Monthly income from options

I stumbled upon the bivio website and read the emails and your informative responses and was very impressed.  I have just ordered your book and look forward to reading it.  I have a question about using options to create monthly income flow and how likely that can be and how much time it would take. Will your book cover that subject?  I have recently heard advertisements for companies pushing this use of options.



Hi Joe,

Thanks for the kind words.

I suggest you ignore those advertisements.  They are primarily hype.  They charge high fees, promise much, and leave clients ill-prepared to use options effectively. I much prefer than an investor have just a bit of patience and take the time to really understand options and how they work.  That's why the introductory section of the book devotes several chapters to providing that background.  Sure you can jump right to trading, but please don't.  And do not skip chapters 6, 7 and 8.

Yes, the book covers the strategy used to collect monthly income from a stock portfolio. That method is called 'covered call writing' and is (in my opinion) the best strategy you can adopt to really understand options and how they work. As you gain exprience, there are advantages to considering the use of other methods, and the book includes detailed information on how to adopt five other strategies.

How much time will it take: Good question, and the answer is different for every investor.
If you adopt the ideas of a popular TV market commentator, you should spend one hour every week researching each of your stocks.  That's a lot of time, and I wouldn't do that.   But if you do, and if you have several stocks in your portfolio, any option strategy based on owning thsoe stocks is going to take a great deal of time.

Here's what I believe: Choosing stocks to own is crucial and I cannot help you with that task.  If you adopt bullish strategies, as most investors feel they must, then if your stocks tumble, your results will not be good.  Writing covered call options will reduce losses - and that's good, but the goal is to make money, not cut losses.  Thus, assuming you have a method for choosing stocks to own - and assuming your question relates to how much extra time it will take to adopt options strategies, then I can tell you that the book contains a good discussion on this area.

If your goal is to earn the maximum annualized return on your investments, then you must spend some time each month on selecting which options to write (sell) for each stock you own.  You can sell one call for each 100 shares.  There is a detailed discussion (chapter 10) on how to choose both the strike price and the expiration month.  There is no single 'best' option to choose.  Your choice depends on your risk tolerance and the amount of time you want to spend on managing your investment portfolio.  You will have a very thorough understanding on how to make appropriate decisions when you read the first (of three) chapters on this strategy.

If you want to generate income and have scant time, you can get by with just an hour or two every three, or even every six, months.  The options you choose to sell under these conditions require that you spend significantly less time making trading decisions.  They also provide additional safety.  But, your potential returns are reduced.  To me, this is a good combination: reduced risk and a lower maximum return.  As long as that profit potential meets your minimuim requirments, you may prefer spending less time managing your portfolio.  If you are an investor who typically buys stocks and never thinks about them again, then you already don't spend much time on your portfolio.  On the other hand, if you trade frequently and already spend lots of time with your investments, then you can get very detail oriented and spend a great deal of time when using options.  The bottom line: the more you micromanage the portfolio, the more time it takes.  But if you want to be a buy and hold investor, then it will not take much of your time to adopt this strategy.

Consider the other methods in the book.  You may find them very attractive.  First because you can be bullsh, bearish, or market neutral.  You don't always have to be a typical investor with a bullish bias.  Second, these methods come with additional safety.  To me, trading with reduced risk is very important.  You can easily make money when using options - the more difficult part is holding onto those gains.  Risk management is the path towards success.  The book shows you a great deal about how to manage that risk.

Best of luck and let me know how you are progressing.  One suggestion:  To get started right away, consider using a practice account (paper trading).  Most brokers offer that at no cost.


Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options