When it comes to passive income, it doesn’t seem like there are many sources that are truly passive. Many of them require you to do a ton of work upfront before you see any potential rewards. If you’re like me and don’t have time to waste on a project that might not even be profitable, I have a solution for you: sell options for passive income.
Sellings options is a real hands-off approach to creating a steady stream of income.
If you’re not familiar with selling options, here’s a quick explanation of how it works:
Traditionally, when you buy an option, you are given the right to exercise it if it goes in-the-money by your expiration date. If it expires out-of-the-money, you lose that right to exercise it, as well the money you paid for that option.
When you sell an option, that entire process is reversed. Someone else is paying you for the right to exercise it. If it expires out-of-the-money, they lose the right to exercise it and you keep all of the money they paid for the contract.
But what happens if the contract expires in-the-money and the person chooses to exercise it?
Well, that depends on the type of option you sold them. If it’s a put that you sold them, then you’ll be forced to buy 100 shares of the stock from them. If it’s a call that you sold them, then you’ll be forced to sell 100 shares of the stock to them. Your trade price for the shares will be equal to the strike of the option you sold.
Now that we’ve gotten our refresher on the basics, let’s dive into how selling options trumps every other source of passive income.
Why passive income usually isn’t passive.
I’d like to start out by examining some of the more popular sources of passive income and show you why they aren’t so passive afterall.
Let’s look at blogging or running a YouTube channel.
I bet you’ve seen tons of influencers making a killing from blogging or being on YouTube. What you don’t see is all the behind the scenes work that went into it. Did you really think it was as simple as create a killer piece of content, post it, and then rake in money while you sleep? I’m sorry I have to be that person, but no- it’s not that easy.
The first thing you’re going to need to do is come up with a really good idea that will make you stand out from others. Then you need to create content on a regular basis and start building an audience. That alone could end up taking you over a year to do successfully. Then if you did manage to build a big enough audience, you’d need to find ways to monetize your content. Basically, you’re going to have to work really hard for a long time before you see any type of money.
This next source of passive income is highly respected by many, but it’s not as passive as people make it seem.
I’m talking about real estate.
When people talk to you about real estate, they’ll tell you how your money will grow as the value of your property appreciates and you’ll have money coming in monthly from your tenants. What they don’t tell you is how much research you’ll have to put into finding a good investment property. You don’t want to go buying a property in a declining neighborhood or in an area where weather patterns can destroy it. Your investment should be producing money for you, not losing it.
They also forget to tell you the headaches that tenants give you. Toilet’s clogged? Guess who’s getting the phone call to fix it. They lost their job and can’t pay their rent, who gets stuck with the bill? Need to evict your tenant? That costs money too. Let’s not forget that if you have the wrong tenant, they can cause thousands of dollars worth of damages to the property. Landlord related issues will have you wasting a lot of your time and money.
Yet again it looks like we’ve found a popular source of passive income that isn’t so passive.
So what is it that sets selling options apart from the rest? Why is selling options one of the best ways to create passive income?
Why selling options is the best way to create passive income.
Getting started with selling options is quick and simple. All you need to do is find a strong company that you expect to continue doing well in the future. You can look at new companies that are growing (growth stocks) or you can look at companies that are already well established in their industry (blue chips). The type of stock you pick is entirely up to you. You just need to make sure you do your research on the company.
After you find the stock you want to sell options against, you either sell puts so you can potentially own the stock at a lower price, or you can buy 100 shares to sell covered calls. You could also use a more advanced technique known as The Wheel Strategy if you prefer to sell puts and covered calls. If you’re interested in learning about other options selling strategies, be sure to check out my guide on the theta strategies.
Everyone has their own preferences when it comes to selling options. I prefer to buy 100 shares and sell covered calls so I can profit off both the share appreciation and the premium from the short options. I like to think of it as a more efficient way to get the same benefits as owning real estate. Think about it, you can buy 100 shares of a stock with a lot less capital compared to putting down money on a property. If you’re selling monthly options, you’re getting paid a set amount of money on a monthly basis. You’re also benefiting from the share appreciation as the stock rises.
Risks of selling options for passive income.
This all sounds great, but what’s the risk? Your maximum risk is the amount of money you used to purchase 100 shares. If you did your research and own shares of a strong company, this shouldn’t be a concern for you. And even if something fundamentally changes about the company, you’ll likely have more than enough time to get out of your position with minimal losses because stocks tend to be very liquid. Ultimately, the risk doesn’t come from the strategy itself, it comes from your ability to pick a quality investment.
Don’t let that make you think you need to be Warren Buffett for selling options to work for you. Selling options is a very forgiving strategy. No matter what happens to the stock, you will always keep the premium of the options you sold. So even if you pick a bad stock that goes against you, the premium you’ve collected will offset the losses.
As you can see, selling options is a much better choice for passive income compared to blogging, Youtube, and real estate.
Let’s recap the benefits of selling options:
- The amount of time it takes you to get started depends on how long it takes you to do research to find a stock you like, and chances are you already have stocks you like in your portfolio.
- You need significantly less capital to get started.
- You’ll see the money flowing in as soon as you start.
- A few minutes every month is all the time you’ll need to maintain your income
Conclusion
Selling options is a great source of passive income because it takes less time and money to get started, you’ll know what’s at risk, and you’ll know how much money to expect. You control most of the process. In my opinion, it’s one of the easiest and stress free ways to get some passive income.
What are your thoughts on passive income? Did this change your opinion on blogging, YouTube, or real estate? Are you going to consider selling options for passive income? Make sure to let me know!
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