Do you want to learn how to generate passive income with options trading? What if you could get to the point where you spend a few minutes trading options that have a high probability of winning, that if you are wrong you have a second chance, and all the while you generate consistent passive income?
I understand this sounds too good to be true, but I've been doing this for over 20 years and I want to let you in on "my secrets" that let me enjoy the freedom I have today. Today's article has a focus on beginners! I'm sharing my insights with you – no sales pitch, just valuable information for free.
Understanding Put Selling: Simplified
Before diving into put selling, let's discuss what a put does. In simple terms, a put option gives the buyer the right to sell a stock at a predetermined price. As a put seller, you receive a premium and agree to buy the stock at the specified price if the buyer exercises the option.
Selling a put involves receiving payment known as premium in exchange for agreeing to buy 100 shares of a stock at an agreed-upon "strike" price. The key is selling puts on stocks you're willing to buy at a lower price, so even if you are wrong, and the put sale loses you own shares of the company, Then you generate additional income through covered calls. I discussed covered calls here!
A picture is worth a thousand words, so let's look at an example. Assume we sold a $140 strike put on AMD (the red horizontal line below.) Let's assume we get paid $150 to sell this put. If AMD stays above the red line- 140 a share until the contract expires we keep the $150 and the put contract we sold expires worthless. If AMD goes below 140 we're agreeing to buy shares at 140.... Even if it goes down to 100, we're agreeing to buy them at 140 in exchange for that $150. There are ways to hedge, and ways to reduce your risk and we discuss these often in our discord.
The key to put selling and remaining as passive is possible is to sell put options on stocks that you are willing to buy at a lower price. You set a good until cancelled order on your put sale and you walk away! If the stock bounces your broker makes the trade for you, if the stock drops you get put 100 shares of stock and then you sell covered calls to create even more income. This is called a Wheel Strategy, GKT trades these all the time, check out our discord if you want more information.
Why Put Selling Works: A High Probability Strategy
Put selling, especially when done the right way, is a high probability strategy leveraging time decay, implied volatility, expected moves, technical analysis, and more.
Time Decay (Theta): Options lose value as they approach expiration. Time decay works in favor of the put seller, contributing to the option's decreasing value until it expires.
Implied Volatility (IV): Put selling benefits from selling options during periods of heightened fear or uncertainty when implied volatility is high. As markets settle, the likelihood of options expiring worthless increases.
Expected Move: Understanding the expected move and using it strategically enhances the probability of success in put selling. Smartly combining this with technical analysis, including moving averages and support/resistance levels, informs well-informed trading decisions.
Technical Analysis: The Chart is another valuable input we consider when trading. If we see Moving Averages these can be used as places a stock might reverse. Recognizing key support and resistance levels also helps us make informed decisions. .
Real Example: A Walkthrough of a trade setup on AMD
Listen, I realize all these words might be confusing. Let's look at the AMD example again and walk through this.
If we sell that 140 put on AMD and the stock is currently trading at 177 that is a 20% discount! People love discounts until it comes to stock trading, but this is why you combine math to help push through the emotional fears of trading.
See the chart below, we're agreeing to buy some AMD at 140, but how did I decide that's a good strike price to sell.
I used math! You might be saying, "but Justin, I'm TERRIBLE at math." Hey I'm not great at math either, but here's the thing the broker will actually do most of the work for you right here on the screen. Especially if you use Tasty Trade.
When you look at the options chain for AMD, you will see a graph of numbers that probably don't mean a lot to you.. But lets focus on a few key things and simplify this. The options chain can be intimidating at first, but GKT can help!
The probability of profit are right on the screen (I put red boxes around them) POP is short for "probability of profit", and P50 is short for "probability of hitting a 50% profit". So as you see below this put sale has an 88% chance of expiring totally worthless (POP) and a 95% chance of hitting a profit target of 50% (P50)!
Do you see that blue dotted line between 140 and 145 in the same image above, that is the standard deviation of the expected move. The orange line in the middle is the expected move of the stock during this time. This is all on the same screen. I know there's a lot in that picture but let's just focus on the basics here.
So we have a good probability of profit, our put's strike is one standard deviation away and we are over $10 outside the expected move of the stock!
What about implied volatility. Remember I said the more volitivity the better its to sell puts? You can see that too right in your broker! It's actually on the picture above listed as IV Rank, but Tasty Trade also graphs it for you. See the red and green lines below, I put a red square around them. The volatility is charted and you can see it's higher than it's have been in some time. Yet another check mark for taking this trade!
Put selling offers traders an exciting opportunity to build passive income. By understanding the fundamentals of this strategy, including factors like time decay, implied volatility, and technical analysis, you can navigate the market with confidence. When done right, this strategy creates a nice stream of income.
If you want more information you should join the GKT discord to discuss more and connect with like minded people who trade the stock market! I hope this article was valuable to you. We want to help educate and show you trading doesn't have to be complicated, and you can do this.
Happy Trading Good Kids!
Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!