If we were selling this spread, that would be a loss in this case because we sold the credit spread and IV went higher. I don't know how to space my trade. Market conditions may have changed. There's not a lot of slippage in the difference between what you can buy an option for and what you can sell it for, the bid-ask spread. Unfortunately, but predictable, most traders use them for pure speculation.
It started out as a challenge to find a winning trading system. It turned out to be one of the best income strategies in the world. From July to January , I put my "Instant Income" strategy through a beta test as the folks over at haxspace.cf looked over my shoulder. The results were even better than I expected.
What is a Spread?
So, the benefit of having a new and growing market of speculators is that we have the ability to take the other side of their trade. I like to use the casino analogy. The speculators buyers of options are the gamblers and we sellers of options are the casino. And as well all know, over the long-term, the casino always wins. So far, my statistical approach to weekly options has worked well. I start out by defining my basket of stocks.
And I use it over various timeframes 2 , 3 and 5. This gives me a more accurate picture as to just how overbought or oversold SPY is during the short-term. A reading above 80 means the asset is overbought, below 20 means the asset is oversold. Just like my other high-probability strategies I will only make trades that make sense.
As always, I allow trades to come to me and not force a trade just for the sake of making a trade. Sometimes this works out beautifully, and you simply pocket the money that you received for selling the put and collect a nice income. But sometimes the unexpected happens—and this is why you should never sell put options on stocks you are not willing to buy.
Sometimes, the stock that you thought was ready to rocket higher actually rockets lower. If this happens, you have two choices: If you buy back the put, the value will have increased, perhaps dramatically, because the put is suddenly in the money. For this reason, many investors incorrectly think that selling puts is incredibly risky.
They are not entirely incorrect, but they are glossing over a nuanced subject. Just consider the previous example. If the stock sinks, you will be on the hook for a lot of money to cover the put. Somehow, it seems the entire market knows when you are short, and it seems that everyone rises up to make life extra-difficult.
The way to get around this is simple: Make sure you have enough money in your brokerage account to actually buy the stock, which is the definition of a cash-secured put.
This cash-secured put strategy works well on stocks that investors want to buy on pullbacks. What if China releases bad economic data and the stock plummets? To reshape that risk, and potentially pocket some added income, you can sell cash-secured puts. If the stock keeps advancing, you can keep the put premiums. Ideally, the stock is just below the put strike price at expiration, and then rockets higher.
The key risk to selling puts—and you should keep this thought running in a loop in your brain—is that the stock falls far below the put strike price. But this is the magic of the cash-secured put write. The risk is actually identical to buying stock. As expiration approaches, the loss on an in-the-money put increases dollar-for-dollar with the decline in the underlying shares.
What else declines dollar-for-dollar with a drop in the underlying issue? A long position in the underlying stock does. Thus, the downside is the same. You might think that selling puts and calls to generate income is esoteric. But the fact is that one day it is likely that no investor will ever buy a stock without first selling a put, or sell a stock without also selling a call.
In May , Morningstar, which millions of individuals rely on to evaluate mutual funds, created a category for options-trading funds that consistently sell puts and calls as part of their main strategy. The classification essentially represents a Good Housekeeping Seal of approval on the income-generation strategy, which should help it gain even broader approval.
In addition, many mutual funds are changing their investment charters so that their managers can use options to reshape risk and generate income. Pension funds are also increasingly using options. Since the financial crisis, some of those massive funds have fired stock managers and instead invested in funds that sell puts and calls.
Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at or visit www. What are you searching for? We've detected you are on Internet Explorer. For the best Barrons. Text Size Regular Medium Large. There is a way to enhance, and even create, an income stream for yourself: No matter who you are or how much you save, at some point in your life you will need to turn your accumulated wealth into an income that you can live on.
For some lucky souls, that comes early in life, for most it comes later in life and for some it comes unexpectedly due to layoffs or health problems.
So how much do you need to save in order to provide an income that will keep you in the lifestyle that you have become accustomed to? Which is more achievable? If you have followed the market at all, you know that the market can be very volatile and unforgiving for traditional options income trades.
However, what I offer is not traditional. My options trading strategy extracts passive income from the market when it goes nowhere but it can also take advantage of significant market moves in either direction. You need to be able to profit using a single strategy whether the market goes up, down, or nowhere.
No two months are the same. You will see a strategy that makes money in a variety of months and market conditions. I teach my options trading strategy using about 18 hours of computer based videos. I provide support during and after the course to make sure you understand the strategy. There is no travel required! Get an options trading education from home. Why probability can be misleading.
The problem with traditional options trading. How to start with a complex options position and adjust it methodically to trap the market into coughing up some profits. How to adjust your trade at points that are precise, known in advance and do not require any interpretation. How to place Conditional Market orders to make adjustments automatically during the day if the market movement dictates.
Option Trading Strategies That Produce Income. In this section, I will cover some of my favorite option trading strategies. I primarily use what are referred to as advanced options strategies. That means usually a combination of options that will form a spread. I do this for two key reasons. Limited risk, which I’ll talk about more in a minute. Learn about Options Analyst Andy Crowder's fool-proof strategy for trading weekly options for consistent, reliable income. Income trading with options can be a great complement to other directional trade strategies. For example, a trader could couple income trading with a trend following strategy. For example, a trader could couple income trading with a .