Generate Monthly Income by Selling Puts

Most people would love to have some extra monthly income.  For those with excess cash sitting in a portfolio, selling puts can be a good source of additional income.

A put is a type of option contract that gives the purchaser the right to sell a stock or ETF to the seller of the put at a set price for a specific period of time. In exchange for that right of locking in a price (called the strike price), the buyer gives the seller some money known as a premium. No matter what ultimately happens that premium is the seller’s to keep. When you sell a put, most brokers would want you to have a reasonable amount of cash or buying power in case the purchaser of the put decides to exercise his right to have you purchase the stock.

Here I share my favorite option education sites so that you can learn more about options and selling puts.

Say you have $11,000 in a brokerage account. You wouldn’t mind owning 500 shares of Microsoft (MSFT) which is currently trading at 22.03 but you want to see if you could get it cheaper and get paid while you wait. Each put contract by convention typically covers 100 shares of the underlying stock or ETF. So you could sell 5 June put contracts with a strike price of 22 for 0.50. What this means is that you have given the purchaser of the put the right to sell to you 500 MSFT shares at $22 per share any time between now and the third Saturday of June (option contracts expire on the third Saturday of the month). In exchange for that right, the purchaser has paid you $0.50 per share which is yours to keep no matter what happens. Your return on your $11,000 is then $250 (0.50*500)/$11,000 which equals about 2.27%.

If the stock is trading above 22, no one will want to sell it to you at that price. You will then get to keep the premium and can sell another put for the month of July repeating the process. If MSFT is below 22 at the time of option expiration, you will be forced to buy the stock which you wanted to do anyway but will actually be getting it for a total of $21.50 per share.

As you can see, selling puts routinely can be a great source of additional monthly income for an otherwise static investment portfolio. You can then take the shares you bought and turn around and sell covered calls for income the next month.