How To Make Money Trading Options After You Retire.
Trading stock options has a reputation as a risky, speculative approach to investing. Yet investors who take a conservative approach to the option market have the potential to generate some relatively low-risk retirement income.
Selling Covered Calls
One of the lowest-risk approaches to the option market is to sell covered call contracts. One study of Chicago Mercantile Exchange data suggests about 75% of all option contracts expire worthless. By selling those contracts rather than buying them, investors can flip the advantage in their favor.
For retirees that have some form of stock investments in their portfolios, here's how selling covered calls works.
An option contract gives the option holder the right to buy shares of stock at a particular price on a particular date in the future. Investors who buy call options are hoping that the price of the stock will rise enough before the expiration date that they can then execute the contract and acquire shares of stock at the strike price, which would theoretically be below the market price of the stock.
A trader might buy call options to buy Microsoft Corporation (NASDAQ: MSFT) shares at $140 with an expiration date of Jan. 17, 2020. If Microsoft's share price is $145 on Jan. 17, 2020, the trader can then exercise the contracts, buy Microsoft shares at the strike price of $140 and then immediately turn around and sell them at market price of $145.
A retiree who owns shares of Microsoft in an investment portfolio can sell call options against those shares of stock and immediately collect the premium that the call buyers will pay. If the seller had sold $150 Microsoft call options and the share price of the stock only reached $145, the options would expire worthless and the seller would be able to keep the option premium as pure profit.
When a stock's share price is at an option contract's strike price, the option is said to be "at the money."
When a call option's strike price is well above the share price of a stock, the contract is said to be "out-of-the-money." Retirees who are looking for a low-risk source of income should consider selling deep out-of-the-money call options that have very little chance of being executed.
The premiums collected for these types of contracts are relatively small, but they also hold relatively little risk.
For example, imagine a retiree owns 200 shares of Microsoft stock worth around $26,700. Today, the price of Microsoft call options with a strike price of $175 and an expiration date of Jan. 17, 2020 is around 31 cents.
If this investor sold two of these 100-share contracts today, he or she would immediately pocket the $62 premium. Then, assuming Microsoft shares don't gain more than 25% in the next six months, the call options expire worthless and the seller keeps the $62.
Becoming The House
In a worst-case scenario, if Microsoft shares rise from $139 to $180 by the expiration date, the option seller simply must sell those Microsoft shares to the buyer at $175 per share, missing out on the final $5 of market gains. The option seller still gets to keep that $62 premium no matter what.
"Many long-term investors sell covered calls, a conservative option strategy that generates income from stocks that you already own. In a way, you are renting your stocks to option buyers and receiving compensation for doing so," Michael Sincere, author of "Understanding Options 2E," recently said.
"The best thing to do is to sell the options to the gamblers, in essence becoming 'the house.'"
Much like stock trading, option trading can be as safe or as risky as the buyer or seller wants it to be. Option buying is not typically the type of high-risk/high-reward trading that is associated with retirement.
As long as investors fully understand the risks associated with their strategies and/or have the assistance of a professional financial advisor, selling covered calls is one creative way for retirees to supplement their retirement investments.
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(c) 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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|Date:||Jul 26, 2019|
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