Trading Options for Income [Updated for Trading in 2021]
If you’re looking for more ways to make money investigating trading options for income is a fantastic place to start.
And if that’s where you’re at and what you’re up to, congrats and you’ve come to the right place.
Now, if you’re new to trading options there are some differences between trading regular stocks.
There is a fair amount of new jargon and phrases that you need to understand to you’re able to understand the basics.
And this needs to happen BEFORE you look into the different strategies of trading options for income.
You’ll need to understand certain things like:
- How to Read An Options Chain
- What Happens When Options Expire in the Money
- What is a Put in Stock Trading
Of course, there are a lot of other things that you need to know. Especially when it comes to basic option trading terminology. But this will give you a bit of a start if you’re new to all of this.
Once you’ve got an understanding of what’s involved in trading options, we can keep going. We’ll explore some of the ways that you can begin trading options for income.
Strategies to Begin Trading Options for Income
I’ll list a few of the more common ways that you can trade options to generate a little more income.
This is by no means an exhaustive list. But should be enough to let you know how you can make money trading options.
Strategy #1 – Buying Options
The first, and simplest options trading strategy is the buying of options.
And this involves buying Calls or buying Puts.
In placing a trade like this, you’re essentially making a call as to whether a stock will go up or down. So it’s a basic directional trade.
Essentially, you just choose a strike price that you feel the call will either stay above or reach. (If you’re buying calls.) If you buy puts you choose a strike price that you think the stock will stay below.
Let’s look at a quick example.
In the picture below, I’ve pulled up an options chain for Facebook. At the time it was trading at $278.75. The image below shows the calls.
So you can see that the strikes of 277.50 and below are currently in the money. And any options contracts above that are out of the money.
So you could either buy any of the strikes at or below the 277.50 strikes and hope the value of Facebook went a bit higher. Or you could buy any of the strikes at 280 or above and hope facebook increased in value above 280. If either of those scenarios happened by the time the option contract expired, your call options would be in the money and you’d end up making money.
It’s the same sort of thing on the put side of the trade.
Here facebook was trading at $279.57 and you can see that all of the put options from 277.50 and below are currently in the money.
So again, you could buy any of the 277.50 or below puts and hope facebook fell below those strikes, or you could buy the in the money options of 280 or above.
And this is a big reason why with our trade alerts inside “The Empirical Collective” the alerts we give out are the basic buying of calls and puts.
Because they’re super easy to follow and it doesn’t take a lot of capital in order to trade them.
Sure, a lot of people say that historically buying options puts you at a disadvantage, but for us having a winning average of over 94% we haven’t noticed 🙂
Strategy # 2 – Selling Weekly Put Options For Income
I’ve covered this strategy in detail here. But essentially what you do is sell put strikes that are below the current trading value of the stock. In this way, you can collect income (the premium you get when you place the trade) so long as the value of the stock doesn’t drop to the level of the strike you chose.
If it does, you end up having to buy enough stock to cover the number of options contracts you purchased.
Strategy # 3 – Trading Covered Calls
To do this, you buy a bunch of stock (in batches of 100 shares) and then sell calls at a strike somewhere above the current trading value of the stock.
When you sell the calls, you collect the premium. If the stock appreciates in value above the strike at which you sold the call options, you have to sell your shares at the strike you sold the calls at.
So you’d gain money on the stock appreciation (being the difference between the value you purchased the stock at and the call strike) as well as the premium you collected.
But you’d no longer own the stock, so in placing this trade, your upside gain would be capped or limited.
Strategy # 4 – Trading Iron Condors
This is a strategy that involves selling options as well in a certain configuration if you feel that a stock will be range bound (or trade within a certain range).
For some – beginners especially – it can seem like a complicated trade to set up as there are a few parts to it.
I show you exactly how you can set them up in the “Clockwork Paycheck System” found here, and Samuel Goldman has a great book on trading them here.
Final Thoughts on Trading
When it comes to trading options for income, it depends on the level of trade complexity you’re handling as well as the size of your trading account.
If you want simple trades and don’t want to risk a lot of money, I’d suggest starting out buy buying options.
If you can handle more risk you can sell options. The nice thing about selling options is that you can trade weekly or monthly contracts which sort of gives you a chance of collecting all your money at a specific point in time (similar to a paycheck).
But when you buy option contracts, a lot of the time you need the stock to move in the direction of your trade and in order to give the trade enough time to work out, a lot of the time you need to place the trades with an expiration date a bit longer out.