How to Trade Options for a Robust and Recurring Income Stream.

Options Trading for Income

As I continue on toward my options trading goal of $10,000 in income in 2023, I keep learning new strategies and skills, which I hope will increase my winning percentages.

I make no bones about it, I am the antithesis of an expert options trader, in fact more of a neophyte trader but with the capacity to learn, listen, and then turn around and share my knowledge.  Sharing is what this site is about, and if it helps others understand different financial strategies better, than I’ll consider myself as having successfully contributed to society, Amen! 

Now Let’s talk about Options Trading for Income; 

Earning $10,000 this year trading Options, along with mySwim to Nashville’ Project are two lofty goals I’m seriously focusing on in 2023.  Now, swimming the equivalent of a road trip from my house to Nashville, may not seem overly ambitious to some, but for me it will be a monumental accomplishment. 

If you’re like me and are interested in building a pseudo-passive income stream, you can easily do that through options trading.  If you own 100 shares of a few stocks, and have a modicum of patience, then you really need to consider trading options for income; it’s like icing on top of the proverbial- financial cake.

Check this out;  you can own 100 shares of a stock, and sell ‘out of the money’ covered calls against those stocks and earn a premium.  And then repeat this each and every week!

Now, there may come a time when your stock gets ‘called away’ or ‘assigned’, and you’ll be forced to surrender it, but if you’ve played your cards right, you’ll have baked in a nice little profit when it does get ‘called away’. 

Conversely, you may have an interest in owning a particular stock, like I did with Palantir Technologies.  Instead of buying that desired stock at the market price, you could place a ‘Cash Secured’ Put Contract to buy 100 shares of it, and be paid a premium while you wait to see if it hits the ‘strike price’.  

And, the best part is, you may never take ownership of those 100 shares, but the premium is yours to keep.  

It’s this premium that can serve as the bedrock of your ‘options trading for income strategy’.  

And conceivably, you can do this each and every week with multiple stocks and ultimately build up a nice options trading income stream, which by the way, is exactly what I am doing. 

It’s important to first understand the difference between a ‘Put’ Seller vs A ‘Call’ Seller

My current goal as an Options Trader is to collect premium or a credit for income, rather than pay a premium.  In order to do that, you have to be a ‘seller’ of options.  

A “Put’ Seller assumes the obligation to Buy 100 shares of a stock if the Strike Price is met.  For this, the seller collects a ‘net credit’.

A “Call” Seller assumes the obligation to Sell 100 shares of a stock if it trades at a certain Strike Price, and for this obligation, the seller collects a ‘premium’.

Both option selling strategies increase your account balance when the trade is executed, so whether it’s called a Net-Credit or Premium, they are essentially one in the same.  

How to evaluate an option position if you want to generate income. 

There are so many stocks available to be traded, in fact according to Benzinga there are precisely 5866 of them.

This is a lot of options, and frankly a lot of noise.  Because not all stocks make good option trades, especially if you’re trading for income.  it’s important to be able to “separate the wheat from the chaff” as we say in the south!

Here are some variables that make for a potentially good option trade..  

If you’re looking to generate income it’s best to trade options using Large-Cap Companies.

Companies with a Market Cap above 10 Billion make the best candidates for options trading.  They represent stability and maturity, and there is typically more analyst information available for these positions.

Many Large-Cap Companies pay a dividend, which can help you increase your returns if you time your trade correctly. 

Choose stocks with high open interest and high volume

Open interest is the number of options or futures contracts that are held by traders and investors in active positions and have yet to be closed out.  

Ideally you’ll want to look at stocks with at least 1000 or more outstanding contracts.  Volume is also a measure of interest in the stock, and it’s often recognized by the ‘big money’ as a way of anticipating a price move.

I use to evaluate Open interest and Volume. 

Here are the top stocks listed for Open Interest as of today:

Option Trading Open Interest

Search for Options with very high liquidity.

The best way to measure liquidity is to look at the daily volume (an average of how many times this stock changed hands) along with the Open Interest.  Those stocks with high daily volume and Open Interest over 1000 are candidates for a good option trade for income.

Look for very tight Bid/Ask Spreads.

The “Bid” is the highest price a buyer is willing to pay for that option contract, while the ‘Ask’ is the lowest price a seller is willing to sell their contract at.  The spread is the difference between the two.

Look how tight these Bid/Ask spreads are on these stocks.  These make for great options to trades.

Options Bid/Ask Spread

Avoid Slippage in your Options Trade

It’s ideal to place your trade in between the Bid and the Ask, but ideally closer to Bid Price.

If you choose stocks with a very tight Bid/Ask you can minimize your chance of Slippage.

Slippage is the cost incurred when an options trader executes a trade at a certain price but pays more or receives less due to market fluctuations.

If you were to place a trade at the “ASK, and were to immediately sell at the “BID’, the difference would be considered the Slippage.  

When Trading Options for Income, A stock’s volatility is extremely intuitive.

Beta is a measurement of a stock’s volatility when it’s compared to the overall market’s volatility. The SPY which is a ‘basket’ of all stocks in the S&P 500 over the last 60 months has a Beta of 1.0. 

This is considered a benchmark in the ‘option world’.

A stock with a Beta of 1.25 is 25% more volatile than the market as a whole.

Typically stocks with a higher Beta make for good option trading candidates. 

For perspective, at the time of writing, Tesla which is a highly traded option position has a Beta of 2.02, where Proctor and Gamble which is less traded has a Beta of .42.

Analyze the Average True Range (ATR) of an option position before entering.

The Average True Range (ATR) tells you how volatile a stock has been over a given period.  It gives you a sense of how strong price moves are or have been.

ATR helps smooth out price estimation because it accounts for Gap Up’s and Gap Downs in prices over a longer period of time.

Many traders use 14, 20, or 22 days when using ATR, because there are generally 20-22 trading days in a month.

ATR is based on absolute price changes not percentage price changes.  Higher priced stocks will typically have higher ATR’s than lower priced stocks.  ATR doesn’t tell you which direction the stock has been moving, just that it has been moving.

If the ATR is shrinking it means that it has gotten less volatile over the period.  Traders use ATR’s to help them determine a stop level.  

In Conclusion

Options trading for income does take planning and research, but its a fantastic way to supplement your income if you like to follow the stock market.  I would suggest if you plan on selling Cash-Secured Put Contracts, that you have a desire to own the particular stock, and if you’re selling Covered Calls, you must feel comfortable with the stock being called-away.  I hope this helps you learn more about Options Trading.  Be sure to tune in on my Options Trading for Income Journey. 


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