Before entering into detail, let me inform you this is my trading style! It is my preferred methodology that produced for me the best results and consistency!

We can earn a lot of cash through trading and, specifically, trading options. However, there are certain factors that must be present for you to achieve that goal. For most of us, however, as retail traders, earning a side income from trading options means making some extra money out of part of our personal wealth. Hence, trading options for income may be the first step toward building a sizable portfolio that might eventually become sizeable enough to get an absolute value that would be sound. For a portfolio of $500k to achieve a 2% monthly (fairly accessible without high-risk options strategies) will give 10k per month… but, a 5K account will only produce $100… it all depends on account size!

Most traders associate investment success with a high success rate of winning trades as well as large returns on a set of individual trades. This is not always true. In fact, many successful investors have very low trade rates and small average returns. The key to long-term investing success is to focus on the overall performance of your portfolio over time rather than focusing on the performance of any single trade or position.

Besides several stock and options trading websites claiming high return/success, the most fundamental theory behind investing continues to be the relationship between risk and reward. Period! If you want to make money in the markets, then you need to take more risk. That’s why it is recommended to start off with a smaller amount of capital and increasing your exposure gradually. It’s also important to remember that when you start trading, you should do so with a clear understanding of what you’re doing and how much you can afford to lose.

While a trader could successfully invest in one single and have a huge success with a very large return, committing a significant portion of everyone's funds to a single security or strategy exposes anyone's account not just to high rewards, but also to a significant risk of losing all your money. Trading options for income is not a get-rich-quick scheme. That is more “gambling”. By contrast, it is a systematic implementation of a set of strategies intended to yield consistent results over time and generate some passive income.

A trader portfolio’s performance is successful when it would provide additional income while progressively building a growing amount of capital that will continue to deliver bigger absolute returns over time.

As stated above, the amount of capital you are willing to invest to trade options for income is a numbers game. Experienced traders have set their goals to achieve 2% – 3% monthly returns on their portfolios without incurring significant risks. This means that to produce $5,000 per month, you need to have around $200,000 to $250,000 available to invest. It depends on the investment objectives and cash committed to trading options.

Another fact that you should consider is the time you are willing to commit to trading. Most people who want to start trading also have a day job that demands a significant portion of their time. This is ok, but trading options, like any other activity, require time (not only dedicated to trading itself), but also to study, research and practice. It took me about 6 years to study, practicing, trade, losing until reaching a consistent level. Discipline, studying, and managing position risk was game-changer for me!

Achieve success in trading, like in any other profession, will be related to the time invested in learning and implementing trading strategies until achieved an expertise level that will produce consistent returns. Also, I can tell you, that mentorship helped me a lot! It made me learn faster and alerted me to some dangerous positions I was taking as well as other kinds of adjustments made possible by the flexibility of options. Trading with someone will also boost your knowledge as it could deliver different perspectives. If possible for you, better to not trade alone (especially if you do not achieve an expertise level in options trading). There’s much more to options trading in terms of complexity than trading stocks. You could join our trading community and help from our group of profitable traders.

There are other income options trading strategies. Below, you only have examples of a small set of easy options strategies to show how flexible options are. I am trading my own set of income strategies in the investment fund I am sharing trades.

 

Some simple income option strategies 

Selling Puts

Selling a Put is an easy way to generate income. Doing this also allows you to buy a stock at a price lower than the current traded price. A put option contract gives the holder the right, but not the obligation, to sell the stock at a certain strike price at or before the option expiry. Traders selling a Put must be willing to take ownership of 100 shares of stock at the strike price you sold the option. There are other factors you could enter into the equation when doing this like the level of IV (Implied Volatility). For example, beaten-down stocks where the IV is high could deliver opportunities to capture more option premium. If every month you sell a set of Puts in several stocks you could spread the risk and have a nice income from options time decay. In this case, you are using a small period of time for the options contract. But, others may consider selling Put with 60 to 90 days until expiration. The strike that you sell is also impacting the level of premium collected and the probability of profit.

Covered Calls

A covered call is an option trading strategy that consists of selling call option contracts on stocks you currently own. A call option gives the holder the right, but not the obligation, to buy a stock at a certain strike price at the expiration date of the option. Covered calls are great if you have a neutral to slightly bullish view on the stock. 

By selling a call on a stock you own, the trader earns a premium (also referred to as the option price). If the stock’s price remains the same or it drops, the option will expire worthlessly and the trader keeps the stock and the premium collected. On the contrary, if the security increases in price, the buyer of the option may exercise the option and the seller will have to sell the stock at the strike price.

Putting both strategies to work 

Suppose you want to buy 100 AAPL shares. It closed on Friday at a current price of 353 after a 3% drop, so IV is a bit inflated versus a normal state. Monday, at the market open, you have 2 ways to buy AAPL stock:

1. The stock trader: 

Simply buys 100 shares with a total investment of $35300 and hopes it will move up in the future to sell them for profit. Or l lose if he sells at a lower price.

2. The options trader:

a. Sell one Put option contract at 340 for 6.30 with Expiry on 17 Jul (18 DTE) for an approximate $6000 margin commitment and a credit received of $630 (you become a net option seller);
     i. If at the expiry date, AAPL closes above 340, the Put expires worthlessly and the options trader keeps all the premium collected ($630); 
     ii. If it closes below, the option is exercised and the trader buy the 100 shares at $340 for a total investment of $34000 - the cost basis is lower than the stock trader
     iii. Selling Puts can be done continuously (every month or week) and the credit continuously be cashed in until option is exercised;

b. At a given moment, when the Put is exercised, the trader owns the shares. He can now start selling Calls against them (again, this option trader becomes net option seller), collecting premium until, again, they are exercised
     i. If at Expiry, the stock continues to fall, credit from sold Calls is being cashed in
     ii. In a moment where AAPL shares will close above the strike price of the sold Calls the shares will be exercised and are sold at that strike.

What you could see above is the flexibility of options can give versus simply buying or selling stock. In the example above, you cashed in credits from Put selling. And, at the exercise date, you bought the 100 shares at a lower price than initially!

When you start to understand the power of options, you will never want to go back to trade stocks! And that example is a pretty basic usage of options!