Constant income from options
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By Jeff Krohnfeldt Updated Jun 25, Investors seeking to generate income constant income from options equity portfolios on a regular basis can employ option writing strategies using puts and calls to buy and sell stocks. In addition to producing income, writing puts to buy stocks lowers the cost basis of the purchase.
Whether you are interested in acquiring an equity position, already own equities, or simply do not wish to own any equities, there are option strategies that are suitable to generate income. In this post, we will explore the top 3 income generating strategies and how to add yield to various portfolios. To learn more about option income strategies, please view our recent webinar. Time Decay Theta — Expiration Dates Before exploring income generating strategies, it is important to understand the concept of time-decay theta and how it affects options pricing and the income received.
Covered call strategies generate income and can increase net sales proceeds. The following examines three ways to generate income on a regular basis using put and call writing strategies. Option Basics An option contract covers shares of an underlying stock and includes a strike price and an expiration month.
The buyer of a call option has the right but not the obligation to buy the underlying stock at the strike price before the contract expires. The seller of a call option, also referred to as a writer, is obligated to sell the shares of the underlying stock at the strike price if a buyer decides to exercise the option to buy the stock.
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In each option transaction, the amount paid by the buyer to the seller is referred to as the premium, which is the source of income for option writers. In these contracts, the buyer of the put option has the right but not the obligation to sell the underlying shares at the strike price prior to expiration.
Learn the Lingo: What Is An Option?
If the buyer of the contract elects to sell the underlying shares, the option writer is obligated to buy them. Options are referred to as being "in the money" when the price of the underlying stock is above the strike price of a call option, or is lower than the strike of a put option.
When options expire in the money, the underlying shares are automatically called away from call writers and assigned to option sellers for purchase at the option's strike price. Selling Puts to Buy Investors can generate income through a process of selling puts on stocks intended for purchase. This process is similar to constant income from options limit orders to buy shares, with one key difference.
For a purchase to be executed using a put strategy, the option must expire in the money or the put buyer must elect to assign shares to the seller for purchase prior to expiration.
Writing Covered Calls Shareholders can produce income on a regular basis by writing calls against stocks held in their portfolios.
If crypt token option expires out of the money, the call writer can sell another option against the shares to generate additional income. With an in-the-money expiration, shares are called away at the strike price. If the option is in the money prior to expiration, the call buyer can elect to call away underlying shares at any time.
The Strategy of Selling Put and Call Options
Maximizing Premiums The price of an option always includes a time premiumwhich is calculated by the amount of time to expiration, the proximity to the strike price and the volatility of the underlying shares.
In the examples using XYZ stock, both options are out of the money and are composed of only time premium. Premiums on options in the money also include an intrinsic value.
Time premiums decline the further away the share price is from the strike price. The options with the highest time premiums are those with strike prices closest to the share price.
How to generate regular income from selling options?
A second consideration is the time to expiration, with more time resulting in higher premiums. Generally speaking, longer expirations tend to have lower time values, as measured on a per-month basis, than shorter expirations.
These variables provide investors the flexibility to create option-income strategies to suit their objectives. For example, short-term traders may elect to sell options with expirations of one month or less, while buy-and-hold investors can develop strategies using expirations going out as far as two years.
How to Generate Monthly Income From Options Selling Author: Alex has served in the financial industry for over 20 years, assisting with client portfolios in addition to his personal investments. When we purchase an option, we can only realize a profit when our market direction bias is correctly aligned with the direction at which the market is moving. Furthermore, not only does the direction of the market need to be correct, our prediction of the direction has to be accurate within a predetermined time frame, or it will similarly result in an overall loss, due to the expiry of the purchased option before any profit could be realized.