Using Options to Create a Steady Income Stream


Will there be a follow up to your Rookie's Guide To Options book that
will go over more advanced concepts? I'm thinking to describe about
various issues in managing a monthly income portfolio.



Thanks Art for leaving the above comment/question.

Writing a book is a big project and I have no plans for another at this time.

Monthly Income

Warning 1: 
Despite the hype that you find all over the Internet, a steady
income is not guaranteed.  Instant riches are not yours for the taking.  Please don't fall for that nonsense.  But, you can create a portfolio with a high
probability of consistently being profitable.  This is not a 'gimmie.' 
You must understand how options work and expend some time and effort learning how to manage risk.

Warning 2:  There is no 'magic' strategy.  Most of the hypesters buy iron condors, and if you are looking for an income stream strategy that's at the top of my list, buying iron condors is it .  But other strategies can be used to provide an income stream.  Here is where I differ from those who promise wealth for only $X per month: 

It's not the strategy that delivers the gains.

It's your ability to manage money.

It's your ability to manage risk.


If you are interested in managing a portfolio with the objective of earning monthly income, any of the premium-selling strategies can work.  Some methods are riskier than others (covered calls and naked puts) because they have very little protection against a market downturn.  If you have a market bias, you can be bullish (sell put spreads, write covered calls, sell naked puts), bearish (sell call spreads); or neutral (buy iron condors).

To generate those profits, you want to have a good understanding of how these strategies work.  The Rookie's Guide to Options teaches, in detail, how to use these methods.  There are also many blog posts right here that will get you off to a good start with these strategies.  Use the Lijit search above (left) to find appropriate posts.

I've also spent a good deal of time discussing risk management, so if you dig, you can find more than enough to get you off to a good start.  Take the time to learn, you don't have to begin trading tomorrow.

Warning 3. The problem with calling it an 'income' strategy, is that there becomes a 'need' to make money every month.  That's just not going to happen.  Taking extra risk in an attempt to squeeze a profit from a position that has turned against you and has made the chance of losing a bundle reasonably likely – that's a position you must learn to FIX immediately.  In fact, for best results, you don't want to be in the situation of owning such a position.  Perhaps a minor adjustment or two could have been made earlier to make the position safer to own.  But the bottom line is that 'needing' an income every month can result in too much risk taking.  If you avoid that mindset, you will make money over time.

Then there's the collar strategy. It eliminates all major downside worries.  The question is which options to trade and your willingness to accept smaller returns in the name of almost complete protection.  That's too conservative for many, but you must find your own comfort zone when seeking an income strategy.


4 Responses to Using Options to Create a Steady Income Stream

  1. Antonio 08/07/2009 at 12:23 PM #

    HI Mark
    This has been an interesting post.
    Let´s see if you can help me, and every people who wants to play with the TWS, in a practical way.
    To me the problem is that I´ve don all my paper with Think Or Swim, the platform is very good looking an easy for beginers. But the think is that Interective brokers is cheaper than the TOS and I´dlike to work with the ceapest because I think in selling options comissions are important.
    But the TWS is complicated, it´s difficult to set orders for options and the netx following of the positions.
    Please could tou explain in a post how do you work with the TWS, the way you set the panels… and some things like that?
    Thanks a lot,

  2. Mark Wolfinger 08/07/2009 at 12:31 PM #

    I don’t see how I can describe in detail, how to use IB’s TWS (Trader Work Station). I don’t want to appear to be promoting one broker over another. And it takes far too much time.
    The broker provides very detailed instructions. Yes, they are too detailed and it takes far too much time to read the instructions, but that’s the best way to learn.
    Here’s what you should do. Open a paper trading account with IB. Then practice using their platform.
    If you have specific questions at that point (instead of requesting a complete tutorial), you can call customer service, or write to me again and I’ll try to answer a specific question.
    You sat it’s ‘difficult to set orders.’ Are you trying to send an order to trade a single option, or a spread (what they call a COMBO)?

  3. Eric 08/07/2009 at 12:56 PM #

    Mark, I have a question about a set it and forget it strategy for High Div (5%+) stocks. If I were to sell deep in the money covered call LEAPS. I would effectively be giving myself leverage without using Margin. I would be holding the underlying, collecting the DIV, and I could use the deep in the money premium to invest again and again. Not sure what the money multiplier would be.
    What do you think? I am sure I am not the first person to ask this question.

  4. Mark Wolfinger 08/07/2009 at 2:32 PM #

    Yes you hold the underlying
    Yes, there’s a chance of collecting the dividend, but it is not likely.
    No you cannot use the deep ITM premium to invest.
    If, for example, you pay 100 for you stock or ETF, and write 2-year calls with a 70 strike price, you will not receive very much in time premium. This high dividend instrument is likely to be non-volatile, and the option may be just a few nickels or dimes over $30 (depending on how much time there is before ex-dividend date).
    If the price is 100 and IV is 20, and if the quarterly dividend is $1.25, then the LEAPS option with a 70 strike price is not worth very much over parity. In fact, when ex-dividend day arrives, my calculator tells me that the options should be exercised for the dividend.
    That means you will collect the dividend ONLY when the LEAPS owner makes a mistake and fails to exercise.
    This is an exercise in futility. If you have a real world example with real stock (ETF) prices and option prices that carry a high time premium, we can discuss further.