Many people talk about creating steady streams of income through investing. You may be familiar with the term "income investing." As its name describes, it aims to pick companies that provide a steady stream of income. When investors think of steady income what first comes to mind are things like fixed income securities such as bonds or stocks that can provide a steady income by paying a solid dividend.
Another way to create an income through investing that I have researched and use is through using the SPDR S&P 500 ETF SPY with weekly options.
The investment seeks to replicate, net of expenses, the S&P 500 index. The index is composed of 500 selected stocks, and spans over 24 separate industry groups. It is heavily weighted toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Weekly options are like monthly options but weekly options are currently listed on Thursdays and expire the following Friday. So the volatility can be much greater. The reason they are so effective at creating an income is because they do expire weekly. If one knows how to utilize a good strategy with them, a steady but conservative investment can be made to pick up a few percentage points each week.
This is a huge advantage over using monthly options only. The way it usually works, a trader will try to make a profit. The more you can make, the more risk one has. Using weekly options, I have found it can be safer to make a trade and accumulate a few percentage points each week. Trades are not as risky, making a few points every week, but it adds up. There are 4.33 weeks in a month. What if you could consistently make 3% a week on a very safe trade? Not many people get excited about a trade that is safe and makes 3% until you do the math.
- (4.33 x 3)= 12.99% every month. (12.99 x 12)= $155.88% return yearly, on a safe conservative trade
An even safer trade is 2%. Again, who gets excited about making 2% on a trade? But do the math again: (4.33 x 2)= 8.66% (8.66 x 12)= 103.92%. Would you turn down the opportunity to grow your portfolio by 100% a year? Thinking in terms of small profits with safe conservative trades creates a high probability of success with minimal probability of loss to the options trader who knows what he/she is doing.
Here's an example. Using the SPY that is presently trading at 125.48, one needs to pick an option strategy that can be worked effectively with weekly options. One of the characteristics of the weekly options that must be used as an ally to your trading is time decay. Since the options expire so quickly, any strategy should use time decay to your advantage. Particular credit spread strategies are designed just for this: Bull Put Spreads and Bear Call Spreads. Bull put spreads will make money as the stock is going up and bear call spreads will make money as the stock is going down.
Looking for safe conservative trades that have a high probability of winning is the key. This is done by studying the stock (in this case the SPY) and knowing how it moves weekly. Then you look for a trade that will deliver a small modest credit of a few points upfront. After all your research, if you believe the SPY will be moving up that week, you might look for a trade like a bull put spread. You might sell a 119 Put that expires on Friday, November 11th for $.31 and then buy the 120 for $.29. This is only 2% but, if you are convinced the stock will not move 6.48 points by Friday 11/11/2011 your trade is good.
When the trade is made (Monday through Thursday) as well as the commission structure of the trade platform you are using will have an affect upon your decision to trade. It is important to use a trade platform that is favorable to option spreads so that the commission does not eat away at your profits.
Disclosure: I am long SPY.