The best-kept secret for generating income from your portfolio is selling options.
Now, before you run away screaming because of the word “options,” you should know that selling options is a conservative strategy.
And it can create a meaningful income stream for you, amounting to thousands of dollars per year.
Let me explain.
Rent Stocks Instead of Owning Them
I’m a big believer in hanging on to quality dividend payers for many years. But you can also buy a quality dividend payer with the plan to own the stock for only a few months. During that time, you’ll collect the dividend and also sell a call option.
The buyer of the call option is betting that the stock price will go higher. As a result, the buyer has the right, but not the obligation, to buy the stock at a specific price from the seller.
For example, Microsoft (Nasdaq: MSFT) closed Friday at $52.64. You can sell the January $55 call for $0.88. That means the buyer of the call will pay you $0.88 per share, or $88 per contract because option contracts are sold in lots of 100 shares. You keep the $88 no matter what happens.
If by the third Friday in January (options typically expire on the third Friday of the month) Microsoft is still below $55, the option expires worthless and you still own your stock. If at any time before the third Friday in January Microsoft trades above $55, the buyer has the right to demand the stock from you at $55. It doesn’t matter if the stock is trading at $55.05 or $75. You will sell it at $55.
If you sell it at $55, you still made $2.36 (55 – 52.64 = 2.36), plus the $0.88, plus the $0.36 dividend, for a total of $3.60, or a return of 6.8%. Compare that to the 2.7% yield you’d receive for owning Microsoft for an entire year. In our example, you more than doubled the annual income in just two months.
And you can make this type of trade over and over again, collecting a year’s worth of income every two months or so.
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