How To Use Options Trading Skills to Create An Alternate Income Stream

Selling Covered Calls

2023 will be ushering in a whole host of new goals for me, both personally and professionally.  One of them is my ‘Swim to Nashville’ project’ which I’ll use to keep focused on progressing toward my goal of swimming 100 miles this year.

One of my financial goals for 2023 is to learn more about options trading.  I’ve been studying the practice for a while, but up to this point haven’t been able to muster up the courage to place a trade for an options contract.

That changed last week; I can confidently claim, ‘the courage has been mustered’.   2023 will be the year for Options Trading and Long Distance Swimming.

I wrote my first two option contracts last week and-low and behold- one of them has already paid off.  That said, the premium I collected was paltry at best.  Venti Mocha LatteSo paltry in fact, it wouldn’t even have afforded me one of those fancy mocha latte’s from Starbucks, not even the Grande-sized, nevermind the Venti!

Yes, there are option contracts you can enter into, which will pay for your daily Starbucks addiction….

And, since this was my very first Option Contract, and I was essentially dipping my little toe into the space, I was trying to mitigate any potential downside risk.  By doing this, as you may have guessed, it also minimizes the upside potential, which I’m entirely at peace with.

I chose a position in Palantir Technologies, Inc. for my first contract, with an expiration date of January 13th and a strike price of $6.50.

Why Trade Options?

If you’re not familiar with Option Trading, it’s the practice of buying or selling an ‘interest’ in a stock, while potentially never owning the underlying stock.  It’s a great way to make recurring income, and you can get started with very little capital.

I chose to sell one ‘Cash-Secured Put Contract’ of Palantir Technologies, Inc. which means I was paid a ‘premium’ for the potential obligation of having to buy 100 shares of Palantir Stock if its price hit $6.50 or less by the time the market closed on Friday January 13th.

A ‘cash-secured’ or ‘short put’ is the inverse of buying a long put.  And, rather than being able to sell 100 shares at the strike price, you must be able to buy 100 shares.

This means you should have a neutral to slightly-bearish short term outlook.  This is a great strategy if you’re looking for a stock to dip a bit so that you can buy in at a good price, and then hold for the long term.

In the case of my Palantir Option Trade, the stock never hit $6.50 by the time the market closed on Friday, so I was able to keep the $4.48 in premium I was paid for taking on the obligation.

The stock was trading at $6.89 when I entered the options contract on January 11th.  I was betting that in two days the price of Palantir Technologies would be higher than it was when I entered the trade.  Palantir Technologies OptionsThe weekly trend was ‘bullish’, and the last time it went below $6.50 was back on December 28th.  And, since December 28th, it’s been consistently rising and has gotten as high as $7.03.

Now I’ll admit; part of placing this trade was to evaluate the process, and to gain a comfort level with option positions.  The worst thing that could have happened is, if the price fell to or below $6.50 in those two days, I would have been obligated to buy 100 shares of the stock.  Potentially a $650 investment.

If that would have happened, I would have turned around and sold ‘Covered Calls’ against my 100 shares.

Which leads me to my second Options Position of the week-Altria Group.

I’ve owned shares of Altria Group (MO) for a while now.  My average price per share is $41, but if someone was willing to buy my 100 shares at $47, I’d gladly take my $600 profit and move on.

It’s precisely the philosophy you need to have when you’re selling covered calls.  With covered calls you have to be willing to give up your shares of the underlying stock if the share price reaches the ‘Strike Price’.

For this position, I sold the $47 Covered Call at the January 20th expiration, and stand to pocket $26.48 in premium if the price of Altria Group closes below $47 on the 20th.

If the price does reach $47, my shares will be ‘called away’, and I will be paid $4700, with a realized profit of $600.

We’ll see what this Friday brings on my Altria Stock, but so far so good!  Have you had any experience with Options Trading?





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