Options let you make money with stocks in unique ways that almost nobody knows about. You can:
- Buy stocks at a discount
- Generate cash flow without owning stocks
- Cash flow with stocks you already own
But they can have an ugly side, too. So how do you properly use options to make money with stocks?
- First, let’s recap the basics:
- Secret Tactic #1 to Make Money With Stocks: Buying Stocks at a Discount
- Secret Tactic #2 to Make Money With Stocks: Generate Cash Flow Without Owning Stocks
- Secret Tactic #3 to Make Money With Stocks: Cash Flow With Shares You Already Own
- Secret Tactic #4 to Make Money With Stocks: The Wheel Strategy
- What am I supposed to do with this info?
First, let’s recap the basics:
In Options for Beginners Part 1, you learned about what you need to get started in stock options.
In Options for Beginners Part 2, you learned:
- Options are “derivative investments,” meaning they are contracts (promises) to buy or sell stocks at a specific strike price by a specific expiry date. The buyer of an option contract pays the seller a premium up front.
- Each option contract is for 100 shares.
- A covered call is a promise to sell your shares at a specific price by a specific date.
- A naked put is a promise to buy someone’s shares at a specific price by a specific date.
Let’s look at how these “Secret Tactics” are used to make money in unusual ways in the stock market.
Secret Tactic #1 to Make Money With Stocks: Buying Stocks at a Discount
Let’s say you like XYZ stock, but don’t want to pay its current price of $97. Maybe you’d rather buy it for $93 per share.
Instead of waiting for the stock to drop, you can sell a naked put. Let’s say you choose a 31-day expiry for this trade.
You’re promising someone to pay them $93 per share of XYZ should they decide to exercise that contract. You’re “insuring” their shares at $93.
As the insurer, you collect premiums just like every insurance company does.
In this example, let’s say you were paid a premium of $0.95 per share. That’s cash upfront.
If the price falls below $93 in 31 days, the buyer of the put can exercise their right to “put” their XYZ shares in your account (meaning you are forced to buy the shares).
So you buy 100 shares of XYZ at a price you like, $93, but you also collected $0.95 per share as a premium up front.
$93 – $0.95 = $92.05
And this is how you buy stocks at a discount. Because of your put option contract, you now own shares at an average cost of $92.05 while the current price sits at $93 per share.
Secret Tactic #2 to Make Money With Stocks: Generate Cash Flow Without Owning Stocks
Remember, every put option contract is for 100 shares. You collected a premium of $0.95 per share.
100 shares x $0.95 per share = $95 in premiums collected.
That’s cash in your account immediately!
If the price of the stock stays above $93 for 31 days, the contract expires and nothing happens.
You keep the $95 premium! And you don’t have to buy any shares.
Even if the price of the stock drops to $93.01, why would the buyer of the put sell you their shares, especially when they paid you an extra $0.95 per share up front?
So theoretically, you can sell naked puts and generate cash flow even when a stock price drops. Now, that’s not an ideal situation to be in, but in this way, you could make money when the stock rises and falls.
Obviously it’s better to sell naked puts on stocks that are trending upward, especially if you’re going to use this as a cash flow strategy. As long as you have cash available in your trading account, you can keep selling puts, collecting premiums, and generating cash flow.
There’s a big temptation here to go out and sell naked puts on stocks that pay high premiums. BE CAREFUL! Be prepared to buy the shares at all times, just in case.
NOTE: This strategy is a part of what we call “Stock Hacking.” It can be a solid side hustle if you know what you’re doing!
Secret Tactic #3 to Make Money With Stocks: Cash Flow With Shares You Already Own
This is where covered calls come in.
Let’s say you own 100 shares of XYZ at an average cost of $92.05 now.
You like owning XYZ at that price, but you also want to keep collecting cash. So you sell a covered call.
A covered call is a promise to sell your shares at specific strike price until a specific expiry date.
So you set a strike price of $107 per share and an expiry date 31 days out. As the seller of the covered call, you collect a premium. In this case, let’s say the premium is $0.50 per share.
For the next 31 days, the buyer of that call has the right to purchase your shares of XYZ at $107 per share. Obviously it wouldn’t make sense to do that unless the price of XYZ went above $107 during that time.
There are 2 outcomes here:
- The price never reaches $107, you keep your shares and the premium. Then you can do it again, set a new strike price if you want, and collect more premium. As long as your shares don’t get “called away,” you can keep collecting premiums on stock you already own.
- The price is over $107 on the expiry date and your shares are called away. In this case, you keep the premium and you get paid for the stock, so you win all around.
Secret Tactic #4 to Make Money With Stocks: The Wheel Strategy
Now here’s the real hack.
- Sell naked puts to get assigned (buy shares). Collect premiums.
- Once you get assigned, sell covered calls at a strike price that is higher than your average cost for the shares. Collect premiums again.
- If your shares get called away, write another naked put and start the cycle again.
See how you can create a cycle of collecting premiums and generating cash flow? We call this the “wheel strategy.”
Now, if the price of your shares drops too far, it can slow down this process significantly. And you should always have the cash ready to buy shares when you write naked puts.
But with relatively stable stocks, this has the potential to become a significant stream of income that almost no one is tapping into.
What am I supposed to do with this info?
There’s so much to learn about stock options. The examples above are only a few ways beginners can use options to make money with stocks .
So for now keep learning. Subscribe to the Stock Hacker Report if you want to get weekly stock option education emailed directly to you. That link actually gives you free access to a case study we compiled called “The Ultimate Side Hustle for Canadians.” Sign up and download it if you’re intrigued by any of this.
And we’ll talk to you later!
Erwin and Cherry
P.S. If you want to a new side hustle, we put together a new case study that examines the four most popular side hustles for passive income in Canada. You can download this case study for FREE right now if you sign up for our email newsletter.