Let Money Work for You
One of Robert Kiyosaki’s (author of Rich Dad Poor Dad) greatest quotes is “Don’t work for money; make it work for you.” Options for Income is a great way to put money to work for you. This strategy is simple and straightforward, the only effort required is a little stock analysis. At YP Investors we have stock analysis tools that do this work for you! With this part automated now all you have to do is learn the options for income strategy, so lets get started.
Don’t work for money; make it work for you.Robert Kiyosaki
Selling Options for Income
The options for income strategy is based on the lower risk side of options contracts. In it we focus on selling options. This means selling a put option or selling a call option. Options get dangerously risky when they are bought as a trade or investment. This is because the premium paid for the contracts can be lost completely upon expiration of the contract. This happens much more often than a company going bankrupt. In the options for income strategy you are collecting these premiums by selling Call and Put options. The premiums are your source of income. The best part is the principal account value should at least stay the same or grow!
Get Paid to Purchase a Stock – Selling Put Options
Selling Options for Income works whether you own stocks or not. If you don’t own stocks then you will be selling puts for income. When you sell a put option you are agreeing to purchase a stock at the Strike price, but only if the stock price falls below that strike price. When you pick sound technical stocks in a positive trend then the odds are the stock will rise in price. This means you collect the premium (get paid) to buy shares of a good stock or get the premium without buying any shares. Lets look at the details of the strategy:
- The first step is to check if the Market Conditions are Good or Very Good using the YP Member Homepage or Stock Selector page (If you are not a member of YP Investors yet, sign up for a free trial today!). If the conditions show “Selling In Control” (Very Bad, Bad, or Fair) you should NOT use this strategy.
- The next step is to find some Good Technical and Fundamental Stocks. YP Investors lists the top technically performing stocks each week on our Top Stocks and Sectors page. This is a great place to get some technically sound stocks. Note: All your stock choices should be Solid Technically performing stocks with 3 or more Positive Technical Attributes including a Positive Trend Line.
- Now you should take this list of stocks and use the Point and Figure Chart on YP Investors to see if any are on a buy signal. Hint: you can watch the YP Investors Point and Figure Charting Tutorial to learn about Buy and Sell signals on point and figure charts.
- The next step is to Sell a Put contract with a Strike Price at or below the Buy Signal Price. When Selling a Put contract you will be paid a premium upfront. The premium you receive will depend on the length of the contract and the difference of the strike price and the stock price. The longer the expiration date is, the more premium. The more in the money the contract, the more premium. This is why it is important to try and sell the put contracts on the days when the stock is down, it will increase the premium! YP Investors recommends selling contracts that expire from as short as the current week to at most a month out. (Hint: With the monthly contract shoot for premium of ~4% of the total price and for weekly shoot for ~2%)
A simple example of how to Sell Put Options for Income:
Sell a Put Contract on XYZ stock for a $50 premium and the Strike Price of $12.50, with the expiration date about a month out from now. The Buy signal price of XYZ stock is $12.50. If the contract is executed you will have to buy 100 Shares of XYZ at $12.50 (strike price) each so you pay $1,250.00 total. Therefore you are required to have this amount of money as collateral until the contract expires. The ROI is the premium divided by the money you have locked up: $50/$1250 = .04 = 4%. If you get this 4% every month that would be a 48% return per year! Your return could easily be more or less based on the stocks performance and the premium price you agree to. If you have to purchase the stocks then sell call options for income described in the next section.
Remember that you are only guaranteed the premium, if the stock begins to fall in price you can lose money. When the stock price falls below the Strike Price you lose money on the Investment because you own the stock at the strike price (ex, $12.50). If the price is now $11.00, you are down $1.50 per share so $150 for 1 contract. In the example you had a premium of $50, so you are down net $100 per option contract. This is why it is key to invest in good stocks that are trending to higher prices. YP Investors uses stocks with solid technically performing attributes and when they are on a buy signal. This greatly increases the odds that the stock will rise in price. If the stock price finishes above the strike price and your contract is never executed then you get your money held back and you don’t have to purchase the stock. From the example, you would get $1,250.00 back plus your $50 in premium already paid to you. Now you can re-invest and repeat the process again and again growing your wealth!
Note on picking the Strike Price: There may not be a contract option for the Strike Price you desire, so this is where you decide how risky you want to be. Picking a Strike Price above the Buy Signal Price is more risky but you will get more premium. Alternatively, picking a Strike Price below the Buy Signal Price will get you less premium but also less risk.
Make Money While Your Stocks Aren’t Going Up – Selling Call Options
Let’s go over how Selling Options for Income works when you own stocks. When you own a stock you will be selling Call Options to generate income. When selling a call option you are agreeing to sell a stock at the Strike price, but only if the stock price is above that strike price. This means you collect the premium (get paid) to “rent out” your shares for the length of the contract. The person who buys the call contract pays you for the right to purchase the stock at the strike price and will only benefit if the stock gets above the strike price. You will benefit because you are getting paid the premium whether the stock goes above the strike price or not. Lets look at the details of the strategy:
- The first step is to figure out what price you purchased the stock for. Use this to define your strike price. You do not want to set a strike price less than what you paid for the stock or you may be taking a loss. Next is to figure out how many shares you own and divide them by 100. This number will be how many contracts you can sell. (Each contract is for 100 shares of a stock.)
- The next step is to Sell Call contracts with a Strike Price at or above the price you purchased the stock. When Selling a Call contract you will be paid a premium upfront. The premium you receive will depend on the length of the contract and the difference of the strike price and the stock price. The longer the expiration date is, the more premium. The more in the money the contract, the more premium. It is very important to try and sell call contracts on days when the stock is way up, this will increase the premium! YP Investors recommends selling contracts that expire from as short as the current week to at most a month out. (Hint: With the monthly contract shoot for premium of ~4% of the total price and for weekly shoot for ~2%)
An easy example of how to Sell Call Options for Income:
You own 200 shares of XYZ stock. You purchased the stock for $12.50 each. You now decide to Sell two Call Options for a premium of $50 each at a strike price of $13.50. The expiration date is about a month out from now. If the contract is executed you will have to sell 200 Shares of XYZ at $13.50 (strike price) each. This means you made 1.00 per share ($13.50-$12.50) which is $200 plus the $100 premium you were paid ($50 per contract). Overall you made $300 which is an ROI of 12% ($300/($12.50*200)). During the length of the contract you should hold onto the 200 shares of XYZ in case the contract gets executed like described. Alternatively if the stock price never gets above $13.50 then you won’t have to sell your shares and you simply collect the $100 in premiums which is 4% ROI ($100/($12.50*200)) . The ROI is the premium plus the profit divided by what it cost you to purchase the shares. Your return could easily be more or less based on the stocks performance and the premium price you agree to. If your stocks do get sold then start over with selling put option contracts above. If they aren’t sold then sell another call option!
Remember that you own the stock at whatever price you purchased it. You are paid a premium, but if the stock price starts dropping below the purchase price you can lose money. For this reason it is key to invest in good stocks that are trending to higher prices. YP Investors only holds stocks that are in Positive Trends. The more positive technical attributes the better the odds that the stock will rise in price.
Options for Income Is How You Become The Casino
Casinos make consistent money from betting, sometimes gamblers hit it big but the majority end up losing. Options is the same way. By selling options contracts you are acting as the casino, collecting the steady premiums. Rarely you will hear of someone who bought an options contract and made 10x or better return. You should ask them how many options contracts they have bought overall, odds are they have lost money more times than made a profit.
Stick with being the house and use the odds to your favor! YP Investors hopes this strategy will help you successfully grow your wealth so that you can live the life you want! If you are not a member of YP Investors sign up for a free trial. Good luck on your investments!