Using Option Premium for Cash Flow

Lately we’ve been using option premium for cash flow with an easy options trade for passive income. Here is our most recent post on RGR showing how we used puts to buy shares of the company. We currently hold 200 shares of RGR and so far we have worked our basis down to $33.66 per share.

Today we’re selling to open both a cash secured put option contract and a covered call option contract. If our call goes in the money and our option contract is called away we will still hold 100 shares of RGR. We’re selling to open these weekly option trades to reduce our basis on the shares we own. We’re happy to sell some of our position here at a profit, so we’ll get paid to make a promise to sell some of our shares at $40. With RGR trading in this price range we’re using option premium for cash flow.

With our basis on RGR standing at $33.66 per share we can sell to open the call at any strike above that and make money if our shares are called away. We chose the $40 strike because it’s close enough to the money that we’ll generate some solid premium. It’s also not in the money yet, so there’s a good chance the contract will expire worthless out of the money. That means we’ll keep both the premium and our shares, so we can sell another covered call on these shares again next month. We sold to open the $40 call option for the 3/21 expiration date and brought in $0.70 in option premium. Using option premium for cash flow this way also helps reduce our basis on the shares we own.

Although we own 200 shares we’re only selling one covered call because we don’t want to sell our entire position. If RGR runs up through our $40 strike we can close the contract and roll it to a higher strike. We could also have our option contract called away at a profit.

With RGR trading just under $40 per share we’re happy to buy more shares in this price range. We sold to open the $40 put option contract for the 3/21 expiration date for $1.25. This easy options trade generates passive income for accredited investors and reduces the basis of shares we own. If RGR stays below $40 per share we will buy the shares and then sell the $40 covered call option. So now we have a covered call and a cash secured put option contract active for the 3/21 expiration date, both at the $40 strike. That gives us premium on both sides of the trade.

Weekly Option Trade Recap

We sold to open the $40 covered call for $0.70. We also sold to open the $40 cash secured put option strike for $1.25. Both contracts are for the 3/21 expiration date. By using option premium for cash flow we were able to reduce our basis to $32.69 per share. With RGR trading at $39.62, we’re happy with our position.