Generate Passive Income Selling Stock Options

To generate passive income selling stock options we want to use our capital effectively. That means getting a solid annualized return on the capital we risk when we sell cash secured put option contracts. It also means using covered calls to boost our return while we hold a company.

We currently own 200 shares of HHH in this portfolio and our current basis is $58.30 per share. As long as we sell our covered call above $58.30 per share we’ll make money on this trade. We’re in luck, because HHH is trading at $78.86. So we can sell the $80 call or the $85 call for some decent premium. If we get called away at $85 we’ll make the difference between the $85 strike and our $58.30 basis. That’s $26.70 per share. We’ll also make the option premium regardless of whether or not we’re called away.

HHH had their earnings call this week and we’re optimistic for the company to trade higher in the near future. We listened to the earnings call and we also read what some analysts have said. Here’s where we find that information. In short, we like the company, we like Bill Ackman, and we like the future prospects of HHH. So while we could generate passive income selling stock options at the $80 strike, we’re going to be less aggressive and sell the $85 covered call.

Weekly Options Trade

We sold to open the covered call at the $85 strike for the 3/21 expiration date for $0.60. Since we have 200 shares, that will reduce our basis by $0.30 down to $58 per share. If we’re called away at the $85 strike our basis on our remaining 100 shares will be just $31 per share. We’ll keep an eye on the trading price and come back to the trade when we’re nearing expiration. If HHH runs up we could let the shares go at $85. We could also roll the position to a higher strike that is further out in time. Using this method to generate passive income selling stock options means we’re holding a company we want to own and being willing to sell it at a price we’re happy to sell it.