Are you thinking of selling put options for weekly or monthly income? If so, you came to the right place.
Selling put options is different than selling covered calls, however, both carry about the same risk, and are safe ways to generate income. But, what if you wanted to generate weekly or monthly income from equities you don’t already own? Selling put options could be the answer.
Indeed, one of my favorite trades is selling weekly or monthly put options for income in my portfolio. Selling puts on quality stocks, and ETFs (which I will now refer to as equity/equities) I would be happy to buy is one way to earn consistent weekly or monthly income.
How does selling put options for income work?
First, it’s essential to know what a put option is. A put option is a contract that gives the buyer the right, but not the obligation to sell something to the option seller, at a predefined price (the strike price), up until a predefined time (the expiration date).
For the put seller, they must buy the underlying security, from the put buyer (should the put buyer decide), at a specific price, at any point until the contract expires.
As a result, put option sellers can generate consistent weekly or monthly income on underlying security they think will stay above the strike, on or before expiration.
Investors sell put options on various underlying securities, expirations, and strike prices. For example, some get sold with expirations on Monday, Wednesday, and Friday. And, other put options expire on Fridays, while traditional, monthly put options expire on the third Friday of each month.
Fictitious Put Option Example
For example, let’s take Jimmy, Sally, and a pound of beans.
Today, beans cost $10 a pound.
Jimmy has a truck full of beans and worries the price of beans will go down over the next month. So, Jimmy wants to protect his investment in beans.
On the other hand, Sally isn’t worried about the price of beans. She thinks the price of beans will be about the same or higher next week.
Jimmy buys a contract from Sally – a put option. The contract is for Jimmy to sell her 100 pounds of beans for $10 a pound, if he wishes, at any point until the contract expires, next month. The cost of this contract would be $100. Both agree, and Jimmy pays Sally the $100 fee for this contract. The $100 is the income (option premium) that Sally gets to keep, no matter how much the beans go up or down in value.
Fast forward to next month…
Fast forward to next month, and a pound of beans now costs $9. Jimmy will now sell a pound of beans to Sally for the contracted rate of $10.
Remember, this contract says Sally must buy a pound of beans from Jimmy for $10 if he requests it before the contract expires. Indeed, this is true even if the price of beans goes to $0.
What if beans cost more than $10 a pound?
On the other hand, what if a pound of beans now costs more than $10? In this case, the put option contract is worthless, but Jimmy’s investment in beans is secure. Regardless, Sally gets to keep the income (option premium), and Jimmy keeps his beans, every week and every month.
Who would you rather be? Jimmy, or Sally?
All options have rights and obligations. For example, those who buy put options have the right to sell the underlying equity to the seller, at the strike price, at any point before the contract expires. In exchange, the option buyer pays the seller an option premium (income). And, this premium is guaranteed income that the put seller gets to keep, every time they sell options, weekly or monthly. Yes, you can repeat the trade, again and again, week after week, month after month.
Things to know about selling puts to generate income
Like any investment, you’ll need to know some basic things about selling put options for income. In particular, it’s important to understand the mechanics, rights, obligations, and overall risk.
What do I need to sell put options?
To sell put options and generate weekly or monthly income, you will need to have collateral. Indeed, collateral will be in the form of cash or margin in your brokerage account. Remember, the put option seller agrees to buy equities in the future. So, the brokerage needs to have an ample amount of collateral to ensure the put seller can afford the purchase.
For example, if you want to sell 2 weekly put options a month on the SPY, you’ll need to be able to buy 200 shares of the SPY in your brokerage account. Conversely, if you want to sell 5 put options (and earn 5x the money), you’ll need to have enough cash or margin available to purchase 500 shares of the SPY in your brokerage account.
Put Option Strike price
The strike is the contracted price that you, the weekly (or monthly) put seller will buy the equity at (stock, or ETF), should the equity be below the strike at expiration. In Jimmy and Sally’s example, $10 is the strike price.
Option Expiration date
The expiration date is the last date the buyer can purchase the equity (called exercising) from you. Generally, put options expire on the 3rd Friday of each month. However, some put options expire weekly (on Fridays), and some expire on Mondays, Wednesdays, and Fridays. And, some options expire as much as 24-36 months into the future; those are called leaps options.
Chances of Profitability
Did you know that millions of options contracts trade daily? And did you know that a significant portion of those will expire worthless? In other words, the option sellers get to keep all the premiums while the buyers lose all their money. When trading put options, investors cannot overlook chances of profitability. Options-friendly brokerages will display the chances that your put option will be profitable. Option sellers who target 75-85% chances of profitability will more often than not, have the option expire workless, and they keep all the premium.
In the above example (left) I entered a sell order for a Microsoft put option with a $300 strike price, expiring May 6. For this, I could collect $10.85 in option premium or $1085 of income for the whole contract. But, take a look at the “profit probability” and “max return”. Notice how the “max return is just 49%? And the “profit probability” is 65%? Putting it differently, there’s a 35% chance this will go to zero.
But, 65% chances of profit isn’t enough. In fact, when it comes to chances of profit, it’s about the only time investors should be greedy. So, I tried a sell order for a Microsoft put option with a $285 strike, also expiring May 6. In this case, the premium is $5.80 but look at the “profit probability” and “max return”. And, there’s a 78% I’ll make a profit on this put option. And, if I sold the $280 strike, the profit probability goes up to 81%. So, the key is to take into consideration probabilities of profit.
How does selling put options work?
First, for each put option you want to sell, you will need to be able to buy 100 shares of the underlying equity. For example, if you’re going to sell 2 put options on the SPY, you’ll need to have enough collateral or margin to buy 200 shares of the SPY already in your brokerage account.
Second, you will need to determine the strike price to sell the put option. In general, I like to sell out-of-the-money put options as there’s a high degree of probability that the option will expire worthless. An “At the money” put option means the underlying equity and put option strike is essentially the same. By contrast, an “Out-of-the-money” put option means the strike price is lower than the underlying equity. And when it comes to selling put options, a lower strike means a lower premium. But, the tradeoff is that you get a higher chance of it expiring worthless.
Examples of “At the Money” and “Out-of-the-Money” put options
Today, the SPY is currently trading at $445.58.
A strike price “At the Money” would be $445.
Conversely, an “Out of the Money” strike price would be $444 or lower.
Last, there’s also another type called “In the Money”. Using the same SPY ETF above, an “In the Money” put option is one that has a strike price of $446 or more.
Related read: 19 Blue Chip Stocks for Incredibly Reliable Dividends
How much income can you make selling weekly put options?
In general, you can earn anywhere between 1 and 5% (or more) selling weekly put options. It all depends on your trading strategy. How much you earn depends on how volatile the stock market currently is, the strike price, and the expiration date. In general, the more volatile the markets are, the higher the weekly and monthly income you’ll earn from selling put options. Conversely, when the markets are calmer, you’ll have to start selling options closer to the strike and/or with a further expiration date to get a higher return.
Notice in the Microsoft 285 Strike Put example above how the option price went up 100% in one day? In other words, if I sold this option yesterday, I would have made half as much in income. Why? Volatility went up, and the stock is down about 3% today. And stock prices have an inverse reaction to put option prices.
To give me the most amount of consistent income, consider selling put options slightly “Out of the Money,” with an expiration of 3-6 weeks out.
What are the risks in selling weekly or monthly put options for income?
First, you must remember that by selling weekly or monthly put options, while you get to keep the income, you agree to buy the underlying equity should the put buyer wish, at any point, until expiration.
The risk in selling put options is that you might end up buying equity for less than it’s worth. Indeed, you need to be sure that whatever you are selling a put on, that it’s a quality stock or ETF that you’d be happy to own today, at the agreed strike price. Sure, once you own it, you can do whatever you like. For example, you can keep it, or generate additional income by selling covered calls on it!
Related read: These 25 Millionaires Reveal Their Top Money Secrets
For example, today (May 18), the SPY is trading at $415.17. You decide to sell a weekly or monthly put option with a strike of $415 that expires May 28 and collect $4 of income (option premium). Then, at expiration, let’s say the SPY is trading at $414. In this case, you’ll have to buy 100 shares of SPY for $415. But, don’t forget, you’ll already have collected $4 (times 100) for the put option itself! Regardless, in this case, you still made a profit.
To be sure, it’s essential to be clear on your rights and obligations of selling weekly put options. Namely, if you get exercised, you’ll have to buy 100 shares X the number of put contracts you’ve sold of the underlying equity.
Another example of selling put options for income
Let’s consider an example of selling weekly put options for income.
As of today, May 16, the AAPL is trading at $126.62. The $123 put option expiring July 2, is currently being traded for $3.00.
What does this mean? If you sell one AAPL weekly put option at a $123 strike with an expiration of July 2, you will generate $300 in income that’s yours to keep! Best yet, if you want more guaranteed weekly income, sell more than one contract. But remember, you must be able to buy 100 shares * the number of put option contracts you sell.
Let’s examine the following scenario (#1)
Today, May 18, the SPY Trades at $415.17
Then, you sell 1 weekly put option, out of the money ($415 strike) that expires July 16 and you get to collect $1098 of income.
Remember, you need to be able to buy 100 shares of the SPY at the strike price. That’s $41517.00 in case you are exercised.
Weekly Put Option Income Collected
Right off the bat, you’ve earned $1098 by selling the put option. Indeed, that’s the option premium (income) you get to keep. Moreover, it lowers your cost to buy the SPY by $1098, should the contract gets exercised.
On July 16, if the SPY trades less than the strike (I.e. $414), your contract will be exercised. Yes, you’ll have to buy 100 X SPY shares for $415. Is this bad? Well, consider that you collected $10.98 in income per share ($1098 total). So, yes, you’ve lost a little on the purchase, but the income (option premium) is yours to keep!
Crunching the numbers
Consider that the SPY is $414 on July 16. And, you bought 100 shares of SPY for $415 each. In this case, you’ll have a paper loss of $100 ( $1 times 100) on the SPY. However, you still keep your $1098 option premium income, for a total profit of $998. Not bad!
Put selling scenario #2
Using the same SPY from scenario #1, today, the SPY trades for $415.17. You sell 1 weekly put option contract, out of the money ($410 strike) that expires July 16, for $9.34 ($934 of income). You’ll need enough collateral to be able to buy 100 shares of the SPY at the $410 strike. The total outlay would be $41,000.00, should the contract be exercised.
And like before, you’ve earned $934 from selling the put option. Indeed, that’s the put option income you get to keep. Also, don’t forget, it lowers your cost to buy the SPY by $934, should you be exercised.
Then, on July 17, if the SPY trades at $415. Note that this is higher than the strike price on your put option. Your put option contract expires worthless, you don’t need to buy any shares, and you get to keep your income.
Crunching the numbers
You sold an out-of-the-money weekly put option and received $934 of income (Option Premium).
Then, on July 16, the SPY is now trading for $415. You get to keep all your money and don’t need to purchase any shares.
Considering over the past 90 years, the annualized rate of return of the S&P 500 is 9.8%, I think this example of selling put options is a clear winner!
But, here’s where it gets even more interesting. When selling options, don’t forget that at expiration, you can just sell another put option for the next month, and that income is also yours to keep. Rinse and repeat!
Effects of Taxation on Selling Put Options
In the United States, options premiums are short-term gains. A short-term gain is a profit you earn by holding property for less than a year. Also, the gain gets taxed as ordinary income. By contrast, in Canada, it’s generally considered a capital gain.
Related read: Stocks Vs. Options – What’s Right for You?
Is selling put options for income profitable?
Selling put options is a guaranteed way to earn weekly or monthly income, and yes, it can be very profitable, month after month. The key is to remember to sell put options on only high-quality equities or ETFs that you would want to own.
My favorite equities to put options on are the SPY (SPDR S&P500 ETF), and large, quality companies such as Apple and Google. Indeed, over the long term, these are high-quality companies whose stock prices generally move upwards.
However, you should have a plan B in case you get exercised, and forced to buy the underlying equity at a loss. In the SPY scenario above, if it dropped to $410 at the time of expiration, and you had to buy it at $415, what could you do? Well, you could sell the stock at a loss and simultaneously sell another put option, perhaps a month out to recover the loss. This is known as rolling an option.
Related Read: How To Invest In Dividend Stocks For Income
Selling Weekly Put Options for Income
Generally, options expire on the 3rd Friday of each month. However, many stocks and ETFs now offer a wider range of expiration dates. For example, the SPY has options that expire on Mondays, Wednesdays, and Fridays of each week! In other words, you could start selling weekly puts for income, as much as three times a week, every week! To be sure, considering the short time duration, it’s important to note that the premium income generated from selling weekly put options (less than a week out) might not be “exciting”.
Can you lose money selling weekly put options?
You will never lose the income from selling weekly put options. To be sure, the income you receive from selling puts is guaranteed. However, if you get exercised, AND you sell the equity at a loss, then yes, that might incur a loss. For example, let us say you sold a $415 put on the SPY. It expires July 16, and you collect $900 ($9 a share). Then, on July 16, the SPY is trading for $400. In this case, you’ll have to buy 100 shares of the SPY at $415, even though they are worth only $400. That would be a $1,500 loss if you sold your SPY shares. But again, the income of $900 helps offset the purchase.
So, just like having a home budget where you track your income and expenses, it’s essential to keep track of your profits and losses from selling put options.
Frequently Asked Questions (FAQ)
The only thing that is bad about selling put options for income is that you may lose money if the underlying equity dips below the strike price. However, you do collect the income as a result. For this reason, when selling put options, its always a good idea to have your plan B. For example, if you get assigned, you can always start selling covered calls!
At a minimum, you will need a brokerage account, with options trading (You might need to apply to the brokerage for selling puts.)
Anyone seeking additional income from their portfolio can consider selling cash secured puts.
Selling naked puts involves selling an option on a stock or ETF that you don’t already own. Rather, you’re using the cash and/or margin in your brokerage account as the security.
A poor man’s put is also known as a credit spread. In this case, the “poor man” either doesn’t have the funds to purchase the 100 shares of the equity, should he be exercised. In this case, the “poor man” sells a put option and then buys one at a strike price slightly further out-of-the-money (for less than the put he sold). The “poor man” gets to keep the difference, known as the credit. The risk is the difference between the strike prices. A credit spread (or poor man’s put) offers less downside risk and requires less money upfront, but the reward is less. Also, selling credit spreads will be for another article.
As soon as you sell your put, the income (option premium) gets deposited into your brokerage account. Generally speaking, you can do whatever you want with it.
Financial experts agree that selling puts is about as risky as owning the equity outright. It’s safer because the income (option premium) lowers the cost of the equity should the contract be exercised. However, you must be ready to buy the underlying equity should the contract be exercised.
You can sell weekly puts, however, just be aware that you will collect more income, the further into the future you sell the put.
In my opinion, selling puts on high-quality stocks, and index ETFs that you would be happy to own can give you the best consistent return.
The aim of this website isn’t to provide investment advice; instead, it gives you the tools and knowledge to start selling puts.
An “Out-of-the-money” put option means the strike price is lower than the underlying equity.
An “In the money” put option means the strike price is higher than the underlying equity.
An “At the money” put option means the strike price is about the same as the underlying equity.
Traders sell put options to earn weekly or monthly income on stocks, ETFs, and futures. When traders sell the put option, believe the underlying stock, ETF, or futures contract will go up in value at expiration.
The risk in selling put options is that the underlying stock, ETF, or futures contract will be below the option strike price at expiration. As a result, the trader will have to buy the underlying security for more than it’s worth.
Buying an out-of-the-money call is a gamble that the underlying stock, ETF, or futures contract will end above the strike at expiration. And even if it is, it’ll have to be higher than what the trader paid for the call option. On the other hand, selling cash secured puts offers guaranteed income to the seller, no matter what happens to the underlying security.
Selling put options can be an excellent way to generate a little extra money every month or even every week. To be sure, any investment incurs risk, so don’t be too greedy! Regardless, the option premium you get by selling a put always helps offset any overall risk and always invest with the direction of an advisor.