Thoughts on the income strategy (Selling Options)

This will probably be a short post.

I am still sorting out my thoughts (on various topics). Selling Options being one of them.

Options Income Strategy: How To Earn 10% Consistently (read here)

New income strategy

Selling Cash Secured Put Options

Late last month (Aug 21), I wrote a post about how to use Tiger Brokers to sell put options.

Step by step guide to selling Put Options using Tiger Brokers (Desktop version) (read here)

I think it is a good way for dividend income investors like myself to add on this to be part of my income strategy (potentially). I have been experimenting with it, but the trial period is not long. As there wasn’t much I can do in such a short period of time.

My thought at the moment is how to incorporate this to be part of my ‘off the mind, can sleep well at night’ income strategy.

For me selling put options is like an extended version of buying stocks using the Limit Order option rather than Market Order option. In my case, occasionally during market corrections, I typically like to set my buy price for the day using the limit order in the morning, and hope that prices through the day drop to that level so that my orders are filled. In a way, it is like ‘low-balling’ and hoping for ‘bargains’ on a daily basis, although typically the next day, prices will drop even lower… hahahaha

So now with selling put options, I can do this ‘Limit Order” trade for extended periods / much longer durations of a week to months, while getting paid premiums.

The thing about selling put options (and call options), unlike traditional dividend income investing, is that one does not need to have the cash on hand first to receive the (profit) premium immediately once the trade is done (Perhaps up to what the margins allows). Instant gratification perhaps? Herein lies the tricky (or dangerous) part, what is preventing me from over committing myself… I can literally sell many put options, without necessarily having the cash available to exercise (and buy) the shares if the stock prices drop to the strike prices’ level (which technically is not a bad thing if that is the stock I am aiming for).

Yup, in other words, how to ensure I don’t get too caught up with greed, and take on more than I can manage.

Michael Douglas High Quality GIF

I view options as a complementary means to add on to the dividend income stream.

My intention is not for it to overtake (my dividend income) or be a major part of the passive income stream. Nevertheless, it has the potential to.

Typically one requires years to have a big enough war-chest to build up a sizable dividend stock portfolio to get reasonable dividend income. For options trading, with no need for initial cash outlay to get the same (or more) income, one can simply enter into more option trades.

Currently, with the volatility with the Chinese Tech stocks, I have selectively sold a few put options for stocks which I currently own (eg. Pinduoduo and Alibaba) and do intend to own more of. My personal take is that current prices present value long term, and if prices drop further it is even better (to buy more). For Alibaba ( I have sold a put option with a longer expiration duration (eg. 1 month), while for Pinduoduo (PDD), I have sold a few options with shorter expiration periods (eg, 10 days).

Selling Covered Call Options

I will probably try this out, provided I have the stocks on hand to sell (if the stock price eventually reach the strike price).

Kelvin did a good explanation on the Wheel Strategy (watch here)

Others might call it the Strangle strategy.

Short Strangle (Sell Strangle) Option Trading Strategy Explained (read here)

Basically for the same underlying equity, I sell both a covered call option and a put option. So technically I can collect premiums from both the options (thereby increasing my income), but I will have to hope that the stock trades within the range of the strike prices of the call option and the put option. If the stock price drops to the strike price of the put option (before the expiration date), I will have to buy 100 shares (or 500 shares in the case of HK listed stocks) at that price. If the stock price rises to the strike price of the call option (before the expiration date), I will have to sell the stocks (100 shares or 500 shares in the case of HK listed stocks) at that price.

Technically, it is ‘safe’ if I do have the stocks on hand, by selling covered call options. The worst case scenario is that I have to sell the stocks at the strike price, and the stock price continues trending upwards, and I miss out on the gains. On the other hand, most people do not advocate selling naked call options, and neither do I (eg. if one does not have the required stocks on hand to sell if the stock price does it hit and go beyond the strike price).

My only slight aversion to this strategy (of selling covered call options) as a long term investor (and collector of stocks), is that I am capping the upside of the stocks I have on hand. Sure I can always buy back (if prices drop below what I have sold it at), but well, kind of a hassle, esp. for volatile Chinese tech stocks, and it might take a long time for it to happen (if it happens).

Unlike selling put options, there is actually a more defined ‘limit’ to how much I can do. Since I can only do it with those stocks that I am actually vested in.

Note: If you intend to sell covered call options using Tiger Brokers, please remember to contact Tiger Brokers and inform them to activate the covered call feature in your trading account, so that no margin capital is required. Otherwise you may face the issues as per the posts below.

Tiger brokers doesn’t support covered calls. Should I transfer my shares to another brokerage (read here)

Finding that balance (between Stocks and Options)

Typically, I would do regular monthly DCA (Dollar cost averaging) stock investing when I receive my salary.

Depending on the market situations, I normally add on to the current positions in my stock portfolio. Normally I will do that early in the month when I receive my salary.

For this month, I held off buying stocks…. but eventually did purchase some, when it is near the options’ expiration dates.

I reckon I needed more cash reserves if I am selling put options.

In addition, I have to remind myself that I am still in the process of building up my stock portfolio, and especially the dividend income machine (must not forget the Sg listed and HK listed dividend counters). Currently, to me, HK listed counters actually offer value from a long term perspective and Sg counters have been going strong. I have also added to my position in Alibaba ( at the current low stock price.. even though I have sold Alibaba put options at even (much) lower strike prices (yeah, sort of a low ball price).

In the long term, it is still important to have a solid stock portfolio (built up over many years).. be it growth or dividend counters. Over the long term, the eventual cost yield of a portfolio consisting of strong dividend growth stocks would be hard to beat.

Trial and error

I guess, with any investment, it takes time to hone our own risk tolerance (from getting our feet wet to testing the parameters).

Even if we do elevate investing on our list of priorities, the time we have to devote to investments is likely to be extremely limited. Or, the fact may be that we just don’t want to devote much time to our investments…..

Certain categories of investments are specifically designed to operate as income producers.

In the book, The Smart Investor’s Money Machine by Bill Kraft, one such strategy to generating regular income is selling options.

There are income investors who are solely trading options (or their investments are mainly into options). Eg. the major part of their passive income is from trading options.

I can see the cost / time benefit in doing options. Technically, converting volatile growth stocks into income plays.

Well There It Is Jurassic Park GIF

If done correctly the annual/monthly yield may even surpass traditional dividend stocks.

However, the main difficulty probably lies in finding that proverbial psychological sweet spot whereby it becomes passive enough, and the income stream more or less stabilised so that we can spend less time monitoring the stock market (and not be overly fearful of any volatility or being too greedy). Eg. I probably have to accept lesser premium while choosing a much lower strike price (for put options) or higher strike price (for call options), with a shorter duration to the expiration date (a week to a month max).

Yes in other words, coming to terms with the lower risk exposure and the less than possible premium. Ultimately, different people have different risk tolerance, what works for others may not work for me.

Selling options as mentioned earlier has the potential to increase my income exponentially and even overtake my dividend income. However, if I over commit and built a ‘house of cards’ by taking on too much options than what I have on hand eg. the cash reserve (put options) or vested stocks (call options), there will be a day when this ‘house’ collapse, and when stock prices move against my planned strike prices.

At the end of the day, I might just feel that selling options as an income strategy is not for me, or I may just be a very inactive seller of options (super small time) if I don’t think the risk reward is worth it, considering the fact that leverage is involved. I probably can’t rest well at night if I have more than 2 options at anytime, preferably just 1 or none (within the comfortable limit of my cash reserves). So I don’t see it as a major contributor (or game changer) to the income strategy.

My personal take at the moment is that the traditional buying and holding and building up a dividend portfolio is still my preferred option. At the very least, in times of distress, the pain is not amplified (and that allows me to think more rationally).


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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat. Check out my Facebook Page:
This entry was posted in Hong Kong Shares, Investing methodology, Options. Bookmark the permalink.

2 Responses to Thoughts on the income strategy (Selling Options)

  1. Pingback: Selling options and the Evergrande crisis | A Pen Quotes

  2. Pingback: Selling options and the Evergrande crisis |

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