For a long time, I couldn't find the answer to the question - to write cash-secured puts or write covered calls?
Now, it seems I have found the answer. I like them both but prefer entering a trade with a cash-secured put. Thus getting a better entry price and collecting a premium upfront. Great for income-hungry investors.
In this article, I decided to take a look at 3 stock names I actually trade options with AMZN, BAC, and INTC. All but, AMZN, also are dividend-paying stocks, meaning if you would get assigned BAC or INTC, you could also collect dividends, besides selling covered calls.
Options trading is an advanced trading strategy and I wouldn't recommend jumping straight in, taking your time, and learning all the pros and cons. Pay attention to greeks etc.
I have been trading options for about 4 years now, have seen some great gains, have taken even greater losses, have faced many margin calls, and survived at least two huge market crashes. If there is a lesson I have learned - greeks and not overtrading.
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This is not trading advice. Investments in stocks, funds, bonds, or cryptos are risk investments and you could lose some or all of your money. Do your due diligence before investing in any kind of asset.
Without further ado:
Generate monthly income selling puts on Amazon (AMZN) stock
You could sell a put with an April 28 expiry and a strike price of $90 for about $2.17. That gets you $217 and makes about a 2.41% potential return of income in less than 30 days if options expire worthless. That's about 28.92% annualized. Break-even: $87.83
At the time of writing this put option had a delta value of -0.25, meaning there was a 75% probability for this trade to expire worthless.
If AMZN stock closes above $90 on April 28, you keep the premium and start over. If the stock closes under $90 you risk getting assigned but also check your break-even points. There are several options you could use not to get assigned, like a roll down or roll forward. Or you could take stock, and start writing covered calls. Win, win!
Remember, you are selling one contract, 100 shares of AMZN stock, make sure you have $9,000 cash or buying power (margin) to buy 100 shares if assigned.
Alternatively, I would also consider a strike price with a lower delta, a strike price of $80 for about $0.63, and a delta -0.086, meaning there would be almost a 94% probability this trade is going to expire worthless. The premium received would be more than 3 times less, but the high probability that the stock won't get assigned also is a smart way to trade options.
Generate monthly income selling puts on Bank of America (BAC) stock
You could sell 2 put options with an April 28 expiry and a strike price of $25 for about $0.39. That gets you $78 and makes about 1.56% potential return of income in less than 30 days if options expire worthless. That's about 18.72% annualized. At the time of writing this put option had a delta value of -0.18, meaning there was an 82% probability for this trade to expire worthless. Break-even: $24.61
If BAC stock closes above $25 on April 28, you keep the premium and start over. If the stock closes under $25 you risk getting assigned but also check your break-even points. There are several options you could use not to get assigned, like a roll down or roll forward. Or you could take stock, and start writing covered calls. Win, win!
Remember, you are selling two contracts, 200 shares of BAC stock, make sure you have $5,000 cash or buying power (margin) to buy 200 shares if assigned.
Alternatively, I would also consider a strike price with a lower delta, a strike price of $23 for about 0.2, and a delta of -0.13, meaning there would be almost an 87% probability this trade is going to expire worthless.
Generate monthly income selling puts on Intel (INTC) stock
You could sell 2 put options with an April 28 expiry and a strike price of $25 for about $0.32. That gets you $64 and makes about 1.28% potential return of income in less than 30 days if options expire worthless. At the time of writing this put option had a delta value of -0.12, meaning there was an 88% probability for this trade to expire worthless. That's about 15.36% annualized. Break-even: $24.68
If INTC stock closes above $25 on April 28, you keep the premium and start over. If the stock closes under $25 you risk getting assigned but also check your break-even points. There are several options you could use not to get assigned, like a roll down or roll forward. Or you could take stock, and start writing covered calls. Win, win!
Remember, you are selling two contracts, 200 shares of INTC stock, make sure you have $5,000 cash or buying power (margin) to buy 200 shares if assigned.
Depending on your risk tolerance, investing plans, and other factors you could generate premiums between $165-$350 from relatively safe trades on 3 great stock companies, with total capital required of $22,600- $24,000.
In the case of margin trading, the capital required would be much lower. I'm trading with Interactive Brokers and enjoy about 6.6x times the margin, which would mean about USD 3,600 enough to open all these trades. even with $165 return on capital, that would give about 4.5% return.
If there is a lesson I have learned over the years - I wouldn't chase for the top dollar, but instead, look for a very high probability of winning trades with deltas under 0.10
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