As a way to make additional cashflow on my long-term stock holdings, I’ve been testing trading options. Specifically, I’ve been selling covered calls and buying puts (that I have the cash reserves to purchase) on stocks that I know and like. While my learning is still very new and my results are not material to my portfolio, I do see how this strategy can build into another source of income as long as I follow a few guiding principles. I’m excited to continue to test and learn, knowing I’ll win some and lose some, but overall looking for opportunities to increase cash flow on my long-term holdings.
Guiding Principles
Never put yourself in a position to lose.
I only sell covered calls and buy puts with money I am able to invest (not in my emergency fund). This may be conservative compared to a lot of traders, but this protects me in situations where the market has a serious correction and several of my trades don’t work out. I would never be in a position where I need to sell additional assets or tap into my emergency fund to close out a loss.
Only trade options in stocks that I’d own for the long-term.
I only trade options in stocks that I am comfortable owning for long periods of time. Every time I buy a put I am comfortable with that put exercising and then my owning that put indefinitely. It puts me in a win-win position because the option doesn’t exercise and I keep my cash flow or it does exercise and now I got a stock at a price I’m comfortable with. There are ways to lose money in this (if the stock drops a ton lower than your strike price), but that’s why I only trade stocks that I like.
Keep it simple (stupid).
I’ve read ~20+ hours on trading options and there are some REALLY complicated trades out there, but simplicity works best for me. When I keep things simple, I can easily understand what my risk / reward is. The more complicated, the harder it gets to understand and therefore not for me. My favorite tactic is the wheel strategy in which you buy puts on a stock you don’t mind owning at a certain price. If it exercises and you own the stock, you start to sell covered calls at a price you don’t mind selling the stock. You repeat this over and over again. There are still ways this strategy doesn’t work (extremely volatile stocks), but overall has been a decent strategy for me in my early testing.
Looking forward to sharing more on my journey to learn how to trade options, but also curious if anyone else has had success learning in a way that doesn’t expose you to unnecessary risk.
