For those who do not know the basics of options, I would refer back to my other blog post, "Options Trading Basics," before moving on to this post, as this post will make much more sense with some background on options.
What is Progressive Passive Income?
Most of us have heard of passive income. This is income that requires pretty much no effort whatsoever. It wasn't until recently that I came across the phrase 'progressive passive income' and learned the difference between the two. Progressive passive income is income that is earned with a little effort, just enough effort that requires you to be there from time to time but isn't quite 100% passive.The most common way people receive passive income is through rental income, dividends, high yield CDs, and earning interest off of savings accounts. This is all income in which you do not have to do anything, but most of the time, the percentage gained on your capital is very minimal.My example of a highly progressive passive income requires some work to understand, but do not be discouraged. Great things don't usually come easy. So, what If I were to tell you that there is a way you can earn 5-10% a month or 50-100% a year on your capital? Why would you even think about keeping your money in a savings account that pays you half a percent per year? Inflation, on average, is 1-2% per year. You would then still be losing money.
https://fred.stlouisfed.org/series/FPCPITOTLZGUSAThis chart shows the historical data of inflation in the United States between the years 2000 to 2018.In this next section, I will tell you exactly how you can earn progressive passive income, and you can decide exactly what you want to do with your returns.
Selling Options for Cash
So how exactly can you sell options for cash? You might also hear people say selling options for premium, but for simpler terms, I decided to call it cash. When you sell an option to a buyer, they have to pay a premium for that contract. The premium is immediately deposited into your brokerage account. It can be used for reinvestment, or you can use that premium for spending money. I would suggest using that premium you receive to buy more stock, so you can build up your portfolio larger and eventually sell more options. But how exactly do you sell options?
Selling Covered Calls
This options strategy is a neutral to bearish outlook, and I will explain how it works. I first want to mention that there is a difference between selling naked calls and selling a covered call. When you sell a covered call, it means that you have 100 shares of the stock to cover yourself if the stock price happens to go over the strike price that you picked. Let me give you an example. It will be easier to understand. Let's say you own 100 shares or more of Microsoft with an average price of $190 a share, ticker symbol $MSFT.Let's say hypothetically $MSFT is trading at $200 a share on Monday, and you are thinking about selling a weekly covered call to make some premium and lower your cost on the stock. You believe that Microsoft will not trade over $210 by the end of Friday, so you sell you a $210 covered call that expires on Friday, which would be five trading days. As I am looking at it, the premium is $1.18, which means you will receive $118 right when you sell the covered call.So what is the best-case scenario and the worst-case scenario? Great question, thanks for asking! The best-case scenario is that $MSFT closes at $209 on Friday so that you get to keep your 100 shares, and you keep the premium you earned. But let me remind you that no matter what happens, you get to keep that premium you earned no matter what happens. The worse case in this scenario you still cannot lose money, and that is if $MSFT closes above $210 on Friday, and you have to sell your shares at $210, even if the stock price goes to $220. You still get to keep the $118 in premium, and your shares got sold for a 20-point gain because remember you owned $MSFT shares at a $190 average price.The trick with this strategy is it works when you sell covered calls against your positions that you are currently in the money on because regardless if the stock hits the strike price, you would still make money. If you have 100 shares of MSFT at a $200 average price and the stock is currently trading at $190, you have to be careful when selling covered calls with a strike price that is below your average. The reason for this is that you would have to sell your shares at a loss. You can still sell covered calls, but I would just pick a strike price that is far enough away from the current price so that the chances of it moving up that much are very meniscal.So this is one way of earning progressive passive income on your investments without really having to do much. There is another strategy that you can use to earn progressive passive income without actually owning any stocks. I will explain in the following section!
Selling Cash-Secured Puts
What if I don't own 100 shares of any stock? Can I still make progressive passive income? The answer is yes, and the way you would do it is by selling cash-secured puts against any company you would like to own in the future. They are cash-secured because you would need to have the cash available in your brokerage account just in case the shares got assigned to you, and you had to buy them. If you do not have the cash in your brokerage, it is called a naked put, and I would highly discourage this as it could lead to huge losses. Make sure you have enough cash on hand to buy the shares if you have to! Don't worry; I am about to explain further! Selling cash-secured puts is a neutral to bullish strategy, and that is because if the stock goes up, you will not be assigned the shares, and you get to keep the premium; if the stock stays the same, most likely, you will profit off of the premium as long as it doesn't hit your strike price. If the stock goes down, you will most likely be assigned the shares and have to buy 100 shares of the stock at your strike price, which is fine since you want to own this stock anyway at a lower price! You also still get to keep your premium!Let's go over an example because it will be easier to understand. Hypothetically you want to own $MSFT, but at the moment, it is a little too high for you to buy some shares. $MSFT is trading around $200, and you would like to own the shares if it drops down to $190. So do you just sit around and wait for the stock to drop so you can buy shares? No! That is a big waste of time and a waste of capital since your capital depreciates every day. If you have at least $19,000 in your account to buy 100 shares if $MSFT drops to $190, then you can sell a cash-secured put with the strike price of $190 for a premium of $80. You get to keep the $80 regardless of where the stock price goes, but if $MSFT happens to come down under $190 and stays below that price at the close of Friday when your expiration is, then you will be assigned those 100 shares at an average price of $190. Now you get to own the stock as you wanted, and you made $80 to do it. What if the stock price expires above $190? In this case, you get to keep the $80 for the week, and you do not have to buy the shares. You can then do the same thing next week until you are assigned the shares.
Running the Wheel
You are probably wondering by this subtitle if I made a mistake in my writing, and the answer is no! So what is running the wheel even mean? Well, this is a cherry on top of the other two topics I discussed. To “run the wheel,” you must know how to sell options.If you know how to sell puts and calls for the premium, you can essentially run the wheel on these. This can seem a bit complicated, but I promise it is straightforward if you know how to sell options.The first way to start “running the wheel” begins if you already own 100 shares of stock. You would start by selling a covered call against those 100 shares. Every week, or whatever time frame you want, you would keep selling a covered call against those 100 shares until eventually you are forced to sell your shares. If you paid attention up to this point, you would know exactly you might be forced to sell your shares, but you may need a reminder, and I don't mind briefly explaining again. If your stock closes above the strike price that you chose when initially selling the covered call, then you would be forced to sell your shares at that strike price. If you get to the point where you are forced to sell your shares, then what you would do is turn around and sell cash-secured puts on that same stock. Once your shares are sold, you should have enough cash to sell those secured puts or a secured put option.The second way to start “running the wheel” works just like the first, except you may not own 100 shares of any stock at the moment. If that is the case, then you would start by selling a cash-secured put on a stock that you would love to own at a lower price. You would keep selling these secured puts until you are assigned the 100 shares. Once you are assigned the 100 shares, you can now able to sell covered calls on that stock. If you are never assigned the shares, it will not hurt you because you are still collecting premiums.Running the wheel can be scaled up like crazy. When I say that, I mean that if you have the funds to do so, you could sell as many covered calls and cash-secured puts as you want and just profit off of all that premium you would be accruing. I am confident that by just running the wheel, you could beat the overall market in percent gains annually by running the wheel.One thing that I did not clarify is that selling covered calls against your positions will reduce your cost on that position. For example, if you own 100 shares of $MSFT at $150 per share, your total cost would be $15,000. But if you sold a weekly covered call on it for a total of $90 in premium, your total cost is now reduced to $14,910. If you do this repeatedly every week, it will not affect you as much if $MSFT stock fell because you are bringing your cost down on the stock anyway while selling covered calls. You just have to be careful that your shares do not get sold for a loss.
