Are you thinking of selling put options for weekly or monthly income?
If so, you came to the right place. In this video, I’m going to talk about selling put options,
what they are, what you need to know, how they work, and the steps I use to sell them. Also,
I’m going to show the 1 thing that you MUST avoid when selling put options. I promise,
if you skip through it, you could lose a lot of money, so stay tuned. I’m also going to give
you a BONUS. A plan B to reduce your risk, and potentially make even more money selling puts.
Now, before I get into it, I want you to know that I’m not an investment banker, financial advisor,
accountant, or in any way licensed to provide financial or investment advice.
Actually, I’m just a high school drop out who learned how to
save, invest in businesses, and eventually retire from a day job at 35yrs old, 7 years ago.
So, everything that I talk about in this video is for entertainment purposes only because like
I always say, invest with a trusted investment advisor. But, at least, by the end of the video,
you’ll have a better idea about another way to earn weekly or monthly income. And then,
you can discuss the method with your investment advisor to see if the plan is right for you.
Now, if you’re new to the channel, my name is Rick Orford, Author of
The Financially Independent Millennial. And if you like videos about investing,
or making money, or even retiring early, now’s a great time to hit the subscribe button.
That way you won’t miss my next video! Oh and before I forget, this video is brought to you by
the financially independent millennial dot com. It’s my blog where you can learn to save,
invest, and become financially independent and retire early.
Now, you might be wondering, what the heck do I know about selling put options?
Well, I’ve been active buying and selling stocks and options for nearly 20 years. And you know,
buying and selling stocks can be complicated enough, and selling options is a strategy that
investment bankers generally use, or those who are super savvy. But, it doesn’t have to be that way.
Now, you may have heard of selling Covered Calls. And you might already be doing this. Actually,
I think selling covered calls could be one of the safest ways to invest.
But selling put options is different. It’s different because, unlike with selling covered
calls, you don’t have to own the commodity, or the stock. Some say it’s very risky.
I think it's no different than owning a stock. But, in order to be successful with
any investment strategy, you have to understand the risks. And I'll go over all of it today.
First, it’s essential to know what an option is.
A put option is a contract between a buyer and a seller that specifies four things: Rights and
Obligations, The underlying security or commodity, The expiration date, and The strike price.
And with a put option, the seller sells the option to a buyer. And the put buyer gets the right,
but not an obligation, to sell an equity or commodity to the option seller, within a specific
time period, and a set price. In other words, the put seller may be required to buy something,
from the put buyer, should the buyer decide. And the put option specifies what that something is,
the underlying security or commodity, along with a strike price, and an expiration date - so the
buyer has the option to exercise his or her right at any point until the contract expires.
Let's consider the following example, of Jimmy & Sally and coffee beans. Jimmy has a warehouse
full of coffee beans. And Jimmy is worried the price of coffee could go down in price. So, he
wants to protect his stash of coffee. Sally isn’t so concerned. Sally buys coffee regularly and
thinks the price of coffee is pretty stable, or might go up, but not too much over the next month.
Today, coffee beans cost $10 a pound. And Sally decides to sell an option contract to someone
that goes like this. Sally sells a contract to Jimmy, the buyer, who will have the right,
but NOT the obligation, to sell her some coffee beans, for $10 a pound,
at any point until the contract expires, in one month.
And Sally offers this contract for $1.00 a pound, and the contract is for 100 pounds. So $100.
Confused? I was too when I started learning about selling put options. Let’s go over it
one more time. Sally sells the contract to Jimmy. So, Sally is the put seller, who might buy Jimmy’s
beans if he decides its worth it. Now, you might be wondering, WHY would someone want to buy such
a contract? Well, Jimmy has a warehouse full of coffee beans, and he wants to protect his
investment. So, if the price of beans goes down, Jimmy can sell them too Sally for a higher price.
The price that’s specified in the contract! So, Jimmy agrees and he’s willing to sell
Sally 100 pounds of his coffee beans for $10 a pound, at any point until the contract expires,
next month - if HE wishes. And he pays Sally $1 a pound for this option, or $100. This contract is
called a put option. So Jimmy paid Sally $100 for this option. The $100 is called option premium,
or the income that Sally gets to keep, no matter what happens to the price of coffee beans.
Fast forward next month, and now we have three possible scenarios. Scenario 1 - The price of
beans goes down to $8 a pound. Uh oh! Well, Jimmy is happy, because now he’ll sell 100 pounds of
his coffee beans to Sally for the contracted price of $10 a pound, because now they are worth $8.
Sally pays Jimmy $1000 for the beans, even though they are only worth $800. But, she did collect
$100 from Jimmy earlier. So for Sally, it’s a bit of a loss, but it’s not the end of the world.
Scenario 2. At expiration, coffee Beans still cost $10 a pound. Bean prices were pretty stable,
so the option expires worthless. Now, if Jimmy wants, he could sell Sally the coffee beans,
but, there would be no reason to do so because the price is still $10. He could sell the
coffee beans to anyone for the same price, or just keep them. But Sally keeps her $100.
Scenario 3 - The price of coffee beans goes up to $12 a pound, just as Sally predicted. Woah.
Now what? Remember, the contract says, Jimmy can sell Sally 100 pounds of coffee beans at any point
before the expiration date, for $10 a pound. Well, why would he do that now? If Jimmy wanted
to sell his coffee beans, he could sell them to someone else for $12. So, again,
the option expires worthless, and that’s what every option seller wants. Either way,
Jimmy loses his $100. But Sally is happy because regardless, she got to keep her $100. And Jimmy
is happy because coffee costs $12 a pound. Who would you rather be? Jimmy, or Sally?
So you see, people buy put options as a form of insurance against the price of the underlying
equity or commodity going down. And the put seller assumes all the risk, but gets to keep the income.
Give me a like if you thought this cartoon was helpful. It’ll give me a sense of whether or not
I should use one again, in a future video. And, I hope it wasn’t too confusing. If it was, take a
moment, go ahead and pause the video, because you can use the magic of youtube and watch it again!
Now I’m going to talk about some real world examples, about how you can start making
weekly or monthly income by selling put options. First, remember, Options are just contracts that
have rights and obligations. For example, those who buy put options have the right to
sell something specific to the option seller at any point before the option contract expires,
at a specified price, the strike price. And In exchange, the put seller collects an
option premium, the income, from the buyer. And, this premium is guaranteed income
that the put seller gets to keep, every time they sell options, regardless if they are
weekly or monthly or even yearly. Yes, you, the put seller, can repeat the trade, again and again,
week after week, month after month, and keep the income, no matter what happens.
But, like any investment, you’ll need to know some basic things about selling weekly or
monthly put options for income. In particular, it’s important to understand the mechanics,
the rights, the obligations, and the overall risk. Typically, retail investors like you and I,
buy and sell put options on equities like an index etf, not on commodities like coffee beans.
Though, I like the coffee example, because to me, I love coffee, so I can relate,
at least a little. One of the things people often sell puts on is the SPY.
The SPY is an ETF. It’s the most famous S&P 500 index ETF and it works like this.
1 put Option on the SPY allows the put buyer the option to sell the put seller 100 shares of the
SPY ETF for a specific price, known as the strike price, before the expiration date. That’s all.
And the seller collects income, the option premium, for selling the put!
So, what do you need to sell put options? Well, remember, when selling a put option, you’re giving
the buyer a right, but not an obligation to sell you the underlying commodity or security.
In other words, you may need to be able to buy the underlying commodity, or stock or etf. So,
you’ll need enough collateral. Collateral will be in the form of cash or margin in your brokerage
account. Remember, you, the put option seller agree to buy something specific, in the future,
if the buyer requests it. So, your brokerage account needs to have enough money, or collateral,
for you to afford the purchase. For example, if you want to sell 1 put option on the SPY, you’ll
need to be able to buy 100 shares of the SPY ETF in your brokerage account at the specified strike
price. If the strike price is $300, then you need to be able to afford to buy $30,000 worth of SPY!
And, if you want to sell 5 put options and earn 5x the money, you’ll need to
have enough cash or margin available to purchase 500 shares of the SPY in your brokerage account.
Also, options typically expire on the 3rd Friday of each month.
However, many stocks and ETF’s now offer a wider range of expiration dates. For example, the SPY
has options that expire on Mondays, Wednesdays, and Fridays of each week! In other words, you
could start selling weekly put options and collect income as much as three times a week, every week!
In general, you can earn anywhere between 1 and 5% or more a month selling weekly
or monthly put options, it all depends on your trading strategy. How much you earn depends on
how volatile the stock market currently is, the strike price, and the expiration date.
In other words, the more risk you are willing to take, the more income you can collect. Similarly,
the more unstable the markets are, the greater the income. To give me the most amount of income,
I prefer selling put options slightly “Out of the Money,” with an expiration of 3-6 weeks out.
An “Out of the money” put option means the strike price is lower than the underlying equity.
Now, you might be wondering about the risks of selling put options. First, you must remember
that by selling weekly or monthly put options, you agree to buy the underlying equity should the put
buyer wish, at any point, until expiration. The risk in selling puts is that you might end up
being forced to buy something for much less than what it’s worth. So, manage the risk, you need to
be sure that whatever you are selling a put option on, that it’s a quality stock or ETF that you’d be
happy to own, at the agreed strike price. And, once you own it, you can do whatever you like.
Let's look at a real world example. Let’s talk about Apple. Let's say Apple
is currently selling for $130 per share. And You think Apple is on its way up.
So, you decide you want to sell a put option with a strike price of $130, that expires next month,
say July 17. Your brokerage tells you that investors are buying the option for $4. So,
if you sell this put option, you’ll collect $4 of income, times the number of contracts you trade,
times 100. So, if you sell one contract, you’ll get $400 of income, or option premium,
that you can keep no matter what happens. It’s guaranteed income.
Now, let's fast forward to the expiration date. Let’s say Apple is now trading at $120.
In this case, you’ll be forced to buy 100 shares of Apple for $130 each,
even though they are only worth $120. But, don’t forget, you’ve already collected $4
for the put option! You’ll only lose if you sell apple shares at a loss.
But, let's examine the 2, more exciting scenarios. Let's say that on expiration day, Apple didn’t
move much, and it’s still selling for $130. Remember, you’ll be fully profitable as long as
apple stays above the strike price, in this case $130. Since $130 is the same as the strike price,
it means nothing happens. The put option expires worthless, which is what you want! And of course,
you get to keep your $400 of income. And you can repeat the trade next week, next month or next
year. And finally, the same will happen if the shares go up in value, above the strike price.
The option expires worthless, and you get to keep the $400 income no matter what.
Now, remember earlier, I mentioned I’d give you the 1 thing I think you should
not do when selling put options? Well here we go. Selling put options is a guaranteed way
to earn weekly or monthly income, and yes, it can be very profitable, month after month.
The key is to remember to sell put options on only high-quality equities
or ETF’s that you would actually want to own, because you may be forced to buy them.
And You might be wondering if you can lose money selling put options. Well,
you’ll never lose the income from selling put options. The income you receive
from selling puts is guaranteed. However, if you’re forced to buy the underlying equity,
AND you sell the equity at a loss, then yes, that might lose money.
And last, but certainly not least, I wanted to give you a plan B. Something else that you can do
to reduce your potential risk, or make even more money selling put options. When you sell a put
option, if the equity has gone up considerably, your option will likely be profitable. So,
you could always close out your trade by buying back the identical option, at a lower price. Now,
why would you want to do that? Well, you then could sell another option, and repeat the process.
Folks, if this is your first time thinking about selling put options, I know you may be confused.
I know I was. So if you’re still confused, go ahead and watch this video a few more
time. By the way, which tip did you like the most? And do you already
sell options? Let me know in the comments below, because I’d love to hear from you.
In the mean time, stay safe and I’ll see you in the next video!
Bye!