Contrary to what we are told the stock market can also be used to create a regular cashflow, rather than just long term savings for retirement. This is analogous to owning a rental property.
With rental property the value of the property goes up and down over time and you receive a monthly income from the renter. If you own a stock it also goes up and down over time, but you may not be aware that you could sell an option every month to bring in an income.
For example, if you were to hold 100 shares in a company, each month you could sell 1 option (1 option equates to 100 shares) promising to sell your shares at a higher price (the strike price) in 30 days and you would receive a premium for having made that promise. Fast forward 30 days and
- If the price of the stock stays below the strike price you get to keep the shares, as well as the premium. You could then sell another option for next month.
- If the price goes up above the strike price you would keep the premium, as well as the profit you’ve made on the shares (locking in the gains between where you bought it and the strike price). You could then buy the shares again and sell another option for next month.
What is great about this strategy is you can generate cash flow whichever way the stock moves. Additionally, options can be bought or sold with daily, weekly, monthly or yearly expirations, so can be tailored to suit your needs.
If you have read our blog on up, down and sideways markets then you’ll know you can buy and sell options to generate income in any direction.
**This does not constitute a recommendation or financial advice and is intended for education only**