Supplemental income in retirement provides freedom to enjoy indulgences without having to draw on your retirement portfolio other than for living expenses. There are many ways of earning supplemental income, options trading is one way.
Options Trading
The Portfolio Hedging blog discusses in detail Call and Put options. This blog discusses two simple option trading strategies that can generate supplemental income.
Cash Secured Put
A cash-secured put involves selling a put contract, and at the same time depositing in the brokerage account the full cash amount for a possible purchase of underlying shares. The purpose of depositing this cash is to ensure that it is available should the price of the underlying shares fall below the put’s strike price at the contract’s expiration. In this case the put seller is obligated to purchase the underlying shares at the put’s strike price.
For example, let us say you sell a put with a one-week expiration of the SPY ETF which is trading at $300 a share. If you sell an at-the-money put, the strike price of the put would be $300. Let us assume you collect a premium of $500 by selling the put. Now after 7 days when the put contract expires, if the price of the SPY ETF is under $300 you are obligated to purchase 100 shares of the SPY ETF at the strike price of $300. The cost to purchase the 100 shares is $30,000 (300 times 100). So, at time of selling the put, the brokerage requires you to deposit $30,000 in your brokerage account. This is called a cash secured put.
If the price of the SPY ETF is greater than $300 at contract expiration, you get to keep the premium you collected from selling the put and the $30,000 you deposited in your brokerage account.
The premium you collect for selling the put is the income you generate per week from your $30,000 investment.
Covered Call
Let us assume in the above instance at the put’s expiration the price of the SPY ETF drops to $290. As a put seller you are obligated to purchase 100 shares of SPY at $300 each. This is called assignment as the shares are assigned to you at the put’s strike price of $300.
On paper you suffer an instant capital loss of $1000 since the ETF is trading at $290 but you are forced to buy 100 shares at $300 each. This loss is offset by the $500 premium you collected when you sold the put. However, you incur this loss only if you sell the assigned shares at the market price of $290 each.
Instead of selling the assigned shares you can generate income on those shares by selling a call. If you sell an at-the-money call, the strike price of the call would be $290 since that is the current price of the ETF. Let us assume you collect a premium of $500 for selling the call contract with a one-week expiration. This $500 is your weekly income from selling the call contract.
Now, if after a week at the time of the call’s expiration, if the price of the SPY ETF is higher than $290, the brokerage will automatically take the 100 shares of SPY ETF from your account and pay you the call’s strike price of $290 each. This is also called assignment.
If the price of the SPY ETF is less than $290 at contract expiration, you get to keep the premium you collected from selling the call and the 100 underlying shares of the ETF.
The premium you collect for selling the call is the income you generate per week from your initial $30,000 investment.
By continuously sell put’s and call’s weekly you can generate income from the premium collected each time.
List of ETFs
You can sell put’s & calls on other ETF’s that cost less than the SPY ETF. The table below lists some of the ETFs on which large quantities of options are traded every week. Depending on your investment capital you can sell a put & call on any one of these ETFs and generate weekly income.
| ETF | Price per share | Investment Capital |
| XLU | $55 | $5500 |
| XLI | $66 | $6600 |
| XLE | $36 | $3600 |
| XLF | $22 | $2200 |
| XLV | $97 | $9700 |
| XLP | $57 | $5700 |
*All ETF prices rounded to the nearest dollar
ETF & Premium Prices
The prices of the ETFs listed in this blog are as of the date this blog was written. These prices fluctuate every day. The premium amounts also continuously fluctuate. All numbers are for illustration purposes only.
More Information on Options Trading
You can visit Tastytrade to learn more about options trading. They present many option strategies in easy to understand video form, backed by years of research showing the probabilities of success from each strategy.
https://www.tastytrade.com/tt/learn
Caution
Do not trade with money you cannot afford to lose. Options trading is complex, and you may lose more money than you invested if you are not careful.