Options often get a bad rap as risky investments. Actually, they are risk-mitigate tools if used correctly and can help you weather the storm during any market conditions. Here are some of the best options strategies for income.
6 Best Options Strategies for Safe Income (Including Examples!)
We all love income investing strategies that can generate consistent monthly income, right. Why? We have monthly bills to pay, from utility bills, cable to phone bills and, more. Creating multiple streams of income is thus very vital.
A stock options trading is a safe income investment that can guarantee you a steady income. At this point, you’ve taken the necessary steps to start investing.
You are probably wondering, how? Well. Here we will explore some of the best options strategies for income.
A majority of people are familiar with income investments such as dividend investing, bonds and rental property. While these are safe income investments strategies, some require a more significant initial outlay like rental properties.
When I check Personal Capital, I’m able to see my various investments and cash flow for free. Use this tool to evaluate your income and investment diversification.
If you want to invest your money effectively, you’ll need to know how an options trading strategy fits within your investing goals. Millionaire Mob wrote a dividend investing book to help people get started investing.
The book is titled Dividend Investing Your Way to Financial Freedom and features a number of resources to help you invest for financial freedom, including:
- Improve your portfolio returns
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If you want a sample of the book, you can download it here.
Many people cannot afford rental properties (like investing in hotels) or other high capital cost investments. Options can be a great way for people to build income and wealth for little upfront capital.
In this article, we will explore how stock options can be the best way to create monthly income. You need to build a solid foundation to understand options trading to help you attain your goals before you start trading.
What are options strategies?
Options are like tools that can help an investor buy stocks at the target buying price or sell stocks at the target selling price. There are two major types of options which include put and call options.
The call option gives the holder of the option the right but not the obligation to buy at the strike price. The put option, on the other hand, gives the option holder the right but not an obligation to sell at the strike price. Options can give you the flexibility to navigate your portfolio and increase the income in your portfolio.
With both a call option and a put option, you can sell and buy the contracts. If you are a seller, you want the options to expire worthless to increase your income. Most of the below strategies for boosting your portfolio income includes both selling and buying options contracts at the same time.
You can find options virtually with every broker. Compare some of the best options brokers before proceeding with one that suits you best.
How to find the best stocks for options strategies
I think fundamental analysis and the evaluation of financial ratios are the best way to narrow down the right stocks for an options income strategy. If you choose the right stocks, you will find that these options strategies are the best ways to make money with options. Over the long haul, speculation will not win out. Having a proven, calculated options strategy is the best way to make consistent money from options.
How do you find the best stocks for your options strategy?
I’ve given you several lists on criteria for finding undervalued stocks that should help you use a stock screener like FINVIZ Pro or GuruFocus to widdle down your stocks to ones that have strong fundamentals. The best stocks for an options strategy include:
- Have higher implied volatility relative to historical averages
- The stock has identifiable resistance and support levels
- The stock has made a recent significant move in one direction or the other (not always required)
- A company that has outstanding fundamentals including profit, strong balance sheet and management team
- In addition, you want to deploy an options strategy with a liquid volume of options trading
The above criteria will help you find the best stocks to deploy an options income strategy.
It doesn’t always have to be stock! In fact, some of the most effective income strategies with options are by using indices. Indices are usually very liquid options markets and you likely have significant exposure to the various indices with your retirement accounts. You can use these options strategies for income to boost your index investment income.
List of the Best Options Strategies for Income with Examples
Options trading may be a risky investment (if not used correctly). However, with the right option income strategies, you can make monthly income through options. There is however a small likelihood of making steady money when buying options, and thus we will mainly look at the selling options strategies.
To sell options like an expert, consider using TradingView as a tool to help you understand where a stock has resistance or support. Read more about the tool in our TradingView review.
Here are 6 of the best options strategies for income:
Covered Call Writing
A covered call writing strategy is one of the best option income strategies. A covered call is also a buy-write strategy. I know you are curious to know what it entails. Covered call writing is an options strategy that involves holding a long position in an asset and writing/selling call options on that asset to generate profits.
It mainly arises when an investor has a short-term neutral view on the asset. Thus, the investor holds the asset in a long position and holds a simultaneous short position via the option. The investor aim is to earn income from the option premium. Read more about the best stocks for covered call writing.
A collar is yet another best options strategy to make money. It is equivalent to an out-of-the-money covered call position, but with an addition of a protective put. In this case, the put acts as an insurance policy. So it limits losses to a minimal, but an adjustable amount. Losses are limited which also means limited profits. But most investors are okay with it since it guarantees some steady income.
A collar options trading strategy is designed by holding shares of the underlying stock while at the same time you are buying protective puts. Also, you are selling call options against that holding. Having the same expiration month, both the calls and the puts are out-of-the-money options. They must also be equal in some contracts.
It is an ideal strategy to use if you are a trader that is writing covered calls basically to earn premiums, but you wish to protect yourself from a sudden drop in the underlying security price.
An example is to buy 100 shares of IBM and Sell one IBM Jan 110 call and simultaneously buy one IBM Jan 95 put.
See Related: Alternatives to Yahoo! Finance
Cash-Secured Naked Put Writing
Another best options strategy for monthly income is the cash-secured naked put writing strategy. It is a strategy that entails writing an out-of-the-money or at-the-money put option and at the same time setting aside sufficient cash to buy the stock.
In simple terms, you sell a put option on a stock you want to own by selecting a strike price that represents the price that you are willing to pay for that particular stock. So, your aim is to get allocated or to acquire the stock below the current/today market price.
Therefore, whether the put is assigned or not, all outcomes are seemingly satisfactory. You get a cash premium in exchange for the obligation to buy stock by paying the strike price. If you don’t purchase the stock, you still keep the premium as a consolation prize.
If you have sufficient money in your brokerage account that you can use to buy the shares, and then you are considered to be ‘cash secured.’ But, that is on condition that the put owner exercises the put.
An example is when you sell one AMZN Jul 100 put and you maintain $10,000 in the account. If you want more examples, read our post about how to sell weekly puts for income.
An iron condor is another best options strategy for income. An iron condor is a position that comprises of one put credit spread one call credit spread. Its gains and losses are also limited. With an iron condor option strategy, the investor is exposed to a limited risk. It is a non-directional strategy that has a high probability of making limited but consistent profits. It occurs when the underlying asset seemingly has low volatility.
An iron condor can be equivalent to combining a bull spread and a call spread.
An example is to buy 2 SPX May 880 calls and sell 2 SPX May 860 calls and buy 2 SPX May 740 puts and then sell 2 SPX May 760 puts.
A credit spread is one of the best income strategies using options. With credit spread strategy, you purchase of one call option and then sell another. An alternative, it involves the purchase of one put option, and sell off another. In this scenario, both options have the same expiration. The reason why it is termed as a credit spread is that the investor collects cash for the options trading.
Therefore, the higher priced option is sold and cheap, a further out-of-the-money option is bought. It is a strategy with market bias and limited profits as well as losses. A call spread is usually bearish, and the put spread is bullish. An example is to buy 5 JNJ Jul 60 calls and sell 5 JNJ Jul 55 calls.
Alternatively, buy 5 SPY Apr 78 puts and sell 5 SPY Apr 80 puts.
Diagonal Spread or Double Diagonal Spread
Diagonal spread can also be a perfect options trading strategy for safe income. It involves spreads where an option has a different strike price as well as expiration dates. The diagonal spread usually involves purchasing and selling of an equal number of options of the same class, and same underlying security with different expiration months and strike prices.
The diagonal spread options strategy is equivalent to calendar spread where short term options are sold, and the long term options are bought. It is mainly to take advantage of the sharp time decline in options that are close to expiration.
With the diagonal spread, the investor has a near term outlook that is slightly more bullish or bearish. It means that the option that is purchased expire later than the option sold. Also, the option purchased is further out-of-the-money than the option sold.
An example is to buy 7 XOM Nov 80 calls and sell 7 XOM Oct 75 calls. Alternatively, you can buy 7 XOM Nov 60 puts and sell 7 XOM Oct 65 puts. When you possess both positions at the same time, it’s a double diagonal spread which is thus one of the best options strategies for income.
Conclusion on Options Strategies for Income
The best options strategy for income is the cash flow investing strategy which involves the selling of options. Nobody knows whether the stock price will rise or fall. What matters most is the ability to manage the risk you are exposed to.
So by selling options, you can collect the premiums from the buyer of the options up front. Selling options are thus one of the safest options trading strategies. Buying calls or puts is a good strategy but has a higher risk and has a low likelihood of consistently making money. I like combining my options strategy with fundamental analysis.
I use these financial ratios to screen for the right dividend stocks.
This helps ensure me that I’m deploying an options strategy with stocks that I like for the long-term.
What do you think are the best options strategies for income? Let me know in the comments below. I’d love to hear from you.
Other Related Investing Money Resources:
- Our resources on how to invest money to ensure success
- Our free dividend calculator to see what it will take to live off dividends
- A guide on how to read financial statements and conduct financial statement analysis
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Whoever wrote this is pretty much clueless.. Number 1 and 2 are about the worst choices, they limit upside potential, the risk/ reward isn’t worth it. Furthermore, no mention is made of any adjustments needed, legging into or out of spreads, ICs, etc.
All of these strategies were awesome at some point. They all work until they don’t.
You claim they are awesome? Covered calls not worth the risk/reward?