Income options trading strategies
In short, it comes down to this: it's next to impossible, and highly unrealistic, to expect both high yield and consistent returns at least in the short term - but more about that in a bit. Option income, while it can be very lucrative, is fleeting. If you put yourself in a position where you depend on income from monthly credit spreads , you must recognize that there will be months that you lose. Not only do losing months eliminate that month's income, in some situations the losses will be equivalent to having to "pay back" income from previous months.
Additionally, income from options is irregular. There's just no way that the Market is so predictable that you can target and achieve a predefined amount of income month in and month out. And the last thing you want to do is to get desperate enough to lower the quality standards of your trading and begin chasing premium.
If you must spend the income generated from your option trading strategies, I would advise that you do so only partially. Accumulate and retain as much of the income as you can so that it can act as a buffer against inevitable setbacks. There's nothing wrong with taking two steps forward and one step back. But if you consume what you produce during those forward steps, any subsequent step backward reduces your principal. In contrast to option income, dividends produced by high quality companies , are real.
They may not yield a lot not at first anyway , but they generate income you can count on and budget with. And never underestimate the power of quality dividend growth investing over time. The results, in both bull market and bear market alike, are staggering. Some might advocate a kind of blended portfolio where half your holdings are in fixed income or dividend paying stocks, and the other half is used to generate income through trading the credit spread of your choice.
If you're drawn to that approach, by all means give it a whirl, but to me it's a divide and conquer strategy - with the object getting divided and conquered being your portfolio. A more creative solution is to employ a variety of customized option trading strategies collectively known as Leveraged Investing designed to lower the cost basis on your long term dividend paying stocks. These perpetual "rebates" or "partial refunds" are reinvested in one form or another into more shares of high quality dividend payers.
And when you learn to track and calculate your option returns in terms of an annualized rate , you really begin to understand what a profound impact these low risk, short term option trades can have when it comes to enhancing your long term portfolio. Additionally, if you can also reinvest your dividends as well, you'll really turbo charge your portfolio and future income stream. Thus, the size of your account matters. I am talking about now, not for all time.
Some months will offer greater opportunity and others will offer less. Sometimes you will like the available trades; at other times you may decide to sit on the sidelines. Winning traders do not force trades. When undecided, trade half or less normal size. All paper trading is not necessary. The goal should be: make enough to cover commissions and other expenses. It also depends on how much money you have.
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Real money is real, with emotions. Paper trading is very helpful, but it often comes with a non-caring attitude. Take paper trading seriously. That could be a month or two. It does not have to be a long time. Learn to be comfortable making the trades. I understand that we are playing for green points dollars , but for short periods of time, profits and losses may not be the best measurement of how well you are trading and managing risk.
Yes, limit the number of strategies, but make it more than one. You cannot discover which feels best unless you read about them and get a feel for how the strategy works. Then they must be traded.
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I suggest at least two and perhaps three strategies to test. Not all for real money, and begin with only one. Do not add a second until you believe you are not too busy with the one. Use the same method for adding a third.
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However, the key to success is not in finding the right strategy. The strategy lets you into the trading game, but you must manage risk well and that includes trading proper size and learn to make quality decisions when trading. In my opinion, the strategy is important.
Options Trading for Income by the Guidelines
You want it to satisfy your needs. If you love daily action, iron condors are not so good. If you hate to trade, want to play safe, and earn a steady income—consider being an investor not a trader. Find a strategy that you, Jim, will like—and that you can handle. Practice a few and discard those that are uncomfortable.
When you gain more experience and confidence, return to reconsider a previously discarded strategy with your new trading insight. Open a position. If you can follow it comfortably, then add another. I suggest no more than three at one time.
You must give yourself time to watch the trade as often as your plan requires , know your adjustment, exit, and profit points, and not feel hurried. Only then can you add the 2nd and 3rd positions. Not even close. You pick a position to own.
These choices will be signaled globally to our partners and will not affect browsing data. A collar is yet another best options strategy to make money. Can you blame them? Tony Zhang It is equivalent to an out-of-the-money covered call position, but with an addition of a protective put. Chuck Hughes has been executing trades in the options market for over 30 years.
The cost should now be ignored because it never matters again—for trade decisions. The Greeks may look too risky.
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Market conditions may have changed. However you manage risk, how can the premium collected have anything to do with the exit decision? How can that make any difference in deciding whether the position is worth holding or folding? Logic tells you that they are unrelated. We are not trading stocks. Not here.