Income for a Beginner Stock Investor
Today we’re going to walk through a way to create income for a beginner stock investor. The company we are going to trade is BLDR. We currently own 300 shares of BLDR in this portfolio with a basis of $103.86 per share. Here is a link to the trade we did last week on BLDR. We sold to open a put option contract at the $90 strike price for the 12/19 expiration date. That put option gives us the obligation to buy 100 shares of BLDR when the option expires. That will happen on the third Friday of December. Since we want to own shares for the long term we’re happy to make this promise to buy shares at the $90 strike price.
We’re willing to allocate up to about $60,000 to BLDR in this portfolio, and right now we’re at $31,000. That gives us plenty of room for another tranche right now. We have that side of the trade active with our cash secured put option contract. BLDR has run up a bit this week with the talk of an interest rate but in December. Now we’re going to sell to open a covered call option contract. Our trading strategy is to sell put options below the money. If the trading price drops through our strike price we‘ll take the shares. Then we’ll stick to our trading plan and sell a covered call at our above the strike price we bought the shares.
We’re using the option premium on the puts and calls to create income for a beginner stock investor. We’ll let the time decay run it’s course. It’s likely that both the put option and the call option will expire worthless out of the money. Then we’ll sell to open another put option and another covered call option when these contracts expire. In this post we walk through how we use this options trading strategy to create consistent income in the stock market regardless of the price movements of the company.
We need to have enough risk tolerance with this strategy to handle the volatility. That means we need to be ok buying more shares at our put strike, or selling shares at our call option strike price. We could be buying or selling shares when each option contract expires. Since BLDR is a thinly traded stock the Chicago Board Options Exchange only offers monthly option contracts on BLDR. Weekly option contracts are not available on BLDR. When we trade options we’re just making a promise to buy shares of a company. It’s a company we want to buy at the price we want to buy it. We collect option premium when we make that promise to buy or sell shares at expiration on the third Friday of the month. We aren’t trying to do the guesswork involved with the options strategies of short term traders.
Some may be interested in how we selected BLDR for our passive income strategy. If that’s you, check out our first trade on BLDR and also the subsequent trades we did to create passive income.
Last Friday we sold to open the $90 put option contract for the 12/19 expiration date. That trade brought in $3.30 per share in passive income. We were also assigned 100 shares at the $115 strike price on Friday. That brought us to the 300 shares we have right now. Now BLDR is trading at just under $112 per share. We could sell a covered call at the $115 strike price to collect a healthy amount of option premium. But if we do that we’re more likely to have our shares called away because our strike price would be so close to the money. We’re going to give ourselves a little bit of a buffer here. We’ll generate some option premium for passive income. If BLDR continues to go up we’ll capture the gain by selecting a higher strike price.
On the price chart below we can see BLDR bounced up off the floor around $94 as we predicted in our last weekly option trade. There appears to be a resistance line that slows down price movements around $120. We can see how each time BLDR hits the $120 price level it pauses for a bit before it passes through. That happened most recently in October and also in June. We anticipate that it’s likely for BLDR to hesitate for a trading session or two if it gets close to the $120 level. Then it may run higher or it may pull back below our $120 strike price. If that happens it will give us more time for the contract to reach the expiration date. We aren’t seeing much of a support level at the $115 price, so we’re going to go up to the $120 strike.
We sold to open the covered call option for the December expiration date on the third Friday of the month. The $120 strike price gives us $2.54 per share. Since one option contract represents 100 shares, this trade gave us $254 in passive income for a beginner stock investor. This trade brings our basis on BLDR down to $103.01 per share. The risk on this option trade strategy is BLDR could run up well beyond our $120 strike price. If that happens we’ll have the obligation to sell 100 shares at $120 per share. Since our basis is $103 per share, we’ll make $17 per share I we sell some at $120 each. We could also roll the option position to keep our shares.
Rolling a covered call means that we could buy to close the covered call at the $120 strike price for the expiration date on the third Friday of December. Then we would look for a another option contract at a higher strike price that would give us enough option premium to cover what we spent to close our original option contract. That could mean going out at least one more month, and possibly several more months.
Let’s recap this profitable trading strategy that can create income for a beginner stock investor. We sold to open a put option contract. We collected option premium as passive income on that option trade. When the trading price of BLDR dropped through our strike price we bought the shares and then sold to open another put option contract. Once we had at least 200 shares we began to sell one covered call option contract each month. We only sell one covered call each month because we want to be sure we can keep some shares for the long term.
We feel that BLDR is a solid company and is likely to be trading much higher in the future than it is today. We’d like to hold some shares for that ride up. We also continue to sell one put option contract below the money each month. This way we collect option premium on both sides of the trading price. As long as our risk tolerance is sufficient to handle the swing if we need to buy or sell shares at the at the trading price we chose, we have a profitable trading strategy. There are only two types of options, put and calls, and we’re using both to create income for a beginner stock investor. We can do this type of trade on an individual company or an index fund.
This option trade brings our basis down to $103.01 per share. Here is the trade history template we use to track our basis. Here is the option contract return calculator template we use to help us pick our option strike prices and expiration dates.
