It’s an amazing feeling to know I can make money anytime I want.
It’s not that I have some super-rare skills, although ring announcing is harder than it looks. (I’m a boxing ring announcer in my spare time. Seriously.)
But with a few mouse clicks, I can get several hundred to several thousand dollars deposited into my brokerage account.
Currently, the majority of my portfolio is invested in Perpetual Dividend Raisers – stocks that raise their dividend every year. And I reinvest all of my dividends. So my portfolio doesn’t generate any income, as those reinvested dividends are building wealth.
But if I want some extra cash – maybe to pay for a vacation, Broadway show tickets or a costly car repair – it’s easy to get, and I can get it in a low-risk way.
I sell options.
Now, I’m not selling something I’ve already bought and taking a capital gain. I’m selling something I don’t own. I’ll explain.
Selling Covered Calls
A call is an option that gives the buyer the right to buy a stock by a certain date at a specific price.
Let’s say you own shares of Cisco Systems (Nasdaq: CSCO) and the stock is trading at $38. You could sell a call with an expiration date in June and a strike price of $39 for $1.55.
That means you are selling the right for the buyer of the call to buy your shares of Cisco for $39 anytime between now and the third Friday in June. (Options expire on the third Friday of the month.) As a result, you will receive $1.55 per share, or $155 for every 100 shares. (Options contracts are made up of 100-share blocks.)
If the stock does not reach $39, your buyer will not buy your stock and you keep the $155. If the stock is above $39, the buyer will buy your stock by expiration. You can always buy back the call before the buyer acquires your stock, if you don’t want to part with your shares.
This strategy generates income and gives you some downside protection. If the stock falls to $36.45, you’re still at breakeven because you’ve collected $1.55 per share, offering you protection of up to 14% slide in the stock.
Selling Naked Puts
This is one of my favorite strategies.
Nine years into a bull market, many stocks are pricey. I have a long list of stocks I’d like to buy if only their prices would come down.
If you feel the same, now you can get paid to wait for those prices to come down. If they don’t, you just keep the money.
Here’s what I mean…
A put option gives the buyer the right to sell their stock by a specific date at a certain price. Remember, a call gives the buyer the right to buy stock. A put gives the buyer the right to sell stock.
But we’re not talking about buying puts; we’re going to sell them.
If Cisco Systems is trading at $38, you could sell a June $35 put for $1.13. That means the buyer of the put can sell you their Cisco stock at $35 anytime between now and the third Friday in June. For that right, they will pay you $1.13 per share, or $113 for every 100 shares.
Buying a put is like buying insurance. The buyer is insuring that no matter what happens to the stock, they can get out at $35. When we sell the put, we’re the insurance company.
If Cisco never falls below $35, you simply keep the $113. Just as an insurance company keeps your premium if disaster doesn’t strike.
If Cisco does fall below $35, you are obligated to buy the shares at $35 if the buyer “puts” the stock to you (makes you buy it). If the share price is $34.90, it’s no big deal because you collected $1.13 for selling the put.
So it’s like owning the stock at $33.87 ($35 minus $1.13). If the stock crashed and is trading at $30, well, you’re paying $35. That’s the risk you’re taking for selling the put. You keep the $1.13 no matter what.
But put selling it actually a conservative strategy to obtain stock at a lower price that you choose. If you like Cisco but think $38 is too high a price – but would be happy buying it at $35 – then selling a put would be a good strategy.
If the stock goes down, you get your stock at the price you want. If it doesn’t, you simply keep the income.
I use both strategies in my portfolio to earn cash. In today’s low interest rate environment, it may be a good way for you to do the same.