Options Trading for Monthly Income

One of the premium features of Options for Rookies Premium is ‘Track that Trade’ – from entry to exit. That has already brought questions about how the entry point and the underlying asset should be chosen.

My thoughts on that are clear: I don’t have the ability to choose stocks that will perform as hoped. Thus, I trade index options. However, a recent post by Dan offers his advice on how to begin the stock selection process.

How To Find Good Monthly Income Vehicles

Many people spend lots of time researching for vehicles to trade. I like my students spending most of their time practicing and perfecting the various income strategies. Here is a simple 3 step process I sometimes use to find good candidates for monthly income trades like calendar spreads, credit spreads, butterflies, condors and covered writes.

#1 List 10 stocks you would be willing to buy 100 shares of for little Guido’s college fund. Typically these are good solid stocks you would buy in your retirement account.

#2 Filter this list by excluding stocks under $55. This gives you stocks with a bit more time premium.

#3 Filter the list again by only including the stocks with implied volatility levels between 17-27. This filters out many potential psycho stocks! This information is easily available from your brokerage platform.

Here is a sampling of stocks or ETF’s that have implied volatility between 17-27 and that are over $55:


This is not an exhaustive method, merely a simple one. The merits of this method is that it doesn’t require computer training or a Harvard education!


For readers who do not understand the suggested limitations, here’s an explanation. Please remember that Options for Rookies Premium is devoted to the education of rookie traders, and readers who have many years of experience know how to handle a wider array of variables. For the newer trader, using familiar stocks (or broad based ETFs/indexes) makes for safer (i.e., less risky) trading.

1) It is always a good idea to trade stocks you are willing to own. It is true that you can exit positions prior to expiration and not find yourself owning shares after being assigned an exercise notice on a short put option, but when screening for stocks, it’s safer to concentrate on stocks you would not mind owning.

2) ‘A bit more time premium.’ Why is that important? It’s not universally important. However, if you are trading a small account and thus trade few option contracts per position, commissions can play an important role in your ability to earn money. Thus, if you are trading a one-lot, it is better to collect $200 to $400 for that trade, rather than $60. It’s just a matter of spending less on commissions. [When using some brokers, this is not an issue]

3) The advice to select less volatile stocks is not going to be accepted by all traders. The idea behind this advice is that it reduces the risk of wild price swings and gives the trader a significantly better probability of earning a profit. Note: We are talking about ‘income producing’ strategies. That in turn means that we are selling option premium and own positions with positive time decay (theta) and negative gamma.

The trade-off for this extra safety is that premium collected is reduced. Low volatility stocks have lower option prices than more volatile stocks. To me this is a good practice – but it truly depends on your comfort zone. Rookie traders who are near the beginning of their careers, must gain valuable trading experience to avoid blowing up an account. Less risky trades help accomplish that goal.

I understand that you feel confident and want to earn more money. I don’t blame you – but you get only one chance to be a rookie, one chance to develop good habits, and it would be a shame to go out of business before you get a chance to see how well you can trade and manage option positions.

NOTE: Dan’s thoughts represent a reasonable way to approach trading income strategies. As always, the trader must feel comfortable when following any advice.


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3 Responses to Options Trading for Monthly Income

  1. Wayne 03/31/2011 at 9:22 AM #

    I have a question about selling IC in a low volatility environment.
    I was attending this webinar where the speaker was talking about how it’s ideal to open IC in a high IV environment, because I can collect a higher premium.
    Of course, you collect a higher premium when the IV is high, but that also means the market is more volatile, so more likely for the short strikes to come to risk.
    So, I asked the speaker (but my question not answered) that is it actually just as good to sell IC when the IV is low. Then I collect a smaller premium, but I will be at better peace because I know that the options is priced such that the low IV is saying it is less likely the market would move violently, threatening the short strikes. So, isn’t this low IV just as good? (I.e. higher IV means higher risk higher reward; but, low IV simply means lower risk lower reward)


    • Mark D Wolfinger 03/31/2011 at 9:53 AM #


      Yes, you collect the higher premium when IV is high. And I love selling at those times also.

      However, you point out the obvious. The market is also more volatile, and that adds risk.

      The idea behind selling when IV is high is simply this: Many times IV gets too high – much higher than the actual realized volatility in the marketplace. That means the options will turn out to have been more expensive than they should have been (but we only learn this in hindsight). If you catch the top, or near the top in VIX when selling, then you have a great premium in a market that is not as volatile as anticipated. That’s the plan. Obviously the market can get more volatile and VIX can increase further. That’s the risk.

      BOTTOM LINE: Neither high nor low is ‘good’ by itself. What is good is this: The market’s realized volatility in the future (between trade date and the date you exit) is LESS than the implied volatility that you sold. We never know the future, so when selling low IV, the chances are that it will not go lower. But if the market is truly non-volatile, that’s more likely to provide you with a profit. A smaller profit.

      When IV is high, the profit potential is greater. But if the market is volatile, especially unidirectional, losses can mount quickly.

      You see both sides of the story. They are both reasonable. But you must recognize that is not the volatility that you collect that is important. It is just how volatile is the future going to be – and we can only guess at that. If you anticipate an increase, then IC is not right. If you anticipate a decrease, then IC is good and should be profitable. If you are like me, and don’t know the future, then you make the trade when you are satisfied with the combination of premium available and your willingness to take a position that can lose money if volatility increases.

  2. Tristan Grayson 03/31/2011 at 7:49 PM #

    For readers interested in Mark’s books (which should be all readers, IMO), Barnes & Noble has a 50% off coupon that expires 4/3/2011: http://slickdeals.net/forums/showthread.php?t=2800433 . I just used it to order “The Rookie’s Guide to Options”.