How to sell puts for monthly income - make $1000 dollars per month

Discussion in 'Investing and Retirement Saving' started by admin, Oct 29, 2015.

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  1. admin

    admin Administrator Staff Member

    Admin Post
    Knowing how to sell puts for monthly income can be very valuable especially if you can find stocks that are trading within a certain range. Trading options can be a great way to manage your risk by having a clearly defined plan and strategy that always helps to beat the market.

    Most people are very cautious when it comes to selling naked puts as they’re terrified of being assigned and being lumped with the stock, if you can change the way you think as well as your paradigms you could make consistent money in bull and bear markets by selling puts on quality stocks.

    Selling Puts for Monthly Income Explained

    When you buy a put you want the price of the underlying stock to go down so the value of your premium will rise, if however you sell a put you are hoping that the stock will either go up or will never reach the strike price that you sold it at. If you’ve identified a stock that is trading within a range then this is the ideal stock to sell puts for.

    For example, if Intel (INTC) which is currently trading at $21, and has always traded between $20 and $30. Intel has never ever gone under $20,this means you can sell a monthly put with a strike price of $19 which expires at the end of the month, you’ll receive $0.20 cents per contract. If you buy one contract you’ll receive $200 for taking on the risk, if you buy 3 contacts you’ll receive $600.

    Setting up the Strategy of Selling Puts

    The key to making profits using this strategy is picking stocks that trade within a range, the stock must be fundamentally strong and pay a dividend, the reason for this is if you’re ever assigned this stock you can be confident that it will never crash and you can enjoy receiving dividends, you could take this trade one step further by selling covered calls to get assigned out of the trade, when you sell a covered call you’re doing the exact opposite as selling a put. If Intel (INTC) is trading at $23 and you sell a covered call with the strike price of $30 you’ll receive a premium of $0.30, if INTC does not reach $30 you get to keep the premium, if it does reach $30 you’ll have sold your position at a profit.

    Stock That You Can Use to Sell Puts

    The basic idea behind this strategy is that you sell puts on stocks that you don’t mind owning, the stocks should be fundamentally strong, and pay dividends; they should have a strong history of performing well during bull markets and maintaining their price during bear markets. Some of the stocks that you could consider are the following

    1. McDonalds (MCD)
    2. Coca Cola (KO)
    3. Intel (INTC)
    4. Microsoft (MSFT)
    5. Pepsi Co (PEP)
    6. Visa (V)
    7. Johnson & Johnson (JNJ)
    8. Kimberly Clarke (KMB)
    9. Kraft (KRFT)
    10. Home Depot (HD)
    All these stocks are fundamentally strong and pay a good divided if you’re assigned. The strategy that you need to follow is as follows.

    1. Find a stock which is fundamentally strong and pays a good dividend that you don’t mind owning
    2. Find trading ranges for these stocks
    3. Sell puts with strike prices just outside the support
    4. If the strike price is not met you keep the premium (monthly income)
    5. If strike price is met you’re assigned the stock to hold and receive dividends
    6. You can sell covered calls to get out of the positions

    Risk Management When Selling Puts

    By using this strategy a lot of investors might argue that you hold high risk positions, this is because you’ve sold a naked put. There is a risk that you’ll be assigned a stock however you know from your analysis that you’ll be holding a fundamentally strong company that pays dividends. You can continue to sell puts to get into the stock at a decent price and if you do reach the support there is a good chance that the stock will trade to the resistance making you a profit.

    Example of Selling Puts

    You identify that Intel (INTC) has a trading range of $20 and $30, the stock has fallen sharply from $25 to $22 in the last few weeks as the market corrects, there is no fundamental news that has occurred so it is declined due to the markets. Intel has a strong support at $20 and has not fallen under this price level for a long time. You set up the following trade in January:

    Sell to Open Intel Put Strike $20 Expires February with Premium $0.2

    You receive $200 per contract and you purchase 3 contracts receiving $600

    There are two things that can happen:

    If Intel does not reach $20 you get to keep $600 and do it all over again the next month.

    if Intel reaches $20 you’ll be assigned the stock at $20, each option contract controls 100 shares which means that you will own (100 x 3 x $20) $6000 worth of Intel Stock at $20 per share which is an excellent price to buy Intel. You know that this is a support and analysis suggests that the stock will rally to $30 eventually.

    Sell Covered Calls of Dividend Stocks

    If you’ve been assigned the stock position then you can sell monthly covered calls at strike levels you think the price won’t reach, you will receive a premium every time the strike level is not reached, if it does reach the strike level then you’ll get assigned out of the share while making a profit.

    The key to successfully implementing this strategy is finding a stock which is fundamentally strong and has an established trading range like Intel, if you can sell puts near the support and calls near the resistance then you can enjoy income all year round, if you do end up owning the stock then you can enjoy receiving a 4% dividend payment as of 2013.

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