Easy Stock Trading Strategy
Lately we’ve been using an easy stock trading strategy to create passive income in our spare time. We’ve been selling cash secured put options just below the money and covered call option contract just above the money. The company we’ve been trading lately is UPS, Our most recent trades include a put at the $97 strike and a covered call at the $105 strike. Selling a put below the money and a covered call above the money gives us a trade on both sides. Here is the post that walks through how we entered those easy option trades.
We currently own 300 shares of UPS in this portfolio and we’ve worked our basis down to $99.11 per share. We had a put option at the $97 strike price that expired out of the money last Friday. So we keep that premium and we are not required to buy shares at the $97 strike. Now we have access to that capital again, so we’re going to sell to open another put option.
We like these types of trades because they’re easy to fill. While we do need to pay attention while we have them active, we don’t need to monitor them with the same intensity we would a credit spread. The down side with this type of trade is we may have to buy the shares at the strike price. As long as we’ve done our valuation of the company and we’re selling the put at a reasonable level, we should be ok with the position over the long term.
We have room for $60,000 worth of UPS in this portfolio and we currently have about half of that. We also have a put option at the $100 strike for the 9/19 expiration date. Including that put option contract, we have room for two more tranches. So now we’re going to sell to open another put option.
When we sell to open a put option we’re making a promise to buy 100 shares of the underlying company at the strike price on or before the expiration date of the option contract. We will not sell to open an option contract unless we are comfortable with buying shares of the company at the strike price. In this case, we’re happy to buy more shares of UPS in this price range. Our primary objective with this trade is generate cash flow with the options premium. So this easy stock trading strategy gives us some flexibility on the strike price.
Today is 6/30, and we’re looking at the 7/11 expiration date. We’d like our trade to go through the holiday weekend to capture the extra premium without having to put another trade on. That makes the trade 11 days long. Since there are 365 days in a year, that gives us a time multiplier of 33.
Now let’s look at the option premium. We sold to open the $99 put option for $1.02 per share. Since one contract is for 100 shares, we brought in $102. We divide the option premium by the strike price, so we take $1.02 and divide that into $99. That gives us 0.0103. We could do this trade 33 times in a year, so we multiply the 0.0103 by 33 and we get 0.339. That’s a return of 33.9% when we annualize it with this easy stock trading strategy. We aim for at least a 20% return when we sell to open a cash secured put option contract. This trade checks that box. Here’s the option contract calculator tool we use to do that math.
Let’s look at how that impacts our basis. We started with 300 shares with a basis of $99.11 per share. Then we subtract the $102 in passive income from this weekly options trade. That reduces our basis to $98.77 per share. Note that if the trading price of UPS drops below our strike price we have the choice of taking the shares at $99 or rolling the position.
Weekly Trade Recap
We sold to open the $99 cash secured put option for the 7/11 expiration date for $1.02 in option premium. Our primary objective with this trade is to create cash flow with options premium. We’re happy to buy shares in this price range. If this contract goes in the money we can then sell a covered call on these shares to create more passive income. This easy stock trading strategy of selling puts just below the money creates passive income from the options premium. If assigned, we then sell covered calls at the assignment strike price to create more cash flow until called away. Including our covered call at the $105 strike, we now have two option trades active for the 7/11 expiration date. Here is the template we use to track our basis.
