First of all, I would like to welcome readers from Tight Fisted Miser! Here at Grand Per Month we talk about making an extra $1000 per month with a side gig. Each Monday a new money making idea is presented.
About a month ago, we talked about how it was possible to make an extra grand per month by selling covered calls. For that method of making extra money, we discovered that it would take about $190,000 in capital and use Pepsi stock as part of our example. Let’s stick with the same stock to make the numbers comparable. At the time, PEP was trading at $63.31 per share. As of Friday, the closing price was $65.30. So had we sold 30 call contracts for the April $65 strike price, we would be facing the possibility of getting called out in 4 weeks and collecting a capital gain of just over $5,000 in addition to the call premium.
But what if that were to happen and we really didn’t feel like we wanted to buy Pepsi stock at more than $65 per share. An alternative to selling covered calls is to sell put options.
Sell Put Options When Bullish on a Stock
Briefly, a put option gives the right for the owner of the option to sell a stock at the strike price on or before the expiration of the contract. In this way, a put option is like an insurance policy for the stock market. So if I own the April $65 strike put options on Pepsi, I can exercise that contract and receive $65 per share for my stock even if it is trading at $50 or even less.
So for the seller of the option, there can be significant risk if the stock were to collapse in price which is why I would advise only selling put options if the stock and market are in a well-defined uptrend.
Looking at Our Example
Let’s look at our example using $190,000 in capital as before. If we are obligated to purchase the shares because the stock declines below $65 per share, we need to continue to have the available cash. That means we could sell 29 put contracts which would obligate $188,500. The April $65 strike put option could be sold for $0.57 per share leading to revenue of $1,653.
The monthly yield on our $188,500 is then 8/10s of a percent or a bit over 10% annually if this could be repeated monthly.
See how easy it is to make $1,000 per month by selling puts!
Of course, the risk is that PEP drops to $50 per share because they miss earnings or some major PR disaster happens. Then you are stuck spending $188,500 on stock worth only $145,000. Taking a $43,500 loss to make $1,653 is not my idea of a good time. However, there is a way to protect against this kind of catastrophe which I will be sharing with you on Thursday.
Selling puts can be a great way to earn some extra money on cash sitting in a portfolio while waiting for the price of a stock to drop. The problem comes if it drops too much. Be sure to come back Thursday to put it all together.