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Other Investments => Global Markets => Topic started by: bdsjp on July 22, 2021, 09:20:43 PM

Title: Generating income while waiting for share price to move
Post by: bdsjp on July 22, 2021, 09:20:43 PM
Hello, I want to share a common but effective options strategy from kindle book “Turning the Wheel” with you. Don’t let the word “options” scare you off. This strategy is simple and easy to pick up, best of all, it gives you a consistent flow of income every 30 to 45 days.

Take Apple Inc. (APPL) as an example, this stock closed at around $146/- on Tuesday. Let say we are not sure will Apple share continue to increase but if it drops to $140/-, we will definitely be interested in buying. So, most people will either buy the shares at $146/- or wait for the share price to fall but not us!

We will sell a Put option at $140/- strike price with expiration date 20 Aug’21, and collect a premium of $248/- (100 shares X $2.48). Effectively get paid while waiting for the share to drop to $140/-.

By end of 20 Aug’21, if Apple share stays above $140/-, we don’t get to buy the share but will keep the premium of $248/-. Not bad, $248/- just for waiting!

If Apple share say drop to $139/-, we will still buy the share at $140/- and keep the premium, effectively reducing the cost of the purchase to $137.5, which is below the price that we are willing to pay.

The real risk here is when Apple shares drop to zero and we still have to buy the shares at $140/-. So, choosing a good company where the share price is stable is important here.

So, if we are more keen to collect premiums than buying the shares, what should we do?

Well, we can sell the Put at a lower strike price of say $135/- and collect a premium of $138/- ($100 shares X $1.38), assuming that Apple share price don’t drop below $135/-.

Important: Please note that you need to have enough cash to buy the shares. In our example, it will be $14,000/- (100 shares X $140/-)

You can refer to the Yahoo Finance link for the options pricing, please note that pricing fluctuate when market open.
https://finance.yahoo.com/quote/AAPL/options?p=AAPL&date=1629417600

Now let say Apple share price drop to $139/- and we brought the shares at $140/-, what should we do other than waiting for the share price to increase 😊

We can sell a Call option at a higher strike price (say $145/-) and collect premium ($310 = 100 shares X $3.10) while waiting for the shares price to move up.

You can just use this 2 steps strategy together or individually to generate consistent monthly income. Barring a sudden prolong correction in the stock market, as long as you choose a suitable stock, enter the trade at the correct price with the right strike and with sound trade management, probability of benefiting financially from this strategy is very high.

The above post is not to promote speculating in options trading but just to show that there are other possibilities other than the traditional straight buy, hold and sell.