Top 3 Options Trading Strategies for Monthly Income

most Traders think that stock options are just a cheap way to play Big up moves on Stocks by buying cheap call options but what most Traders are missing is that options are an incredible potential source of consistent cash income this potential consistent cash is available to almost every Trader and investor if they learn just a few basic options trading strategies that can be understood in a few minutes in this video we will share three of the best option strategies for earning consistent monthly income you can immediately immediately Implement these in your online broker account just like many great money managers and Traders do daily I'm Mike bellafuri and we're one of the top proprietary trading firms located in New York City and proud to developed numerous seven and even eight figure per year Traders we hope you agree this is the top YouTube channel to help you grow your trading account [Music] hi I'm Seth freiberg I'm the head Trader of SMB capitals options trading desk here in Manhattan and we've got Traders and investors from all over the world asking us to share with them the techniques that we use to produce cash income for our accounts and the truth is that all of these strategies are really very easy to understand but most Traders just never take the time to learn how they work after which they can very quickly begin to use them to produce monthly income for themselves so let's go ahead and dive in most people have this impression that the best way to trade options is to pick a stock that you're really bullish on and go out and buy a cheap call option at a tiny fraction of the cost of that stock and put yourself into a position of making good money if that stock rallies or buying a cheap put option on a stock that you're bearish on and then instead of taking the big risk of shorting the shares they can make good money because the put will gain value if the stock does in fact sell off but very few Traders ever think of turning that whole idea upside down and instead of buying options to make money from Big stock moves instead of that they rarely think about selling options and collecting the cash that you'll immediately receive through selling options and this video is really about that whole process of selling options for cash income and in order to explain how this strategy works we need to make sure that you understand how stock and index options work and if you don't if you're new to options trading and don't know what stock and index options are or how they work we've created a video for you to understand options Basics and if you click the video appearing on your screen right now it will lay the groundwork for understanding the strategy we'll be teaching you in the video then when you're finished you can come back and watch the rest of the video the first option strategy for cash income is known as the cash secured put and let's show you an example of how a cash secured put works so let's head back to June 1st 2023 and as you can see on that day Exxon which trades under the ticker symbol XOM was in the midst of a sell-off since early May and it was approaching what some Traders would recognize as a pretty reliable support area that 97 to 99 price from which it bounced multiple times since October of 2022 and so let's say that you determined that you'd be happy to own those shares at a price of 99 per share because every time it hit that price recently it bounced and you would have made a nice profit and so suppose on that day with Exxon trading 101.56 you went out to an options chain that expired at the end of June and you went ahead and sold five puts at the 99 strike price which were selling for a price of about two dollars and eighteen cents now if you did that you'd be entering into a cash secured put position and what that means is that if Exxon were to close on June 30th the day the options expire at any price below 99 you'd be required to buy 100 shares of Exxon for 99 per share for each option that you sold and since you sold five of them you'd be required to buy 500 shares of Exxon and so let's analyze what happened here from a cash flow standpoint and as you can see from the calculation you're receiving two dollars and eighteen cents for the put options but remember each put option represents 100 shares of stock so you multiply that by 100 and you sold five of them and so the resultant cash flow which your broker will immediately deposit into your account would have been one thousand ninety dollars and your broker would require you to have forty nine thousand five hundred dollars in your account so did the stock closed below 99 on the day that those is expired you'd need to buy those 500 shares at 99 a share and so your broker wants to make sure that you can meet that obligation now let's move forward to June 30th and as you can see the stock bounced then on the final trading day of June had actually closed at 107.25 and so the implications of this are that with the stock closing at 107.25 then those puts expire worthless right because who's going to exercise the right to sell their shares at 99 when the stock closed more than eight points higher obviously that's not going to happen and so the puts just expire worthless and the trader simply Pockets that one thousand ninety dollars that he received for selling them a month earlier which is a return of 2.2 percent in a month and so if he does a similar trade every month locating the puts at a price below the current trading price of the stock and collecting a price of 218 or more for each of the puts that would translate into a whopping 26.4 return per year on that capital or thirteen thousand eighty dollars a year simply by selling cash secured puts each month now remember if the stock had closed below 99 then you would have been required to buy those shares but you had already made the decision that you were happy to buy those shares at 99 because the likelihood was that the stock would have bounced at that price anyway and you would instead make a great profit on the shares and that's why the cash secured put strategy is known as a win win strategy because you either profit from the cash we got selling the puts as we did in this case because the stock closed above that's puts strike price on expiration day or you own the shares at a price that is very attractive and very likely gives you a great long stock trade and in fact that's why some of the greatest investors in the world including Warren Buffett use cash secured puts at the time to position themselves to win either way okay so now let's delve into our second cash flow generating strategy and that's known as the covered call strategy now most investors and Traders own Common Stocks in their own accounts and some of the greatest growth stocks like Tesla simply don't pay a dividend and so most Traders just accept that the portion of their portfolio is dedicated to these growth stocks that don't pay a dividend are just not going to produce any ongoing cash flow for the investor while he owns the stock and that can be frustrating for investors who want cash flow from all of their Investments and that's where the covered call strategy comes in let's say for example that we own 200 shares of Tesla on February 1st which was trading at 180 141 that day well the value of those shares would be 36 282 so let's say that on that day owning those 200 shares you went ahead and sold two of the Tesla 200 strike price calls for a price of 7.62 cents well if you did that you'd be executing what options Traders refer to as a covered call trade okay so in this case then as you can see from the calculation once you sell those calls your broker will immediately deposit into your account one thousand five hundred twenty four dollars and you get to keep that cash no matter what now let's move forward to the day that those two puts expired on March 3rd and as you can see Tesla closed at 197.79 that day and so let's examine what happened to our two calls up at 200 and as you can see with the stock closing at 197.79 the two calls up at 200 expire worthless because there's obviously no value to a right to buy shares of Tesla 200 when you can go into the open market and buy them for more than two dollars less than that so those calls just expire worthless which means that again the trader can just go ahead and pocket the one thousand five hundred twenty four dollars of Premium he received a month earlier and do it all over again if he wishes for options expiring in April if he did a similar trade each month it would result in an unbelievable annualized return of over 50 percent and an annual cash flow of over eighteen thousand dollars on his 200 Tesla shares it's important to realize that had the shares closed above 200 the guy you sold the call to would no doubt exercises right to buy those shares at 200 and you would no longer own the Tesla shares in that case if you wanted to continue to glean income from your Tesla shares each month then you simply re-buy the shares and initiate a new covered call transaction for early April a month later and just continue doing this every month if you're looking for cash flow from non-dividend yielding stocks like Tesla and now yet another way the Traders make cash income is by utilizing a simple option strategy known as the credit spread which is often executed using index options and so let's just jump right into an example so you can and see how credit spreads on indexes work so in the first trading day of the year January 3rd the SPX index had closed at 38 24 14 and let's say that you were now bullish on the index after this sell-off that took place in 2022 and suppose that on that day you went ahead and pulled up an options chain for options expiring about a month later on February 2nd and you move down from the closing price of 38.24 down about 50 points to 37.75 and you went ahead and sold two of those 37.75 put options expiring a month later for price of 72.65 and you simultaneously bought two of the puts 25 points lower at the 37.50 strike price for a price of sixty three dollars and 70 cents well when you do that selling two puts below where the Market's trading and buying two puts further below where the market is trading for protection when you do that you are entering into what options trade is referred to as an out of the money put credit spread and it's a very commonly used strategy among professional options Traders when they're bullish and you'll see why this is actually a bullish trade in a minute now let's first take a look at the cash flow implications of this trade and as you can see we are again selling options selling the 37.75 puts for price of 72.65 now as you know index options pay off in cash and in the case of SPX options they pay off at the rate of 100 per point that the index closes below the strike price of the put option so you multiply the price by a hundred and you sold two of them so when you multiply it all together you'll receive cash in the amount of 14 530 for selling those puts but in this case we're also going to be buying options paying 63.70 for those 3750s which as you can see from the same kind of calculation causes us to pay out twelve thousand seven hundred forty dollars of the money collected for the protective puts at 37.50 which results in net cash flow after paying for the protective puts of one thousand seven hundred ninety dollars and it's also important to realize that your broker will require you to have three thousand two hundred ten dollars in your account to execute this trade which is also the trades worst case scenario okay so now let's move forward a month to February 2nd the day these options expired and as you can see the index did indeed rally and the index closed at 41.79.76 on that day and so again if you think about it it's pretty easy to figure out how the trade turns out because put options on indexes don't pay off unless the index closes below the puts strike price well in the case of the short options at 37.75 and those long options at 37.50 they are both more than 400 points below the index's final price on February 2nd resulting in the trader again simply walking away with the Seventeen hundred ninety dollars in cash that he collected a month earlier when he initiated the trade and so Trader can simply enter this trade every month of the year and as long as the index closes above the strike price of the short and long options the trader will be able to walk away from the trade with all the cash flow he initially collected of course if the index had closed below the long strike at 37.50 then the trader would have experienced a full loss of 3210 thus most Traders try to place the short and long puts at a good distance below the market to avoid this situation happening very frequently and so what I'd like you to take away from today's video is that options are not exclusively used as a cheap way of playing a rally on a stock that you like through buying call options there's a whole world of strategies that involve selling options for monthly income and the three traits that we shared with you in today's video provide you a glimpse into that world options can be used to generate monthly cash flow and they're fantastic way of generating that income that you might be seeking okay if you like the three strategies that we taught you in this video to make monthly income you're gonna love the zero DTE option strategy which gives you the potential to capture super quick returns just click the video appearing on your screen right now you shouldn't miss this highly informative and valuable options trading video

Channel: SMB Capital

Views: 164,694

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, options income strategy, options strategies, covered call, credit spread, cash secured put, options trading smb capital, how to trade options

Id: TOc1XyCu83I

Length: 15min 4sec (904 seconds)

Published: Thu Aug 24 2023