Options Trading: A safer way to generate income regardless of market direction

Hi there guys! I know it has been some time since I last uploaded a post in my website. I have been doing some paper options trading on thinkorswim demo account and recently got a really good idea on how to trade options safely. This I want to share with you guys.

Safely? You might ask. I thought options are risky instruments? You may wonder…

Yes, options are risky if you don’t know how to trade them. It is like a knife, used properly, it can cook a great meal; used in the wrong hands, it can use to hurt or even kill people…

Actually, this idea is not my own. I got it through an free ebook that I submitted my email at this link here. But I will explain the strategy here…

So how is this strategy safe given that options are risky instruments? It is because it works in ALL market directions.

The first step is to choose a US blue chip stock that you want to trade. This stock should be something that you want to own as an investor. Example can be Apple (APPL), Microsoft (MSFT) or Walmart (WMT). The reason why I mention you should trade blue chip stocks is such that the risk of the company going  bust is small.

The second step involves selling a put option on the stock that you wish to trade. According to Investopedia, a put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame. You may wonder at which price you would want to sell your put option. For me, I recommend based on your risk tolerance, a delta of -0.10 to -0.20. That means a probability OTM (Out-of-the-Money) of 80% to 90%.

Now here’s the thing. The first situation is that the put option expire worthless, meaning that the market moves up or sideways. It is a win for you, for you pocket the premium received without having to do anything. But what about the second situation, when the price goes lower than your strike price? You will be assigned the shares at a lower cost to you, which is a good thing. Why? Because the fundamental principle of investing is to buy LOW, sell HIGH. So in this case, when the stock price tanks below your strike price, you buy the shares at a LOW price. So what do we do now with the shares that have been assigned to us? Here is the third step…

You sell a covered call to your assigned shares. According to Investopedia, call options are an agreement that give the option buyer the right, but not the obligation, to buy a instrument at a specified price within a specific time period. So technically, in all circumstances, you generate income regardless of market direction. In the first scenario, where the market moves downwards or sideways, you win as you pocket the premium while it expires worthless. When the market price moves beyond your strike price of delta 0.10 to 0.20, you basically sell your shares at a profit, because now you are selling HIGH. You are essentially buying LOW and selling HIGH. You then rinse and repeat this process to generate passive income.

The only 2 potential problems left with this strategy is probably first, the amount of capital you need for this to work, and second, the commissions you have to pay for each trade. For selling the puts and calls options, you can choose to sell those with 1 month expiration date.

Hope this strategy helps you guys with the capital to generate passive income!

Note: Options are risky instruments and not everyone is suitable to trade them. You are advised to take into account your personal financial circumstances and commitments, as well as your financial knowledge before investing in options. You could lose all of your capital trading options. This blog post is intended as a educational tool and not an offer or solicitation to invest in options. Any financial risk is completely borne by the investor trading options and Ken is not liable for any monetary losses made by the investor.

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