The two most common ways to earn income from options are selling covered calls on stock you own and selling cash-secured puts on stock you would be willing to buy. In both, you collect a premium up front, and you keep it if the option expires unexercised. The income is not risk-free: with a covered call you still carry the full downside of the stock and give up gains above the strike, and with a short put you must buy the stock at the strike even if it has fallen far below it. Both need periodic monitoring, so "passive" means less screen time than active trading, not none. This is educational content, not investment advice.
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Covered Calls
A covered call means owning 100 shares of a stock and selling one call option against them for a premium. It is one of the most basic option income strategies and needs less day-to-day management than active trading.
When a person buys a few stocks in his/her name, they can further go ahead and sell the calls against the stock they bought. One option comprises 100 shares; hence, it is advised to buy stocks in multiples of hundreds if you want to sell multiple calls. Based on the number of shares you own, you can sell calls for a premium (the price the option buyer pays you) with a strike price that is slightly higher than the price you anticipate for these shares at option expiration. Your profit per option will be one hundred (the number of shares per option) multiplied by the premium of the call.
You always keep the premium, but the premium only offsets a small part of a stock decline, so a covered call position can still lose money. The other drawback appears when the stock rises sharply. In this scenario, the buyer will exercise the options and you will end up making less profit on the premium value as compared to the value of the stock if you sold it in the open market.
Covered calls require limited attention, but you still carry the stock's price risk. Another benefit of the covered call strategy as a source of passive income is its flexibility. If the buyer does not exercise his calls before the expiration date, you still own the shares and can sell new calls against them for additional premium.
Selling Put Options
If you’re an active investor who is looking for a side hustle via options trading, you can arrange to buy new stocks in the future at a lower price by selling put options. Berkshire Hathaway under Warren Buffett has sold put options on stocks it was willing to own. While this strategy bears out of a desire to buy shares in the future, let’s take a deeper look at its utility in options trading for a passive income.
Selling a cash-secured put means setting aside enough cash to buy 100 shares at the strike price and collecting a premium for that obligation. Make sure to choose the stock you want to purchase and set the strike price of the option equal to the price you are looking forward to buying the stock for. Once you do that, you only need to sell a put option for the stock.
This will not only help you to generate income through the premium at which you sold the put option but also allows you time till the buyer chooses to exercise the stock. As soon as the buyer exercises the option, you need to buy the new stocks you chose to purchase in the first place to have both the premium made by selling the put option and the additional stocks bought with limited effort.
Another added advantage of this technique is that you can still keep the premium even if the put option remains not exercised at expiration. It also allows you to sell new put options for an additional premium without any additional input to generate a passive income.
The Bottom Line
Covered calls and cash-secured puts are the simplest option income techniques, but neither is safe from losses. We can also look at Iron Condors and defined risk spreads to determine how we can sell time to make a monthly passive income. These techniques are a little more complicated and would require pre-learning before diving with full force into options trading with them.
Selling options can produce regular premium income for people with limited time, but every short option position carries downside risk that needs a plan.
MarketXLS templates pull option chains and prices into Excel so you can compare premiums and track open positions. Option data is end-of-day on the Standard plan and real-time on the Advanced and Business plans.
We have specific templates created just to cater to the covered call and selling put option strategies.See the MarketXLS templates library, book a demo, or view pricing.
