One of my favorite ways to generate relatively safe, high income is by selling options.
I’ve sold hundreds of option contracts since 2014 and generated tens of thousands of dollars in income in the process. I’ve made the majority of those trades available to the public almost immediately after making them, so feel free to do a fact check!
While most of my option trades involve selling covered calls, I do sell my fair share of cash-secured puts.
Selling puts is a great way to get paid cash TODAY for simply agreeing to buy a stock you like 1) by a future date (the “expiration” date), and 2) at a price that’s LESS than what it’s currently trading for.
If the option buyer doesn’t exercise the contract by the expiration date, the contract you sold expires worthless. You’re no longer obligated to purchase the shares and you simply walk away with the cash you already collected up front when you sold the put option.
If the contract does get exercised, then you’re getting paid to buy the stock at a discount! And because the income you collect lowers your cost-basis, I consider selling puts safer than buying a stock outright, the traditional way.
It’s a great way to generate income for the opportunity to buy your favorite stocks for less than what they’re currently trading for.
Most recently, I’ve sold puts on:
- DraftKings and generated $378 in income or the opportunity to buy shares at a 27% discount,
- Medtronic and generated $372 in income or the opportunity to buy shares at an 11% discount, and
- Tesla and generated $4,172 in income or the opportunity to buy shares at a 23% discount
When it comes to selling puts, I’ve developed eight rules that help me maximize my income while minimizing my potential risk.
I only sell a put option if:
- I want to own the underlying stock anyways (since there’s a chance I’ll be “put” shares)
- I’d be buying the stock at a reasonable price (typically fair value or better) if I am indeed “put” shares
- The strike price of the option I’m selling is At-The-Money (ATM) or Out-of-The-Money (OTM)
- I’m comfortable owning the stock for the long-haul in case the price drops significantly below my strike price
- I’m comfortable “letting the stock get away from me” if I don’t get “put” shares and the stock takes off
- My position-sizing makes sense if I’m “put” the shares (I like to keep position sizes around 5% of my portfolio to stay diversified)
- I can make the trade in a retirement account, such as my 401(k) or IRA (this minimizes taxes and tax paperwork)
- I “secure” or “cover” my put sale by having the cash in my account (this cash covers my purchase obligation in case the contract gets exercised and I have to buy the underlying stock. I ONLY sell cash-secured puts, NEVER naked puts.
If you’re interested in learning more about my own put-selling strategy, I put together a video that goes into a little more detail and walks you through a couple trades I recently made with Starbucks (SBUX) for safe, high income: $760 in Seconds: How I Sell Put Options for Safe Passive Income