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Many people immediately picture buying stock or mutual funds to produce income while they are still young. Sell put option contracts every other week to generate income from your investments. What you should realize is that options are income-generating instruments.
It is possible to lose all of the money you invested by simply selling options, or you could be obligated to pay an astronomically large amount of money to a bank or a brokerage company. Selling options and not paying money to them is probably the most dangerous thing that you will do. Use only a very few real trades to learn the trading theories.
How does selling put options for our income to work?
Firstly, you need to understand what a put option is. A buy and hold contract is essentially a kind of buying and selling agreement in which the buyer has the right, but cannot have the obligation, to give to the seller what he wants (the strike price). The seller agrees to pay a price to the buyer (if the buyer decides to do so) at a specified time (expiration date). For a put buyer, the seller is required to buy the security at a price that the buyer can afford, and at any time before the expiration of the contract.
Put options can help sellers earn a recurring income every week or every month by buying securities that are expected to rise higher than the strike price, and that will remain in the range of the strike price until the expiration of the option. Investors buy and hold options on different recurring indices and on different expiration dates and strike prices. A person can buy put options with expirations on Monday, Wednesday, and Friday. And some put option contracts expiring on Fridays, and others expiring on the last day of every month, on the 30th day of the month.
What do I need to sell put options?
Before you get started, it is important to first define what we mean by “put options” and why we are talking about them. A put option is an option contract where the buyer of the option pays a premium for the right to sell a specified quantity of an underlying asset at a specified price. In return for paying this premium, the buyer receives the right to sell that quantity of the underlying asset at that price for a specific period of time (the “expiration date”).
So, why do we want to sell put options? Well, if we can purchase a put option for less than the premium we will have received, then we will have received a guaranteed return. However, if the underlying asset is at or above the strike price of the put option at expiration then we will have made a profit and no additional work is required. In this situation it would be silly to pay more than the premium to acquire this put option.
Do you need to sell weekly put options?
You might think that selling weekly put options would be a good way to make money for a limited period of time. After all, the first week of the month you would have to buy the weekly options at $7.50 and then sell them back at $9.50 on Friday, thus making an extra $1.50 per contract. Of course this is not how this works. It is true that you can earn some money by buying puts in early weeks of the month and selling them back in later weeks of the month, but it’s not as good as it sounds.
First off, there are no actual “puts” being sold or bought. You are just earning a small interest on an asset that you already own and which is paying no interest (cash). The net gain will only be realized when you eventually sell your put options at their higher strike price for more than what you paid for them in the first place (up to 25% more if you bought more than one contract). If your options expire worthless or are exercised by the holder, you lose nothing but if they expire worth something, your profit will be equal to 25% x $100 = $25 per contract – minus commission costs which may not be $100 per contract.
Is selling monthly put options better than weekly put options?
In general, the answer is “Yes”, but it depends on how you look at it. You can have an argument that selling weekly puts is better than selling monthly puts. But the fact is that many traders make more money by selling monthly puts than by selling weekly puts. In fact, some traders make more money by writing a few monthly put options contracts and then converting those options into weekly put options and then converting those options into daily put options.
Stock options that are traded regularly on a weekly basis are often at the cheapest prices as a result. Options that are offered each week are generally cheaper and more attractive to traders as compared to ordinary options. Options expire within a very short time; it takes just a couple of days to execute an option trade.
Conclusion between selling weekly put options and monthly put options for income
In general, you should sell put options when you think the stock price will go down. That’s the point of writing put options. The amount of money you can make from selling put options is limited only by how much money you are willing to risk on your trading account. But the more money that you are willing to risk, the more likely it is that your trading account will be wiped out by a single losing trade . And there is no way around that fact, even if you do not use margin. The best way to reduce the risk on your trading account is to write fewer trades and sell fewer puts at a higher strike price than you originally intended.