You can use put options in two different ways. You can use them as insurance on stock you own and you can use them as an investment vehicle. The following article does a nice job of explaining how. The only thing I would caution you on is making sure you know what you’re doing. Selling naked puts can be very risky (see this article in The Street).
As the Street article suggests, I would recommend buying a put option below the one you’re selling, creating a “bull put spread,”. That will reduce your risk as well as the cost of getting into the trade. Just make sure you’re well educated in options before making any option trades.
The stock niche is certainly another one of the numerous ways for you to generate money.
Inside the stock industry a very very good means to generate cash and it is options trading. Simply put I earn 15 to 20% each and every month by trading options, more precisely put options.
Generally there are are two different features to put options investment.
At this time there is usually the facet associated with coverage for ones portfolio also called purchasing insurance for your stock, and then there is the wealth building, monthly cash flow side aka getting paid to own a stock. Let’s take a quick glance at both of these.
Buying Insurance with Put Options
Being the purchaser of this put options contract, you’ve got the “option” to be able to offer the stock set at a certain price until you sell the option or perhaps the particular option expires.
Nearly all investors implement puts to protect their account from big movements to the downside and furthermore lock in profits.
For example, lets say an investor purchased a stock and it increased in price by about $10 per share. This is a really large move.
Right now the question you may be wondering is…should you take profits or maybe let it ride? Additionally you have to consider that should you choose nothing, your profits could possibly be destroyed in minutes with some not so great news. Taking no action is probably the most detrimental action you can take in the stock market. What do you do in that situation?
You can acquire a put option with a strike price which is a couple of prices below the current price of the stock. As a result, you will be able to sell your stock at this strike price no matter what happens to the cost of the actual stock. For instance, if you bought the stock at $200 and it increased to $250, you can purchase the put at $240. With the $240 put option, regardless of how low the stock goes, you can still sell it at $240! So, if the stock drops to $30 per share, you can STILL sell it at $240, think about that for a second…let it sink in.
Making Monthly Passive Income with Put options
On the other side of this put options coin is how you’ll be able to create wealth by using options through passive income each and every month.
For the stock buyer to protect his stocks by buying protective puts, he will need to have someone prepared to sell those put options to him.
I personally generate income each month by selling put options against stocks I might be prepared to own and sometimes even against stocks that I never plan to own.
The real key to successfully building wealth with put option selling is usually to sell puts for securities you would not mind getting and also seek out stocks that are relatively flat with regards to their price goes. Flat stocks are generally stocks that will move at most $3 in a month and possess minimal PE ratios.
I’ve found that I really also have a good deal of success by stock trading in the $20 – $30 price range. Anything higher as well as cheaper is commonly too risky if you ask me.
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