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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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