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How To Generate Income From Stocks You Don't Own

What is the catch or does it sound too good to be true? There isn't a catch, but there is risk involved.

In my last article, I illustrated generating additional income from your stock portfolio by selling covered calls. In this article, I will explain a method that isn't common, but savvy investors use it to generate income while waiting for a stock to reach its desired price. Have you ever said, "if stock XYZ falls under $20, I will buy more?"? How many times have you dollar cost averaged down or up from your original share price? How many times have you waited for a stock to decline before purchasing? If any of these common themes in investing sound familiar, I will introduce a method for generating income from shares while you wait for your desired price by selling puts. I will also reveal a recent put option I just sold on one of my favorite growth stocks.

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First things first, and I need to explain what a put option is. A put option is basically the opposite of call options, which I discussed in my last article. Put options are contracts that give the owner the right to sell a specific amount of an underlying security at a predetermined price within a specific time frame. I am going to focus on selling put options as this is the only method that I utilize puts. Please keep in mind there are different ways to utilize options, especially puts. Before implementing selling puts into your investment strategy, I suggest doing a fair amount of research and making sure that you understand every aspect. I will link a video from the Everything Money channel on YouTube here, where Paul Gabrail does an excellent job of breaking down puts and calls. While reading this article, please keep in mind that I only sell put options on stocks I want to own at a lower price from where they currently trade.

Just like call options, put options have the same main components: the option expiration date, the strike price, and the last/bid/ask price. In the realm of stocks, 1 option contract is the equivalent of 100 shares.

  • Expiration Date
    • This is the date when your option expires. You must either sell or exercise your option by this date.
  • Strike Price
    • The strike price is the price that you agree to either buy or sell an equity for at a later date which is defined by the expiration date
  • Last / Ask / Bid
    • This is what the option contract is currently trading at on a per-share basis
    • If you see .03 you must multiply by 100 as the option contract is for 100 shares, so if you see .03 on the ask it's the equivalent of $3

Here is an example of selling put options. Company XYZ is a company that has been on your watch list, and it's almost in your buy range. XYZ currently trades at $20 per share, and you have said, if XYZ gets to $18 per share, I will purchase 100 shares. You have already determined that your personal purchase price to start a position in XYZ is $18. You can utilize selling a put option to generate income while waiting for XYZ to reach $18 and get paid to wait. You may be thinking to yourself, what is the catch or sounds too good to be true? There isn't a catch, but there is risk involved. I am going to walk you through this strategy with a put option I just sold on SOFI.

(Source: Yahoo Finance)

(Source: Yahoo Finance)

Above is the put option chain from SOFI Technologies Inc. (SOFI) expiring on November 5th, 2021. I currently have an equity position in SOFI, and I am very bullish on the future prospects of capital appreciation by owning shares of their company. I have outlined my investment thesis on SOFI in this article here. My average price per share is roughly $14.70 per share, and I have decided that if SOFI declines, I will buy more shares once it reaches $14.50 per share. Instead of waiting for this event to occur, I sold a put option to generate income and get paid to wait.

I selected an expiration date of 11/5/21, which was 28 days until expiration, with 20 trading days occurring from when I sold the put option. By selling the put option, I locked myself into an obligation to purchase shares of SOFI on 11/5/21 at $14.50 if SOFI is selling at $14.50 or lower. Here is where the risk comes as nothing is free in life, and there is always risk in investing. On 11/5/21, if SOFI is trading at $13, I am still obligated to purchase shares at $14.50 even though shares are trading for $1.50 lower than the current market price. If shares never decline to $14.50, the put option expires worthless, and I keep the premium I was paid. This strategy works for me because no matter what, I was going to buy shares at $14.50 anyway, so I would rather get paid to wait because once SOFI hit $14.50, I was buying more shares, so if shares continued to decline down to $13 I would have been in the red on those shares regardless.

At the time, shares of SOFI were trading at $16.23. I sold a put option with an 11/5/21 expiration date at a strike price of $14.50 for $0.38. I collected $38 in premium and kept $37.34 after the commission for writing the contract. I said to myself, I wanted to buy more SOFI anyway at $14.50, so why not get paid to wait? I am now obligated to purchase 100 shares on 11/5/21 if SOFI is $14.50 or lower. If SOFI never trades below $14.51, the contract expires, and I keep the premium I collected.

So why did I do this? I wanted to generate income from idle cash in my account. I am bullish on SOFI, and I picked a share price that I would want to own more shares at, and it also happens to be a price that I don't think will occur by 11/5/21. I am hoping that the option expires worthless, but if it doesn't, I am getting more shares of SOFI at a price I was going to pay anyway. If for some reason, shares go down to $13, I wouldn't be mad because I had slated cash to purchase more shares at $14.50 regardless of when that occurred.

I don't like looking too far out, especially around earnings season, because the investment thesis can change in an instant. 11/5/21 is before SOFI earnings on 11/10/21, so I was comfortable with the obligation date. I just generated $37.34 in income from pledging $1,450 for a month. I was paid 2.57% on my cash to guarantee that I would buy a specific number of shares on 11/5/21, and the best thing is, I would purchase the shares anyway. Instead of just waiting for shares to sell off to purchase more, I am now getting paid to wait.

I believe this contract will expire worthless, and I will keep the $37.34 in income, but I will be perfectly happy if it doesn't. I am operating on the premise that in a month, my obligation will end with shares trading above $14.50, and I can rinse and repeat the process. I plan to wait until after earnings and sell a put option on SOFI a month into the future. Selling puts on stocks you want to own can become a lucrative strategy to generate income. To keep the math simple, let's say I can repeat this strategy 10 times throughout the year with the same numbers. I would rinse and repeat utilizing $1,450 in cash to sell a continuous put option on SOFI. Over a year, if the option expires worthless each time I do this, I would have generated $373.40 in income from the options premium. This would be a return of 25.75% by just selling put options on a stock I want to own at a lower price.

There are many different ways to generate income in the market. I personally implement selling covered calls on shares of a company that I own to increase my income, and I sell puts on companies I want to own at a lower price to generate income. It doesn't matter what company it is, from SOFI to Apple (AAPL). If I determined that I wanted to purchase 100 shares of AAPL at $130, I could sell a put option for $1.01 or $101 before the commission and get paid to wait. If AAPL declined from $142.90 to $130 on 11/5/21, I would purchase the 100 shares for $13,000. I would be getting paid $101 to do so, which lowers my price per share to $129 from $130. I am a big fan of making your capital work for you and squeezing every last drop of income out of your dollar. I only sell put options on companies I want to own at a specific price that's lower than the current market price, and I only sell call options on stocks that I currently own. Please do your research before implementing an option strategy. My strategy of selling puts and selling calls fits within my overall investment risk tolerance. I have developed specific rules and criteria to follow.  

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