The end goal of many dividend investors is to generate enough portfolio income to cover their living expenses.
There are two ways to reach this goal faster: have a larger portfolio or generate a higher portfolio yield.
In this video, I explain how you can generate higher portfolio income by implementing a sophisticated options strategy called cash-secured puts.
This video discusses the following concepts:
• What Is A Cash-Secured Put Options Strategy?
• How To Select Which Cash-Secured Puts To Sell
• Cash-Secured Put Example #1: Johnson & Johnson (JNJ)
• Cash Secured Put Example #2: The Coca-Cola Company (KO)
• Cash-Secured Put Example #3: Berkshire Hathaway (BRK.B)
We have also included a brief summary of the cash-secured puts option strategy, for those who prefer learning through text rather than through video.
What is a cash-secured put options strategy?
In a cash-secured put options strategy, you sell a put option for a security that you would like to purchase, but at a lower price than it is currently trading at. This allows you to receive the option premium upfront in exchange for the obligation to purchase the security at a lower price point.
In an ideal scenario, the stock that you own will trade above the strike price of the option for the duration of the option’s lifespan. This means that you will collect the option premium and will not be required to actually purchase the underlying stock. While this is the ideal scenario, there are still two other possible scenarios that must be understood before an investor participates in a cash-secured put options strategy.
The second alternative scenario is when the underlying stock falls to a level that is between the strike price and the strike price less the option premium. In this scenario, the investor still wins because its adjusted cost basis is still better than what’s available on the open market after you account for the option premium received.
The third scenario is when the stock price declines to a point below the strike price minus the option premium. In this scenario, the investor’s adjusted cost basis is worse than what can be achieved on the open market, even after accounting for the option premium received in the beginning. This is the worst-case scenario for the cash-secured put trader.
How To Decide Which Cash-Secured Puts To Sell
In my experience, an excellent way to identify put options that are suitable for a cash-secured put strategy is by targeting the following characteristics:
• Stock options with 45-60 days until expiration;
• With strike prices ~1 standard deviation below the current market price
If you take anything away from this video and text summary, let it be this: cash-secured puts allow you to generate passive income from the cash that sits in your account waiting to buy high-quality companies at lower purchase prices. Because of the collateral embedded in this strategy, we recommend it only to investors that are very comfortable dealing with stock options.
Disclosure: I am/we are long JNJ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.