[QUESTION] - Options trading for INCOME

[luckyfnlou]

u read my mind, been looking for a good book on options. Thank u sir.

I agree with Tradex. If you really learn options you have a lot of investment flexibility. It is still up to you to use the right strategy at the right time. Your underlying assumptions are still so important but options often give you some buffer and flexibility allowing much easier adjustments than just trading the underlying.

I like McMillian too but it is a lot of reading and a great resource. I prefer Natenberg’s Option Volatility & Pricing as an early book. If you are younger and want more current content I also like what Options Playbook radio is doing alongside their book (same name) by Ally invest but they don’t go into depth as much as McMillan and Natenberg.

 

[Tradex]

I prefer Natenberg’s

Good advice of course, Natenberg's books are great too.

 

[qlai]

Yes, you can still lose. Just be wise enough to separate the fuck you money from trading.

Nice story and nice video. I always assumed that selling premium for income makes sense only when you allocate 10-30% of overall portfolio to it. Your uncle must have gotten carried away with it.

BTW, I didn’t catch what he said in the video at the beginning - jap sh*t box?

 

[JSOP]

Hey ET Community,

Noob here with a noob question.

Why do beginners or the general public think that options trading can provide you with INCOME? Just like trading any other instrument you P&L and risk are going to fluctuate just like with any other position. Why does everybody think there is something magical about options that can provide you with a stable income as opposed to any other type of trading?

Maybe I am missing something, am I thinking about this the right way?

Yes, you may receive an initial "credit" upfront, but the position can still move against you and you can still lose money just like you would see with any other type of trading... equities, futures, forex, etc.

I would appreciate some clarification or anybody that trades options to weigh in on this.

Thanks, guys!

Just like when they tell you Binary options are guaranteed to make money, you win either way and you cannot lose! And no, you didn't miss anything.

 

[newwurldmn]

no such thing as trading for income??
Yes, there absolutely is.

It’s not worth arguing with someone who is at the Natenburg level of their options journey.

 

[Bekim]

All trading is the same you make good trades you get income you make bad trades you lose income, sometimes you good trades and you still lose income

 

[Cabin111]

I will share a repost from a few days ago. I believe I can (and have) earned more income by doing covered calls, that just a buy and hold on certain stocks. The stock MUST be stable. I have learned from GM and GE this can be a killer to my strategy.

Below is some copy and pastes:

Pekelo said:
If the writer has stocks too aka covered calls, it is not a loss for him, just a predetermined gain. Sure he is missing out on the stock's rally, but probably he is still happy with the profits.

Me

That is me for the last 20 years...

I have bought and sold (optioned away) ADM for the last 14+ years. 2006 the price was $41. Today it is at $39.43...Very boring you would think. In my two different Roth IRAs anything I earn is tax free. It has held it's dividend for about a gazillion years!! I do covered calls on this stock (my favorite hold). If it gets called away, I do not have to wait 31 days to buy again. Dividend is 3.73%...Not bad in this fed (free money) environment. Predetermined gain for the most part...Everybody eats!!

Illini Trader said:
I worked for ADM for 8 years and it is (at that time anyway) a very well run company and an excellent choice for your 14 year strategy. I am curious as to how you navigated the the decline from 46 on Feb 11th to 29 on March 23rd. This appears to be a covered call strategy nightmare scenario. I know over the long term you are fine but did you just bite the bullet and keep selling weekly calls to mitigate the capital decline in your base asset? Did you buy a OTM put to hedge the potential decline in ADM once it started down in force on Feb 25th?

Thanks for reminding me of good ole ADM. I am thinking of doing this strategy on ADM as an experiment myself. I might even do it in a Trading Journal to document how a "Covered Call -- Cash Secured Put" strategy works in real time over different market conditions. However, the high volatility right now is probably not the best time to start.[/QUOTE

Me

Much more basic than you might think. Very little thought process involved really. Buy when you believe it is low to value. If it is low and you know a dividend is coming soon, buy. Once a dividend is declared, many financial advisors push ADM to retirees and widow and orphan type people.

I was a contract worker for Hershey's years ago. They would work on their quarters. They would use duck tape and super glue to keep they plants running!! They had to make their numbers for that quarter (bonuses). Once the quarter ended, they did all the work. You knew there was deferred maintenance that would kill the next quarter...But the company was solid. You may have seen the same thing at ADM.

So my simple answer is to do leaps...Up to a year and a half. If the stock is way too high to buy, I will wait till it drops a bit. Even put my price in 20 cents lower than the bid/ask...Waiting for a dip. It's not going anywhere. My wife and I have ADM in 5 different accounts...Two trust accounts and three Roth IRAs. When one gets called away we wait then buy on the dip. VERY BORING!!

I am NOT Warren Buffett...Berkshire Hathaway. But he bought up Sees Candy and GEICO Insurance...Then he bought a railroad. A RAILROAD!! Who saw that coming?? Why?? Because he saw value where others did not. I'm eyeing one company right now. When I pull the trigger, I will post (value company).

I will also say this strategy may not make as much as buying QQQ or the S & P 500 and reinvesting the dividends. Yeah, I get it. But I've made between 5-6% over the years (when money market funds were at 2 to 3% you would make money on the float of the covered call money...Compounding, small amounts).
Just me...

 

[ironchef]

The stock MUST be stable. I have learned from GM and GE this can be a killer to my strategy.

Me too. I am glad I am not the only fool.

Regards,

 

[destriero]

I’ll post some names and tenors for short vol if anyone is interested.

 

[Illini Trader]

Tall Mike, There is a lot of good advice in this thread and good resources referenced. Most of the thread deals with Covered Call Writing but some do confirm that there are other good strategies available.

Many people do derive a good income from selling options but it is not for the novice and your have to fully understand the risk you are accepting especially in the last hour prior to expiration of the options. It works because buying out of the money options are how a fool is parted with his money because:

1. You have to be right on the direction of the underlying stock.
2. You have to be right before your option expires.
3. You have to be right to the magnitude of your strike price then even more to get back what you paid for the option then even more to make a profit.

So, many people just sell Iron Condors on Weekly Expiration options. Now that I have said this, it brings anathema to many ET posters. Regardless of that, it does work over time because you are putting the time decay of options in your favor as you are fading the speculators. I will let you read the books to get educated but I will show you a current example of how this works.

Apple closed Friday at $364.11. Here is the setup for a July 10 Expiration Iron Condor which is just a call vertical spread and a put vertical spread sold simultaneously.

+375 Call
-372.5 Call
-357.5 Put
+355 Put

This IC could have been sold for $141.00 on the Friday's close. That is the mid-point of the IC spread and my experience is that you can almost always get this midpoint price on a limit offer although sometimes the Market Maker gets stubborn and you have to give a cent or two. Since it is a $250 spread you are risking $109 to make $141 If Apple stays below 372.50 and above 357.50 your IC expires worthless and you keep the $141 that they put into your account the instant you sold it. Your breakeven points are 356.09 and 373.91 but if Apple closes on July 10 above 375 or below 355 you have a max loss of $109.

There are ways to defend a trade that gets into trouble but the best advice for someone just learning is to exit the trade; and not just the side that is in trouble but the entire Iron Condor. The secret to making this work over time is proper money management and to be satisfied with "an income" and not trying to make a fortune. The nice thing about this style is that you never need to take a max loss because even if Apple goes above 375, your vertical call spread will not be priced at the max 2.50 spread until shortly before expiration.