In yesterday’s Cash Course, we talked about how to sell put options for income.
It’s hands down my favorite trading strategy because of its high statistical probabilityfor success.
Remember, 90% of all options contracts expire worthless, meaning it literally pays to be an option seller.
Plus, this strategy allows me to do something I don’t attempt with any other trading strategy I teach – go after the best high risk/high reward trade setups in the market.
Today, I’m going to show you some real results from this strategy using real trades that my students have used to generate weekly income selling puts.
Why We Sell Puts
If you missed yesterday’s lesson, I recommend catching up, but I want to give you high-level review before we dive in…
Selling puts is simple.
First, pick a stock you think will move sideways or higher. Then, sell a put option with a strike price below the stock’s current price, and collect the premium. If the stock rises or stays the same, the option expires worthless, and you keep the premium. If the stock drops, you can either buy back the option, accept the stock at a discount, or roll out the trade.
Selling puts lets you generate steady cash flow, but it requires margin (or enough cash in your account to cover if you’re assigned shares). You can sell puts on strong, volatile stocks you’d like to own at a discount – so you cangenerate passive income while waiting to own great stocks at discount prices.
Now, one of the things we look for are “expensive options” – which I point out regularly here at Patterns & Profits.
And as I told you on Tuesday, we find expensive options by looking at volatility – and we can do that in two ways.
First, we look at Implied Volatility – a measure of the likelihood that an individual securitywill make a big move.
But when market volatility is high as measured by the VIX (which has spiked twice in recent weeks), options overall become more expensive.
Remember, the VIX is a measure of the likelihood that stocks will move. The higher the volatility, the greater chance stocks will see big swings – and that makes the options more expensive.
With the dysfunction in Congress and yet another fight over a government shutdown looming, and any uncertainty will likely put pressure on the VIX – and juice your income.
Cash Flow Trader Review
Today, I want to show you a series of trades I recommended to my Cash Flow Trader subscribers to show you how easy (and lucrative) it is to trade this way.
Let’s get to it…
Back in April, market volatility spiked, giving us three great opportunities for income. Here are the results…
Trade #1: Pinterest Inc. (PINS)
Open Date: April 12
Option: PINS May 17, 2024, $29 Put
Price: $0.75
% Gain: 2.5%
Our first of two trades in April on Pinterest Inc. (PINS) was actually recommended on March 25.
As with every recommendation, we used a limit order to get into the trade at our predetermined price – and not a penny less.
It took until April 12, but the trade eventually came to us and we got our fill at $0.75 – without compromising on price.
As planned, our puts expired worthless, and we kept the premium for a 2.5% gain against our risk.
Trade #2: Wolfspeed Inc. (WOLF)
Open Date: April 1
Option: WOLF May 3, 2024, $23 Put
Price: $1.15
Risk: $2,185
Gain: 4.8%
On April 1, IV was spiking on semiconductor manufacturer Wolfspeed Inc. (WOLF). And according to my research, the “Buy Zone” was below support at $23 – giving us a high statistical probability of success for this trade.
We collected $1.15, or $115 per contract and the option expired worthless on May 3, handing us a 4.8% gain on our risk in just over a month.
Trade #3: Pinterest Inc. (PINS)
Open Date: April 8
Option: PINS May 10, 2024, $31 Put
Price: $1.00
Risk: $3,000
% Gain: 3.2%
We took another shot at PINS on April 8 with the May 10, 2024, $31puts.
Again, just over a month later, our options expired worthless.
We kept 100% of the premium paid, resulting in a 3.2% gain against our risk.
Overall in April, we collected $290 on a one-contract basis – perfect for consistently building wealth, even with a small account.
With a larger account that can accommodate more risk, you could sell multiple contracts to bring in even more income…
If you sold five contracts, you would have collected $1,450 in options income in April.
And if you sold 10 contracts, you would have collected $2,900.
Whatever you choose to do, make sure your position size is in line with your risk tolerance.
Each week in Cash Flow Trader, my students get my best high-probability/high reward put-selling recommendations to help them grow their wealth, one trade at a time.
Tomorrow, we’ll dive into the mailbag (and I’ll deliver the next episode of my podcast).
If you’ve got additional questions about selling puts for income – or anything else – you can ask me right here.
Good trading,
Tom Gentile
America’s Pattern Trader