Blog

Selling Put Options for a Living – The Basics {Updated for 2021}

Selling Put Options for a Living

In the crazy financial world we live in, people are starved for a decent ROI on their invested capital which has a lot of people looking into selling put options for a living.

And it makes sense, really.

After all, interest rates have never been lower and if anything it seems they could even drop further (negative interest rates anybody?).

This leaves us in unprecedented times and forced to navigate an increasingly tricky investing and trading landscape as things have become increasingly complex over the years.

Years ago when trading in the stock market, you largely only had other traders you had to worry about.

You had the large institutional traders, individual traders, hedge funds and for the most part the government stayed out of the whole thing.

Generally speaking the only government intervention in the markets was the result of some legal crackdown where they enforced regulations (in the case of insider trading or uncovering scams like Bernie Madoff’s pyramid scheme) or whether or not they moved interest rates at all.

I’d say this period of time was around when Alan Greenspan was chairman of the Federal Reserve.

But since 2008 everything has changed.

Now governments have taken an active role in the financial markets from buying assets to prop up the market to printing money to offer liquidity and so on.

Oh, and they still fiddle with interest rates but it seems only to keep them at the current level or drop them.

Because of all of this, the stock market has continued to climb in value (where assets, in my opinion, are reflecting more the inflated financial environment as opposed to indicating the true value of the company) and volatility is suppressed.

Then, all of a sudden, something happens and volatility returns to the market with a vengeance and the market drops huge (like the 20-30%+ drops we’ve seen off and on over the past couple years) before everyone piles back in, buys the dip and the market jumps back up to it’s previous highs and beyond.

You may be asking yourself, “And why does this matter? Why the history lesson when all I want to know is how to sell put options for a living?”

It matters because with everything changing in the markets – and interest rates being so low – it means people can no longer just throw their money in a savings account in the bank and earn a decent return.

And for the most part, they can’t do it in any other secure or non-risky financial asset.

Because of this, it causes investors to seek out returns wherever they can find them and this causes increased competition and a rush towards riskier trades and investment ideas as they scramble to earn a return on their money that beats inflation.

And this could very well be where you’re at right now by searching how you can go about selling put options for a living.

In fact, I believe it’s a big reason why trading options has become so popular over the past few years – with all sorts of new people jumping into trading them. (Of course, if you follow my blog at all you know that I recommend that everyone get up to speed on the ins and outs of trading options before placing any trades. And a big part of figuring that out is to read this book here.)

So with the history lesson, my goal is to give you a bit of insight as to the current financial landscape and to let you know that even with strategies like selling put options for income it comes with a heightened bit of risk because of the situation we find ourselves in.

Selling Put Options for a Living – Here We Go

selling put options for incomeWhen it comes to outlining this options trading strategy, I’ve gone through it in detail in the post I’ve written called, “Selling Put Options for Income – The Fast Start Guide”

So for the specific “how to’s” of the strategy, you should read that article.

That said, I’ll give you a brief overview of how it works here.

Basically when you’re selling puts you choose a price that you think a stock won’t drop below.

Then you choose the closest strike price to that level and then sell however many put contracts you want.

Once you do this, you’ll be credited a certain amount of money for placing the trade (this is called the “option premium”).

This is basically the income you’re trying to generate.

The amount of money that you get for placing this trade depends on a lot of things: time left in the contract before it expires, the volatility of the stock, the volatility of the stock market, how close the strike price is to the current price the stock is trading at and so on.

It is a bit of a balancing act and takes some experience and practice to figure all these things out to where you’re making a decent amount of income for the risk you’re taking. (Which is why I recommend you get started by following the trade alerts here.)

If – at the option expiration date – the stock is trading above the strike price you chose, everything is great and the option expires out of the money (which is what you want when you’re selling options) and life is good.

In this case, you walk away with your premium.

On the other hand, if the stock drops below the strike price you sold the puts at, you then have to buy an equal number of shares of stock to the put contracts you sold.

So if you sold 2 put contracts, you would have to buy 200 shares of stock (as each option contract controls 100 shares).

You’d still get to keep the premium, but you’d just have to come up with the money to cover the share purchase.

And this might not be a bad thing if you like the stock and were happy to buy it at a lower price than the market level when you place the trade.

If you don’t like the stock and end up having to buy all those shares, it can really mess up your trading or money management program – tying up a large amount of your capital.

But this strategy has a number of positives:

  • you can receive premium and end up buying stocks you like at a discount
  • you can trade weekly or monthly put contracts so that you generate weekly or monthly income (just like an extra paycheck)
  • as a seller of options (rather than a buyer), historically the odds are in your favor as most option contracts expire worthless

The negatives are:

  • your account needs to be approved by your online broker before you can place your trades
  • you need to have enough capital in your account in order to cover the buying of the shares in case the trade moves against you
  • you may tie up a lot of your trading capital or get stuck with a stock you don’t want

All in all, if you can live with the negatives this can be a great way to generate monthly income. So you can see that it’s possible to start selling put options for a living.

With that said, if you’re going to get into selling put options for income, I HIGHLY recommend that you trade alongside someone who has experience doing this. And my best recommendation is to follow along the trade alerts with Jeff and his team here. (Their track record is amazing.)

Of course, if you can’t afford to do this and you want something a little more straightforward, you’re welcome to join “The Empirical Collective” where my team and I give out stock trade alerts for buying calls and puts. And our 94%+ success rate is nothing to sneeze at either 😉

trading options for income