As the father of multiple teenage drivers, I cringe every time I open the bill from my insurance company.
Month after month, I pay hundreds of dollars to insure my children. And that’s money I’ll never see again unless something bad happens.
Talk about being on the wrong side of a transaction!
I often think about how much money insurance companies make on these monthly premiums — especially when they’re insuring good drivers with a low risk of having an accident.
Insurance is an extremely profitable business.
That’s why many of the best financial minds, like Warren Buffett for instance, have made fortunes running insurance companies.
Did you know that you can use options contracts to run your own profitable insurance business?
Today, I’ll show you how to use an options hack to generate reliable income from the market — almost exactly how insurance companies get reliable income from their customers.
Let’s take a look!
Writing Options Contracts Is Like Writing an Insurance Policy
In the past few installments, we’ve talked about how options are contracts agreed upon between two traders with each investor taking a different side of the agreement.
A call contract gives the owner the right to buy shares of stock. And a put contract gives the owner the right to sell shares of stock.
But have you thought about who’s on the other side of the trade — who are you agreeing to buy shares from or sell shares to?
What you may not have realized is that you can choose to be on either side of this agreement.
In other words, you can sell a contract and agree to the obligation that comes along with the other side of the agreement
When you sell a call contract, you’re agreeing to give someone else the right to buy stock from you. And when you sell a put contract, you’re giving someone else the right to sell stock to you.
The key thing to understand is that you don’t have to already own an options contract to sell it. Since options are contracts between two traders, you can essentially create a new contract and sell it to another trader.
This process is called writing a contract, similar to the way an insurance company writes a policy and sells it to you.
And since all options contracts are standardized and traded on exchanges, it’s easy to simply sell a standardized contract.
Your broker will take care of all the details. You can simply choose the “sell to open” choice on your trading platform, which tells your broker that you are selling a contract to open a new position.
Once you understand the concept of selling (or writing) an options contract, you can use this strategy for some great income plays in your account!
Capturing Income From Stocks You Want to Own
The first strategy I want to show you today is known as “cash-secured put selling.” This is my favorite way to generate income from stocks that you would be happy to own.
It’s a fairly straightforward transaction…
Simply sell a put contract for shares of a stock that you would be willing to buy.
Let’s take Apple Inc. (AAPL) as an example again. As I type this alert, AAPL is trading a bit above $120 per share.
If AAPL is a stock that you want to own, you could sell an AAPL $115 put contract.
Remember, the person who buys the put contract has the right to sell shares at $115. So if you’re the one writing the contract, you’re giving someone else the right to sell those shares to you.
So by selling an AAPL $115 put contract, you’re accepting an obligation to buy shares of AAPL in your account at $115.
When you sell a put contract, you’ll be paid the market price for that particular contract. So you’ll accept income in exchange for your obligation to buy shares of AAPL.
Keep in mind, you can sell a put contract that expires in a week or two, a couple of months, or some time farther out in the future.
Typically, the more time left until the put contract expires, the higher the price — which means the more income you’ll collect upfront.
When the put contract expires, you’ll want to pay close attention to where AAPL is trading.
If the stock is trading above your $115 strike price, the puts will expire worthless.
After all, no one who owns the put contract would sell you their shares at $115 if they could get a higher price in the open market.
This is good news for you because you no longer have any obligation to buy shares of AAPL. And you can then turn around and sell another put contract to collect more income.
On the other hand, if AAPL is trading below $115 when the put contract expires, you’ll be obligated to buy shares at the $115 strike price.
But keep in mind, this is the price you agreed on when you sold the put contract. And you were paid extra income to enter this agreement.
So the outcome is still good because you received income and you wound up buying shares of a stock you wanted to own at a price that you agreed on.
And that’s just one way to use options to generate instant income.
Collecting Income From Stocks You Already Own
You can make a similar transaction to collect extra income from stocks you already own in your account.
Remember, call contracts give owners the right to buy shares of stock. So if you write (or sell) a call contract, you’re giving someone else the right to buy shares from you.
Let’s assume you own 100 shares of AAPL and the stock is trading a little above $120.
You might be willing to sell your shares at $130 and lock in a profit at that price point.
If you sold an AAPL call contract with a $130 strike price, you would be giving someone else the right to buy your shares at that $130 price.
And by selling the call contract, you’ll collect income right now from the trader who is buying the contract from you.
Just like the put contracts, you can choose how long you want the contract to last.
You could sell a contract that expires in a few weeks, a few months, or even longer! The more time left for the call contract to expire, the more income you can expect to receive.
Once the expiration date approaches, keep a close eye on where your shares are trading.
In this example, if AAPL is trading below $130, you can expect your call contracts to expire.
The owner of the call contracts won’t want to buy your shares at $130 because they can buy them cheaper in the open market.
This is good news for you because you get to keep your shares and can then sell more call contracts for more income if you want.
On the other hand, if AAPL is trading above $130, you can expect the call contracts to be “exercised.” That means the other trader will exercise their right to buy your shares at $130.
That’s also good news because it means you’ll sell your shares at the attractive price you agreed on.
And of course, you’ll still get to keep the income you received from selling your call contracts.
A Few Things to Remember
Please keep in mind that every options contract represents 100 shares. So if you sell one put contract, you’ll have an obligation to buy 100 shares at the agreed-upon price. The same is true for call contracts.
It’s also helpful to know that if you sell a put or a call contract, you can buy the contract back to close out your position.
Just make sure you use the “buy to close” choice in your broker’s drop-down menu.
Selling put and call contracts may sound complicated at first. But once you do your first one or two transactions, you’ll get the hang of it very quickly.
These two options transactions are great ways to generate reliable income in your retirement account.
I use these strategies in my own trading accounts to help generate income for my family. And I’d love to hear from you if you decide to try them out yourself!
In our next installment in our options series, we’ll talk about pairing two different options contracts together to set up trades that can create profits from many different market environments.
If you like learning about how to make money with options contracts, I think you’re going to love this next lesson!