When devising an income strategy, Options are usually not included because they are considered to be a risky investments. However, in reality, they are tools that can help anyone get through the toughest financial scenarios if used correctly. They may let you easily manage your monthly payments. This article will serve as a guide; explaining how Options can be an important constituent of your income strategy. It will also share with you an “Options for Income Strategy” manual that will reveal 5 ways to incorporate Options into your earnings plan.
What exactly is meant by Options?
People go for investment strategies that almost guarantee a confirmed monthly source of income. Everyone has bills to pay whereas, sometimes our budget may get out of hand because there are so many expenses that suddenly pop up out of the blue; a sudden car break-down, deductibles that need to be paid, or extra medical expenses. Nobody can foresee what may suddenly offset our monthly budget.
Investing in stocks is a safe option for generating income. Therefore, it is important to learn how to invest wisely and reap the resulting benefits. However, before that, let us briefly discuss other income-generating options that people use.
Many of you may be familiar with the idea of investing a portion of your income to earn more cash in the form of dividends, property rent, or bonds. These are safe ways to go about investing a set amount from your income to earn more money and that too, at continuous, regular intervals. The only drawback is that some of these options require a person to put in a significant amount from his/her income to get the desired substantial returns.
An alternative to these is the “Options” strategy.
Options are tools that have helped many investors grow financially by allowing them to target stocks at the right price for buying or selling. They are contracts that allow the sale or purchase of something at a predetermined price within a specific period. Beneficiaries of Options have the right to make that sale or purchase at the agreed price, but they do not necessarily have to do so if they do not want to. It is basically, just an option they have.
There are two types of Options; the “Call Option” allows investors to buy the stock at the right price. Then, there is the “Put Option” that gives them the choice to sell their stocks at a certain price. These prices are referred to as the Strike Price.
Usually, sellers retire stocks that are not yielding many dividends and go for stocks with higher dividend yields to maintain or increase additional monthly income. This, in return, builds up an income portfolio through stock trading.
Usually, brokers provide information regarding the Options associated with different stocks. Such brokers are called Option brokers. Sometimes investors go for Put Options, and not Call Options. When stocks are getting sold, these investors buy the ones that are priced at a lower rate then. These investors do so because they have calculated that the particular stocks will see an increased dividend return in the upcoming future. Therefore, they act wise and buy as many of those stocks as possible.
How to go about knowing which stocks to buy or sell?
It is believed by players of the stock market that basic analysis and evaluation of ratios related to the financial position and stocks of each company is the ideal way to narrow down an investors` choices for the stocks to buy as a part of their income strategy.
Identifying the companies for buying or selling stocks based on the above-mentioned techniques seems like one of the best ways to maintain a steady income.
Furthermore, investors must not rely on guesswork or gut feelings or get swayed away by following other investors. Good investors usually have a foolproof, calculated and strategic Options plan that guarantees an additional source of income.
Options for income strategy, manual
To help you make your life easier, we have created a five-point manual that will help you get out the most from an investment:
- The first strategy is called the “Covered Call Writing” and is a very good Options strategy to adopt. It is also known as the “Buy-Write Strategy”. The strategy works this way:
A person holds on to the stock and simultaneously sells Call Options, to generate a good amount of profit. The person who is holding the shares is called the writer or seller of the Call Option and a buyer is given the option to buy the shares of stock at a certain price and by a specific date. If the buyer exercises his right, the seller is still not at a loss because he received the base price for the sold Option. However, if the buyer does not buy the particular stock within the defined period, and the price increases, the owner benefits from the hike. Thus, it is a win-win situation.
- The “Collar” is another Options income strategy that will make money for you. The strategy is designed to hold shares of an underlying stock while at the same time buying Protective Put Options. However, you are also selling Call Options against those same stocks and within the same expiry date. Both these Put and Call are out-of-the-money Options.
- “Cash Security Naked Put Selling” is yet another strategy to ensure a steady extra monthly income. In this strategy, you write a Put Option to get a specific strike price. This price must be such that you would be willing to buy the same stock at that price. So if you get a premium on the stock you sell, but do not buy the stock, you still earn the cash premium.
- The Iron Condor Strategy is made up of a single Put and a single Call credit spread. There is a limited risk involved. You get a limited but constant profit opportunity. This can take place when the assets involved are not volatile.
- “Credit Spread” strategy is another very effective income strategy option. In this strategy, a Call Option is obtained and then written off. On the contrary, a Put Option is also bought at the same time. As the stock prices increase or fall, the difference produces enough money for the investor in this type of Options trading.
Apply the strategies mentioned here and if you find them helpful, then do share them with others.