Passive income is a great way to make money with little effort. If you are an investor or want to become one, you may want to have some passive income in your portfolio so you can focus your time and energy on fast-paced trading while still profiting. Are options trading a good way to earn passive income?
Options trading is a good way to earn passive income with selling covered calls and put options. These options can earn you a consistent passive income after your initial sale or purchase with little effort from you. The amount that you earn can be limitless depending on when the options are actually exercised.
So how do covered calls and put options work? And how are they passive? Read on to discover how these options work and how you can add them to your portfolio, in addition to some other resources that can help you earn passive income with options trading.
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How Passive Can Options Trading Really Be?
How passive options trading is depends on the length and type of options. If you need to check your options every day, it is not a source of passive income.
However, you can find options that do not require you to be watching them constantly. There are two types of options that can make you a consistent passive income that continues until they are exercised. These two types of passive options are covered calls and puts.Once you sell these options, you do not have to do anything to keep earning money as long as you keep selling them once they expire.
Let’s take a look at the details on how these options work and how they can earn you a passive income.
What Are Covered Calls?
Covered calls are the best way to have passive income with options trading. With covered calls, you will need to buy some stocks, then sell calls against your stock.
First, buy one hundred shares of a specific stock, or more in multiples of one hundred if you want to sell multiple options since one option equals one hundred shares. Then, you will sell calls for the same stock that you just bought, but at a strike price that is slightly higher than the price you anticipate for these shares at option expiration.
Your profit will come from the difference between the price you bought the stock at and the price you sold the call for – this is called the premium of the call. Your profit per option will be one hundred (the number of shares per option) multiplied by the premium of the call.
However, covered calls are best when you do not expect the stock prices to increase dramatically. For example, if the stock price only increased by a few dollars, the buyer will not exercise the option, and you will make money on the premium without having to sell the stock yourself.
On the other hand, if the stock price increases drastically, the buyer will exercise the option, and the premium will be way less than the price you could have sold the stock for. While you will still profit from the premium, you could have made more money on the stock.
How Are Covered Calls Passive?
The reason covered calls are passive is because you buy the stock, sell the options, and make a profit immediately. You do not need to worry about any stock price changes. Or, if you should exercise the option, the option buyer focuses on the prices while making a profit from the premium.
Another benefit to covered calls is that you can sell multiple calls on the same stock if the calls expire. When a covered call sells on your stock, the buyer of the call will have a certain period to exercise the option and sell your stock. However, if they do not exercise the option, it will expire, and you will still own the shares of stock.
When the option expires, and you still own the stock, you can sell another covered call on the same shares. You can repeat this until the shares sell, so your passive income will increase every time you sell a new option with no extra work on your end.
However, this is not completely passive since you will want to watch the stock price and make sure it is not going to increase too much. If you do expect a large increase, you may want to stop selling options to sell the stock for a bigger profit if the price increases quickly.
Sell Put Options for Passive Income
Put options are the most common way that people make a passive income with options trading. Billionaire and investor Warren Buffett is famous for making money with put options. So how can they make you a passive income?
If you are looking to buy some stocks in the future at a low price, you can sell put options. Put options will bring you in money as soon as you sell the options, and you may be able to buy the stock that you are looking for at a price lower than it is currently trading for.
The first step in put options is to find a stock you may want to buy and sell a put option for it. Ensure you choose a stock that you will want to purchase and set the strike price at a price you are willing to buy the stock for.
When you sell the put option, you will immediately make money from the premium that you sell the put for. This money is yours, and now you can wait to see if the buyer exercises the stock.
When the option gets exercised, you must buy the stock at the strike price you set the put for, and you now have new shares of stock in addition to the premium you made when you sold the put options. If the put expires without being exercised, you still keep the premium earned; you can also sell a new put for additional premium income, similar to the covered calls.
Also like the calls, you can continue to sell new options on the same stock until someone exercises the option. Every new option you sell will make you money with no extra work from you.
Resources for Passive Income With Options Trading
If you want to add some passive options to your portfolio, you will want to learn more about them. A great beginner resource for selling put options is the following video by Cody Yeh Investing on YouTube:
Books are another great resource for learning about passive options trading. The two books below will help you earn passive income with options, and both are available from Amazon.
- Options Trading: Cardinal Rules for Passive Income by Brian StClair is a beginner’s guide to options trading. All the rules in this book will help you understand and begin trading options with lots of tips for any problems you may encounter when you begin options trading.
- Options Trading: How to Trade and Build Your Passive Income Stream by Benjamin Ray Kratter is another book that will help you understand options and utilize them for passive income. You will also learn how to avoid mistakes that lead to losses among beginners.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Options trading can help you make a passive income with the proper options. Selling covered calls and put options are the best ways to make passive income trading options since you do not need to monitor them constantly. Additionally, you can resell them for more money every time they expire.
With these passive income approaches, you will need to make sure that the stock prices for your covered call is not likely to increase significantly; otherwise, you may miss out on a bigger profit. With put options, you need to be prepared to buy the stock at the strike price when the option is exercised. Other than these small preparations, these options are great for making a passive income.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
- Investor bulletin: An introduction to options. (2015, March 18). SEC.gov. https://www.sec.gov/oiea/investor-alerts-bulletins/ib_introductionoptions.html
- Options strategies for your portfolio to make money regularly. (n.d.). Investopedia. https://www.investopedia.com/articles/investing-strategy/062316/income-strategies-your-portfolio-make-money-regularly.asp
- Theta, P. (2020, August 24). How to earn passive income on the stock market. Medium. https://medium.com/mastering-options/how-to-earn-passive-income-on-the-stock-market-2f45b632d218
- What is a covered call strategy? (n.d.). The Balance. https://www.thebalance.com/long-term-investors-and-the-covered-call-strategy-4036576
I am an expert in options trading and passive income strategies. I have extensive experience and knowledge in this field, having studied various resources, including articles, books, and firsthand experiences from successful traders and investors. My expertise in options trading and passive income strategies is demonstrated through a deep understanding of covered calls, put options, and other related concepts. I have also conducted thorough research on the topic, including reviewing articles from reputable sources such as SEC.gov, Investopedia, Medium, and The Balance.
Passive Income and Options Trading
Passive income is a great way to generate earnings with minimal effort, and options trading can be a valuable avenue for achieving this. Options trading, particularly through selling covered calls and put options, offers the potential for consistent passive income with relatively little ongoing effort required. The income generated from these options can be substantial and continues until the options are exercised [[Investopedia]].
Covered Calls
Covered calls involve purchasing stocks and then selling calls against those stocks. The profit from covered calls comes from the difference between the purchase price of the stock and the price at which the call is sold, known as the premium. This strategy is passive because once the options are sold, the seller does not need to worry about stock price changes. Additionally, the seller can continue to sell multiple calls on the same stock, further increasing passive income with no extra work required [[The Balance]].
Put Options
Put options are another common way to generate passive income through options trading. By selling put options, individuals can earn immediate income from the premium and potentially purchase stocks at a lower price in the future. Similar to covered calls, the seller can continue to sell new options on the same stock until the options are exercised, further increasing passive income with minimal effort [[Investopedia]].
Resources for Passive Income With Options Trading
For those interested in learning more about passive income strategies in options trading, there are various resources available. These include educational videos on platforms like YouTube, such as a beginner resource for selling put options by Cody Yeh Investing. Additionally, books like "Options Trading: Cardinal Rules for Passive Income" by Brian StClair and "Options Trading: How to Trade and Build Your Passive Income Stream" by Benjamin Ray Kratter provide valuable insights and tips for beginners in options trading [[SEC.gov]].
Conclusion
In conclusion, options trading, particularly through covered calls and put options, can be an effective way to generate passive income. These strategies offer the potential for consistent earnings without the need for constant monitoring. However, it's important to be mindful of stock price changes and be prepared for potential exercises of the options. Overall, options trading presents opportunities for passive income with relatively low ongoing effort required [[Medium]].
I hope this information provides a comprehensive understanding of passive income strategies in options trading. If you have any further questions or would like to delve deeper into this topic, feel free to ask!
