How I Make Money Trading Options

Financial independence is all about having options. 🙂 And that’s the topic of today’s post. I’ll explain what they are, and how I plan to make the most of my new options income strategy.

In April I made over $700 trading options. My goal is to continue writing options every month, and collect the option premiums as income.

An option is a contract to buy and sell 100 shares of a stock. The buyer of an option has the choice (or option) to trade a stock in the future at a pre-determined price. But this choice comes at a price. So the option’s buyer must pay the seller to have the privilege to exercise this option.

Here’s an example of an option I sold a couple of weeks ago on one of my favourite companies, Apple. 🍎 This is the transaction summary.

So to break down this put option, here’s what it means.

1. The option buyer paid me $209 for selling this option. Yay money. 🙂
2. Any time before July 16th this year, the buyer can choose to sell me 100 Apple shares at $115/share.

Apple stock is trading at $131 now. That’s 14% higher than the option’s strike price. There’s no way the option will be exercised today. Why sell their asset to me for $115, when they can sell it at a higher price on the open market for $131?

So between now and July 16th, if Apple shares fall below $115 there’s a chance the option will be exercised. That’s fine with me. If I can buy AAPL at a 14% discount from today’s price I’m happy. 🙂 And if AAPL continues to stay above $115/share, then the option will expire and nothing will happen.

My option results from April

Last month I earned $721 selling options. Woot! I sold mostly put options. But also wrote some covered calls.

One mistake I made was selling a TD call option without setting a limit price. I chose market price instead and got taken advantage of. I’ve marked it on the chart below with a sad face. I only received $2 in premiums. And the trade commission ate up 75% of my earnings, lol.

Total income made: $721 CAD

Overall I am quite pleased with the outcome. I spent about 6 hours on research and executing the trades. That works out to over $100/hour for my efforts. 🙂 My plan for this month (May) is to make another $700 or more from option premiums.

Why target $700/month? I currently have a $270,000 portfolio with my discount broker IB. From what I’ve researched, making a 3% yield using an options income strategy is safe and sustainable. $700 a month, or $8,400 a year roughly gets me to that 3% target.

Investment website Seeking Alpha even advocates consistently earning 10% a year from trading options. That would actually be fantastic, but it seems almost too good to be true doesn’t it?

I must refrain from being greedy, especially in the beginning. Biting off more than one can chew is precisely how so many novice option traders lose a lot of money.😮

You should learn to swim by slowly exposing yourself to deeper and deeper water. If you immediately dive right into the deep end then don’t be surprised if you can’t handle it. That’s why I will start off with a 3% annual target, track my progress, and then gradually tackle higher levels of uncertainty after I’ve gained some experience.

“Beware of unearned wisdom.”

-Psychiatrist Carl Jung

Jung probably meant this in a psycho-analytical context. But the analogy applies aptly to investing as well.

Making full use of my assets

The reason I started to trade options is to see if I can make some easy money. 🙂

Trading options allows me to leverage the dormant capital of my existing stocks. I can capitalize on my $270,000 portfolio by earning regular income via option premiums without investing any new money. In the rare case that I’m assigned a new stock, I can simply pay for it with a margin loan.

Most option contracts expire worthless, especially way out of the money contracts like the ones I’m selling. But even if a stock crosses the option’s strike price, I don’t have to get assigned the stock. For example if my put option is about to expire in 3 weeks and it falls in the money, I can place a buy to close order. This way, I may lose a bit of money, but I won’t be obligated to buy the underlying stock if the option is exercised. Although there are risks that come with trading options, there are ways to mitigate them. 🙂

More to come later

Once I become more comfortable selling puts and calls I plan to use more sophisticated options strategies such as spreads or butterflies. And I will eventually try to increase my options income to (5%) of my overall portfolio value. Along with dividends (3%) and long term capital appreciation (4%), it’s reasonable to expect a 12% annualized total portfolio return.

That’s my plan for now. I started last month. Let’s see how this plays out. If you have a large stock portfolio (over $100,000) maybe you can learn from my experience and consider generating some options income as well. Just make sure to use a broker with reasonably low fees.

“I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.”

-Journalist Jason Zweig

Going forward I’ll continue to post my trades, and explain my decision process. The purpose is to hold myself accountable, and to help you make better investment decisions with your own portfolio. Do not mirror my trades unless you’ve done your own research. I am learning as well. 😅

Wisdom comes from experience. You might be given insight from someone with wisdom. But if you have not earned that wisdom, as Carl Jung would say, then you cannot fully put that information to practical use.

Anyway, I’ll give an update next month to share what I’ve learned. Thanks for reading!

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Random Useless Fact: