One of the often overlooked benefits of selling options is that nothing stops you from keeping your positions on indefinitely and get paid every month just like if you had a rental property. However, while you need $150-200k for the deposit of a rental property, with options you can start enjoying the benefits of additional cash.
So how does that work?
If you are not keen on frequently guessing which way a stock is going to move then you can simply use a non-directional strategy, such as strangles and iron condors, to make money. I personally prefer strangles as it's easier and cheaper to manage than iron condors so let's focus on that for now.
What is a strangle?
You sell a put and a call option against the same stock. Normally the two options would have the same expiration and the aim is to keep them the same distance from the stock. For example, if the stock is trading at $100 than you may sell a put with a $95 strike price and a call with a $105 strike price. If the price moves up then you may want to roll your positions up too.
On the below diagram the green horizontal lines indicate the option strike prices while the length of the lines indicate the duration of the options.
Some points to note:
a. The first month worked out perfectly and the stock price moved up a bit so for the second month we would sell the strangle with higher strike prices, which can backfire if the stock takes a sudden move to one of the directions. In our example it moved down a fair bit testing the put side. However, fortunately the testing was short-lived and the stock price moved away from the put side towards the middle of our range.
b. Because the stock price finished lower at the end of the second month, it made sense to move the strike prices down again but this time the stock shoot up and went above our call option strike price. If someone doesn't know how to adjust their position then these type of scenarios would result in a loss.
c. The last few months were fine but in month 7 the call side was tested again but fortunately at expiry the stock price was lower than our strike price.
So how is this compared to a rental property?
Like I mentioned earlier, if you manage your positions properly and the market doesn't have any extraordinary movement then every month you can grow your wealth by keeping the premium that you collect as a compensation for selling options and taking a risk.
How much can you get paid?
A lot. Seriously, a lot more than through a rental property. While a rental property yields normally between 3 and 5%, option premiums can easily yield in excess of 25%. There are many factors that determine how much you can collect, which I cover in another post.
If it's so simple than why don't people do this?
I could write a book about that. :) The bottom line is that most people are unaware of stock options or don't know how they work so it wouldn't even cross their mind. Also, if you don't know what you're doing and don't know how to defend your position when a stock moves against you, either on the call or on the put side, then you could lose significant amounts, while the risk of not getting rent from your rental property is much lower. Lower risk obviously means lower returns.