The 2020s may be a lost decade for the stock market. Some people call this a bubble that may not pop—but may flatline.
However, our net worth must still grow over 10% every year. If the gains don’t originate from the stock market, where do they come from?
We can obtain yield from dividends, but we would still need to rely on companies to pay them. A more interesting approach is to generate a high yield by selling cash-secured puts.
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Why sell cash-secured puts? Selling cash-secured puts is an essential part of the stock market ecosystem because it shows how traders, investors, and speculators are thinking.
A put option allows the buyer to sell 100 shares of a stock if the price drops below a certain point.
Let’s say I purchase a SoFi Technologies (SOFI) put option with a strike price of $15. SOFI’s current share price is $16.50.
As a buyer, purchasing a put option allows me to speculate on the price of a stock and sell it if the price drops. However, I pay a premium (in this case, $60) for this privilege.
Why would a buyer want the option to sell their shares? The toughest part of options trading is understanding buyer and seller motivations.
Let’s say I own 100 shares of SOFI at $8 each. The current share price is $16.50, and I want to speculate a little more before taking profits.
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However, I do not want to risk all my capital gains, so I buy a put option to protect my profits up to $15. If the price drops to $12, I can still force the put seller to purchase my 100 shares at $15.
As cash-secured put option sellers, we collect the premiums; however, we must hold enough cash in reserve to purchase 100 shares at the strike price.
Let’s walk through the scenario as a cash-secured put seller. I determine that SOFI is a stock that generates substantial options premiums due to volatility.
I set the strike price at $15, which means I must have $1,500 ($15 x 100) in reserve. I then sell the put and collect the $60 premium.
I will wait for the month and see how the share price moves. If it drops below $15, I will likely wake up with 100 SOFI shares instead of my $1,500.
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If the price doesn’t move past $15, I keep my $1,500 and the $60 premium. I can reset and sell another cash-secured put for the upcoming month.
Buying shares back. If the price moves upward from $16.50, I can purchase my contract back at a discount.
If SOFI’s share price moves to $19, my options contract may drop in value to $30. Remember, I already collected a $60 premium.
I can cut my profits in half and take the money and run. I like to take the money because it gives me back something much more valuable—time.
Instead of sitting there with your hands in your pocket for a month, you can take your $30 after a week and reset.
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You can jump back into SOFI options or try another stock. Or you can enjoy the easiest $30 you have ever made. This scenario doesn’t seem too exciting, but your impression may change mighty quickly when you talk about big numbers.
Putting it all together. But why put your capital at risk by selling cash-secured puts? Isn’t it better to drop your money in a high-yield savings account, money market fund, treasury bills, or certificates of deposit?
Sure, those are all safer ways to generate yield, but is that enough to promote long-term financial success?
I firmly believe that your net worth AND passive income should increase by 10% annually. This ensures you beat inflation, and the cost of living increases every year.
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I recently got a 2.5% cost-of-living increase for my military pension. Is that enough of a pay raise to ensure I beat inflation? No.
Treasury Bills, certificates of deposit, high-yield savings, and money market funds yield about 4% currently. You will not beat inflation at these rates.
Finding your yield. Let’s see how much yield we extract by selling cash-secured puts from the above example. Remember, we earned $60 monthly on a capital outlay of $1,500.
We can find our annual options income by multiplying $60 by 12, giving us $720. This gives us an annual yield of 60%.
Even if we repurchase all of our contracts at $30/each, we would still have an annual yield of 30%. Selling cash-secured puts is a low-risk way to generate life-changing yields.
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Compare over the long haul. Let’s take the $20,000 we have sitting in a money market account at 4% and use it to sell cash-secured puts.
The money market account paid us $800 annually while selling cash-secured puts at a 40% yield would earn us $8,000. Which would you prefer?
But we don’t have to take one over the other; life is about giving yourself options. You can keep resources in your money market funds while selling cash-secured puts elsewhere.
The best place to start your options trading journey is to decide how much monthly income you want to generate. For example, say your number is $500/month.
I then used my rule of 40 to determine that having $20,000 in a cash-secured put account is the right amount. This total includes additional money that isn’t in play.
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Remember, if things go your way, you must have money on hand to repurchase shares. Also, if you receive shares, you will have leftover funds to continue selling puts.
Part of the bigger income picture. Selling cash-secured puts isn’t the end-all, be-all of your income portfolio. In fact, it’s just the beginning.
You should add preferred shares, closed-end funds, and high-yield dividend stocks. These securities will keep income coming your way when the options market is acting funny.
Yes, the options market is extremely unpredictable. Whether you analyze graphs and charts (technical analysis) or follow company information (fundamental analysis), you will have a tough time in the options market.
However, this is how it is supposed to be. If everyone could earn 30-60% trading options, everyone would do it. However, most people cannot handle the emotional strain of watching their accounts boom and bust every day.
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Conclusion. Can you sell cash-secured puts? Yes. Anyone who has saved the initial capital to sell cash-secured puts has the financial discipline to succeed in the options market.
Ultimately, selling cash-secured puts requires discipline and a willingness to see the bigger picture. What do you do if you earn a $900 premium and the share price rises?
You want to keep the $900 premium, but the market is giving you the opportunity to repurchase your contract for $300. Do you have the discipline and awareness to take the deal?
Many people cannot make the deal and take chances with the market. In a month, they will keep the $900 but end up collecting 1,000 shares of a stock. You must have a better plan than this.
The two ways to fail within the options market are not having a plan and not following your plan. Everything else is just a randomized gambling machine.
The best part of selling cash-secured puts is that you can play with one contract at a time—that’s the best way to learn about time decay and volatility.
If you stick with it, you can succeed at earning over 30% annual returns while generating extraordinary passive income. 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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