How do we use options to generate regular income for us?
By selling a put and a call option against the same stock and keep 'rolling' our position we can generate a relatively steady stream of income.
What does rolling mean?
Each option has an expiration date and using the above strategy we do not want our options to expire. Instead, as we get to about 21 days to expiration we close our existing position and sell another one expiring a month later. Also, it's expected that the stock will move against one of our positions in which case we roll the other position (untested side) a bit closer to the new price. This is what we call: 'managing winners'.
Below is a chart of my SPY position that I have been rolling since mid-May.
Blue candlestick >> price movement
Continuous lines >> my option positions
Dotted line >> Premium collected
As we can see, the premium I collected climbed rapidly in the first few months due to the high volatility in the market. In recent months the the volatility has been fluctuating greatly and the market tested my positions on both sides (wild movements up/down). As a result in recent months my profit has been stagnating but I should be able to increase it bit by bit.
Note: the approximate capital that such option strategy requires for SPY is between $7-8 thousands, however it might be lower depending on your broker platform.
For those, who are new to my daily market comments, I place and document one trade a day with the objective of helping everyone learn how to trade options.
What's my trade for today?
#AMZN (#Amazon). The stock fell a bit today and am hoping for a quick bounce. I selected a strike price at 18 delta which gives me approximately 82% probability of profit.
Trade Type: Short Put
Expiry: 20 Jan
IV Rank: 39.1
Cap Req: $802
Annualised Prof at Expiry: 155%
IMPORTANT: Studying previous trades provide the opportunity to everyone to learn a great deal so I encourage you to click on the links below and digest the info.
Let me know what you think.
Closed at $1.19 for an annualised profit of 2,640%.