Introduction to Options
When it comes to earning passive income, options are one of the best ways to get started. But before you dive in and start buying and selling stocks and other assets, there are a few things you should know.
Options in short are like insurance where an investor buy/sell call/put options while paying/receiving the option premium.
Many people have heard of options from YouTube, social media etc that options allow you to generate “passive income”. One just need to learn and join their courses to get passive income etc.
This article will cover two popular methods for earning passive income using options trades: covered calls and covered puts.
Selling Covered Calls
Selling covered calls is a way to generate income from your portfolio, but only if you use them correctly. Let’s start with the basics: what are covered calls?
A covered call is when you sell an option(s) that would covers owns an equivalent amount of the underlying security that the investor already owned. In the process, the seller will earn a premium from the buying.
The investor for example holds 100 shares of XXX, he or she can sell 1 call option (=100 shares) of XXX which will expired at a specific expiry date with a strike price. In the process, the investor earn an income premium (some sort like insurance writing).
At the expiry date, if the price of the underlying security is above the option’s strike price, the seller of the option has to sell the 100 shares at the strike price if the buyer of the option chooses to exercise the option. The seller will have to forgo the price gain of the security above the strike price. Conversely, if the price drop below the strike price at the expiry date, the buyer likely will not exercise the option, the seller will thus profit and gain free premium (“passive income” while holding the security).
It sounds like an easy way to make money, but the execution is really not that easy. It is not that “passive” at all.
Selling Covered Puts
Selling covered puts are a way to make money when you think the stock price will go down. A covered put is an option that gives the holder permission to buy shares of a stock at a certain price, with the obligation of paying for them if they’re exercised.
To give you an idea of how this works, let’s say that YYY stock is trading at $100 per share and someone sells one month out from expiration (1 pull option) 100 shares of YYY with a strike price set at $95 per share. If the expiry price is below $95 (e.g. $90), the seller of the option get to purchase the 100 shares at $95 even though the market price is $90. If the expiry price is above $95 (e.g. $100), the buyer of the option will likely not exercise the option, hence the seller of the option will pocket the premium.
This is like a good to cancel order that most investors are aware of – just put the queue at the price you want to buy but there are other risks involved.
You might be wondering how you can get started with options trading. Here are some tips:
- Understand the basics of options trading.
- Options are traded on many different exchanges around the world, but they all work pretty much the same way.
- For example, there are call and put options that allow you to buy or sell an underlying asset at a certain price within a specified amount of time (usually 30 days). The key difference between these two types of trades is whether the seller pays up front for their option—which means they’re assuming risk—or if they do so later in exchange for compensation from whoever buys their contract first.
- Be aware of fees associated with each type of trade before making any decisions about whether it makes sense for your portfolio.
- Know which brokers offer lower commissions than others when buying/selling into/out, this will help keep your costs down while still providing access to markets anywhere in world!
Conclusion
As you can see from the above, there are many options available to investors looking for passive income using options trades. It is important that you fully understand them before you begin trading and have a sound plan in place to ensure that your risk is minimal while still generating the expected return on investment (ROI).
In real application, it is not as simple as it seems. I would not recommend any investor especially newbie to use options to generate passive income, moreover attend course and pay people to learn options (you are making them rich, not yourself). This is just an article so share some basic about using options to generate “passive income”.
There are many other considerations that one need to know before doing options. Most people should do better with index Etf investing. Those more adventurous can try dividend investing, growth investing, value investing or the Cryptocurrency if one is even more adventurous.
The two options methods discussed above are popular, but they aren’t the only methods available to investors seeking passive income using options trades. As with any investment strategy, it is important to fully understand how all the various options work and have a sound trading plan in place before you put any money on the line.