Option Trading for a Living

Since we’re option trading for a living we need to be sure we’re appropriately allocating our capital every week. Today we have a put and a call expiring out of the money on OXY. Our put is at the $46 strike and our call is at the $51 strike. OXY is trading at $48.40 right now and we currently own 700 shares of OXY in this portfolio. Our current basis is $50.60 per share. Today we’re going to do some cash flow options trades to generate some passive income. This week our weekly options trades for passive income include selling to open a cash secured put option and a covered call option.

OXY has earnings next week. Here’s where we find that information.  Earnings announcements can increase the volatility of the trading price for a company, and we’re going to use that volatility to earn some premium.

This passive income strategy for accredited investors who are option trading for a living minimizes our risk a few ways. These trades reduce the basis of the shares we own. If we buy more shares with our cash secured put option contract we’ll lower our cost basis some more. And we’ll be buying the shares at our on-sale price for OXY. We would not be selling the put option contract here if that were not the case. If OXY goes up and we have some shares called away we’ll be selling those shares at a profit. We’ll also generate passive income from selling the stock option call contract.

Weekly Options Trade

Since our put at the $46 strike is expiring worthless out of the money today we’re selling that same strike for next week. We sold the $46 put option for the 2/21 expiration date for $0.35. Since one option contract is for 100 shares, we made $035 in passive income on this options trade. When we’re making trades for cash flow like this we want to be sure we’re getting an acceptable return on our capital. This trade is one week long, and there are 52 weeks in a year. That makes our time multiplier 52.

Then we look at the options premium as it compares with the strike price. This contract is for the $46 strike. The premium is $0.35. So we divide the $0.35 into the $46 strike and we get 0.0076. Then we multiply that by our time multiplier of 52 and we get 0.396. That’s an annualized return of 39.6%. Here’s the tool we use to help with that math.  Since we’re option trading for a living our target annualized return on trades like this is 20%+. This trade checks that box. We’re only selling to open this put option at this strike because we’re happy to buy more shares of OXY at that price.

Since our current cost basis per share of OXY is $50.60, we’re also going to sell a covered call on OXY at $51. That’s above our cost basis, so if OXY runs up and we sell our shares we’ll be selling them at a profit. We sold to open the $51 covered call option contract for $0.23. If OXY runs up through our strike we may roll the position to a higher strike price that is further out in time. These trades bring our basis on OXY down to $50.52 per share.