consistent income

Discussion in 'Options' started by mark trader, Jun 17, 2008.

  1. I have $50K in savings and want to use this money to generate a consistent monthly income with low risk.

    I started reading about various options strategies and am thinking perhaps selling puts would be the best strategy.

    Would anyone mind sharing what has been the most profitable and consistent strategy to generate monthly income? and what level of monthly income can I expect using $50K?
  2. selling puts..
    what if u were selling BSC puts 2 months back..

    it takes 1 bad trade to wipe you out ,

    I have sold JNJ PEP GS and RIG naked puts-OTM. for jan 09 and they are doing well. but you never know.!

    I would say. also look at LEAPS and Covered calls.. Deep ITM. but that is also not helping much with the bearish market..

    One advice that has worked for me. is .. try out small trades. and put your eggs in many basket. max 10% for u. ie. 5K in each position.
  3. Sorry but there is no method to generate consistent monthly income like the market was an ATM machine . Naked puts have enormous risks and people mistakenly assume that because you are selling an option the premium is yours and you have guaranteed income. You are apparently new to options and short puts/covered calls are always passed off as conservative newbie strategies but the limited profits versus significant risks does not make sense for a beginner with no understanding of the greeks.

    The worst thing for a newbie is to have expectations of consistent income. I think we all would simply do this and earn untold fortunes of consistent income.

    My advice is save the $50k right now and maybe spend $100 - $200 on a few books and really learn about options. For starters you have no idea what your risk tolerance or trading style is to ensure that the one out of 30 strategies is the one that best matches your skills, abilities and risk tolerance. This is a process. You will profit more from the learning process to determine the best way to use your money for investing.

    Remember income only occurs after you close a position for a profit. Just because you sell an option does not mean you are making money. So it takes some skill in selecting strategies and strikes and time to expiration, etc...

    Start out learning first before worried about earning.
  4. I always hear this tremendous risk with naked puts and covered call strategies but lets assume one is investing long term:

    wouldn't covered calls reduce the average cost per share? Isn't it a method to generate income from stocks you are willing to hold in your portfolio?

    Regarding naked puts, the same thing applies. For example, if one wants to operate long term, and wants to buy a stock at 3 dollars. But said stock is currently trading at 5 dollars. Well you sell puts at 3 dollar strike and if they end ITM - well you were willing to buy the stock at that price anyways, right? On the other hand if they end OTM, you end up with a premium..

    What other associated risks do these two strategies have?
  5. The problem with selling OTM puts is not the risk but the risk/reward. You say well but if I am assigned on those puts I dont mind because at that price level I am willing to hold those shares in my portfolio. But what if for example the company comes out with some news and the stock gaps 50 % lower. Are you still wiling to hold those shares in your portfolio?
  6. 1) Your statements are valid, if you have ENOUGH cash to cover a naked put trade, and your intention is to BUY the underlying anyway. Then it is a good strategy. I used it many times with good results.
    a) I want to buy 1000 shares of xyz at $20
    b) I sell xyz 20P at $1 premium
    c) If xyz never drops to $20 at expiration, i pocket $1 and walk away.
    d) if xyz drops to $20, i let it get assigned. My cost basis is now $19.
    e) I then sell a covered call - 21C at $1. If xyz goes above $21 at expiration, i walk away with $2 +$1 . Else my cost basis is now $18 vs buying the stock outright at $20.

    Of course above is only an EXECUTION method. You still need some edge / TA to pick the correct underlying entry and strikes to begin with. Just like if you are buying the stocks outright.

    2) People get in trouble when they start to naked short highly vol stocks such as leh, solf, etc.. and take on large positions that barely meet the margin requirement. Then when the stock gaps the other direction even briefly, you are in a world of hurt.

    I found writing naked call/put on the spx/es pretty good, because it's relatively stable and you can somewhat predict the movement to be at most ~5% in either direction. As oppose to above mentioned stocks, where it can gap 10-50% in a day or 2.
  7. That's irrelevant, because he would bought the stocks anyway at those prices and have the same loss.
  8. wow! thanks for the replies.

    I wrote some covered calls before, during the dotcom era, made very little premium and lost the shares since it got "exercised". I now paper trade on CBOE, sold puts and did a vertical spread.... interesting....

    I know you can get wiped out, I never truly recovered (financially) from the crash.

    Any recommendations on a good book to read/learn? I am reading Getting Started in Options by Thomsett, it is an okay book, would welcome more suggestions.

    I am not talking about making a living type of monthly income level, if I can make close to $2K consistently per month, I would be happy.
  9. u21c3f6


    I am not talking about making a living type of monthly income level, if I can make close to $2K consistently per month, I would be happy.

    I will assume that you are kidding.

    If not, my suggestion would be to leave your money where it is and to read as much as you can about risk and reward.

  10. GTS


    4% per month?!?

    Yea, I think most people would be happy with a low risk investment with those kind of returns. Good luck.
    #10     Jun 17, 2008