App: $Kingmarine1981
- For more detailed analysis, join my Youtube: MFI YouTube Channel
PDF of the Month: Don’t Gamble with Retirement 12 (Free 460-Page PDF)
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
Leave a Reply