How Selling Options Can Increase Your Income

Selling options for income is a smart move to generate yield

You’ve found a stock that you believe is destined to soar. You’ve done the research. You checked the financials, the charts, the company’s outlook for the future and the firm’s competition.

You buy the shares and …

They just go nowhere.

Do you have a stock like that in your portfolio?

For most of us, that’s an immediate yes. We understand the frustration with watching a stock go up 5% one month only to fall 3% the next. It’s a seesaw battle that makes you a spectator rather than a participant in the market.

Lucky for you, there is a way to take control and turn that paltry gain into a solid double-digit gain.

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Many individual investors use stocks and/or options in their personal portfolios to implement different strategies, but only a few combine the two techniques to form one strategy.

While there are different strategies that combine both stocks and options, one of the most common is selling options on stocks you either want to own or already own.

By selling options for income, you can create an income stream that puts extra cash in your account without taking on additional risk.

Let me walk you through an example.

Generate 172% More Yield By Selling Options

A perfect example is a trade that we just closed this past Friday in Pure Income.

Below you will see a chart with three lines: blue, red and green.

Options-Chart

See larger image

The blue line indicates the stock price return — up 2% over the time frame. The red line is the price return with its dividend — a 9% gain. The green line is the gain my readers received. It is the same as the red, but with the added bonus of the option income received — an 18% gain.

The stock was People’s United Financial (Nasdaq: PBCT), a regional bank with a 4.4% dividend yield. Had I just bought the stock, I would have ended up with a 9% gain. That’s not horrible, but that is almost entirely from dividends. The stock itself was up only 2%, virtually flat for over a year. Had I been buying options on them, I would have lost a ton of capital.

Instead, I was selling options.

It started with a recommendation to sell put options on People’s United at $15. We collected 3% in income for the trade. After about three months, those shares were put to us. (In other words, we purchased the shares for $15 a piece.) Later that year, we sold a call option to add additional income. After that, we sold another call option and then another.

I have written about both put sells and covered calls strategies in the past. Just remember when selling puts, you are agreeing to either buy the shares of a particular company at a specific price (strike price). With a covered call, you are agreeing to sell the shares of the company at a specific price (strike price).

All told, we ended up collecting $1.57 in option income per share, or an 11.7% yield. Add to that the dividend income we collected after being put shares of the stock and we are walking away with nearly an 18% gain, all from income.

Produce Stronger Returns

That’s the beauty of how selling options for income can be utilized inside your existing equity portfolio.

By selling options for income, you can generate significant yields from a stock that essentially is going nowhere — in the example above, we collected 172% more yield than the dividend payments alone.

Your risk when selling options for income is never any worse than owning shares of the stock, so it’s a relatively conservative strategy that can boost your yields by 172%.

If you have an equity portfolio that you still believe in but isn’t doing much for you, start selling options for income: You’ll generate some extra income in an income-less world.

It’s easy. It’s effective. And it can enhance your portfolio dramatically.

Regards,
Chad Shoop Sovereign Investor
Chad Shoop
Editor, Pure Income