hi guys welcome back to the channel my
name is dave and today we're talking
about trading options for income with
spy why well this is the go to etf for
options this is one with the most open
interest meaning it
has a huge volume lots of contracts
flying around expirations monday
wednesday friday it's like the proving
grounds for trading options with etfs
now it's not for everyone so if you want
to run out of the room right now and go
watch some reality television i don't
blame you but if you want to watch an
average looking semi-intelligent white
guy talk about options which is a great
friday night and this might be the one
for you
so if that is what you're looking for
please stick around
spy is an s p 500 index fund offered
from spyder there are others like vo and
that's my buy and hold
s p 500 index fund that i just kind of
sit on but if i'm doing options spy is
where it's at why because it's got a
really tight bid and asked prices
because of all that open interest it
makes it really easy to trade options
against it and there's all these
expiration dates and it's wonderful to
work with so this is kind of the
no-brainer if you just want to focus on
options in one area spy the next nice
perk about just focusing your attention
on trading spy options is that you can
ignore what's going on in coca-cola over
here and pfizer over here and if pfizer
lays an egg it's not going to hurt you
too bad because it's going to be in the
s p 500 index and have 499 other stocks
to back it up to make sure it's doing
all right so you're gonna be focused on
big macro trends like
a war in europe or a pandemic something
like that that could really affect spy
but in general
right you're not gonna have to focus on
the granular stuff that's going on in
individual stocks and that should
simplify the number of variables that
you have going on when it comes to
trading options and the third thing
worth talking about right now to scare a
few people away is that there is a
little bit of a barrier for entry to do
what we're talking about today which is
selling puts and calls because if you
want to buy one contract right now if
you want to buy 100 shares
that's b why right now it's going to
cost you 45 thousand dollars you'd buy
that sell the covered call and collect
450 bucks you're right 800 something
like that so
not everybody has that lying around
right so that causes a barrier just like
if you want to sell a put you're going
to be in the same scenario in case
because you need the collateral right so
it's not for everyone typically if
you're just out of school learning about
options this is not what you're going to
be focused on so you can be later in
life when you really want the income for
some reason you build up a pot of money
or you've had really good success as a
younger person but either way you're
gonna need some cash in order to make
this all work so why do this because
it's definitely not for everyone you
know i do this for income i have lots of
different investments i'm i'm fortunate
that way that i've got you know real
estate investments that pay me income
i've got a bunch of long-term holdings
in stocks i've got business income i've
got my job and things like that so i'm
fortunate that way and i decided to take
a portion of the income that i brought
home and stick it into options trading
with the objective of paying off low
interest debt right mortgages right so
i've talked about that on this channel
and i think that makes a lot of sense
because
income from options is different enough
from long-term holdings in the stock
market it doesn't really quite follow
the same pattern so
and it's a little bit more predictable
in my opinion so i i have this pot of
money and i'm using that to generate
income now the argument is going to be
total market return that's definitely a
good argument but i still feel like it's
different enough that it's justifiable
and if i can meet my goal of paying off
that low interest debt that i took for
this exact reason i'm meeting my
objective so it makes sense and that's
why i'm doing this so how can we improve
our chances of success trading spy
options well one thing i think you
should do is have a strategy that's
written down on paper and a road map
that you can kind of follow it doesn't
mean you can't deviate from it but in
general
this is the path that we will follow and
i say this because every variable that
we can eliminate is going to increase
our chances so for example if you know
the return that you're targeting and you
put that in all your formulas then
you're gonna have a better chance of
success that's the idea right uh phil
hellmuth the bad boy of poker he's like
a white guy looks like your neighbor i
don't know if that makes him a bad boy
or not but uh he was a
great poker player and he wrote a book
called play poker like the pros i
remember reading this and you know his
his whole thing was about
calculating pot odds folding mucking
every bad hand and only playing about 10
good hands right aces queens kings
suited connectors and a few others right
so he wasn't
doing anything dramatic he wasn't
reading the guy across from there but he
definitely wasn't playing hunches all
the time either he was just playing good
solid poker that's where we start when
we're talking about options as well
that's going to improve our chances of
having success so get it down on paper
and work through it
if you've watched my other videos you've
probably seen me do it quite a bit this
is the best thing that could happen and
this is the worst thing that can happen
and if you know these outcomes or these
potential outcomes you're going to feel
a lot better when before you go into
this and start trading spy options one
other thing worth mentioning is qyld
since i did a video on it a couple of
weeks ago so you might say why not just
buy that and sit back and relax well i
think my strategy which doesn't take
that much time and effort we can still
give you the 12 percent the qyld does
but with more protection for your basis
so that's why maybe it's just arrogance
but i think i can outperform qyld
keep my money and get the 12 return
so let's talk strategy because that's
what this really boils down to and for
me i never want to own spy
with this pot of money that's my goal
because a big market correction is the
the biggest problem for us right if the
stock goes up that's not a problem
whether you buy the shares and sell the
covered call or if you sell a put
so i'm going to protect myself from the
downside the best way i can now my goal
for this particular pot of money is 12
percent if i haven't already mentioned
that one percent a month so the way i'm
going to set this up is i'm going to
sell a put
out of the money as far as i can to
collect one percent out about 30 days
monthly options
and i'll collect that one percent and if
i do this all year long then that's yeah
that's 12 percent i did just fine
unfortunately it doesn't always work out
that way and just so we're all on the
same page this is what it would look
like this is on fidelity so i'm selling
to open one put contract out a month
which would be april 25th
as of the date of this video with a
strike price of 434 dollars you can
crunch the numbers but this is going to
pay you off about 478
and that's just over one percent
for those
30 days or so that you own this and if
you take this out a year that's the 12
percent we just talked about so we sold
our first put we're off to the races
good job everyone we got our one percent
that's in our pocket right now now a few
different things can happen we've always
talked about these right if if spy takes
off
right shoots to the moon well then you
could probably buy to close this early
and collect the majority of that premium
and turn around and do it again that's
probably what i would do now if you want
to just melt it and wait knowing that
this is a pretty secure trade because
it's really out of the money at this
point
you can just let it ride but i would
probably close it out and repeat the
same process and collect another one
percent earlier than i expected
now if it trades sideways of course we
can just sit on it and wait for it to
expire again or close it out near
expiration and do the same thing collect
another one percent so those are both
good scenarios for us now if spy starts
trending down towards our initial strike
price that we sold this put against
that's not a bad scenario actually
that's almost perfect because we should
be able to collect the majority of our
premium and close that out or it might
expire right either way we're going to
be really close to that initial strike
price which means we can sell it again
sell it for the next month and even
lower strike price and feel pretty good
about that right
now if it does correct like
significantly let's say we sold this
again four percent out of the money plus
we got the one percent and let's say spy
drops seven percent this month well uh
it's not great right because we
collected
we were four percent out of the money we
got one percent it dropped seven
right so we had five all together we
gave up seven so we're essentially down
two percent
so
this is where you have a decision to
make do you want to play hot potato and
let it get put to you and then try to
get rid of it right away or do you want
to close it out and try to play it at a
lower strike price uh that's up to you i
tend to do the wheel strategy with this
but i completely understand if you don't
want to have it put to you and you want
to close it out and again try to get it
at a lower strike so that's a decision
that you kind of have to make as part of
your road map but in general if it's
just a little bit under there
because i have
more dry powder which i hate that saying
by the way but because i could buy
another one an average down i would
probably allow it to be put to me and
then i start selling the covered call so
let's look at the case where you decide
to accept assignment meaning you've
picked up the shares right so
let's not forget it dropped seven
percent but you were in about five
percent you're down about two percent
right now the shares have been assigned
to you and you turn around and you saw
the covered call well where would i pick
i would pick to sell it
at the initial strike price of that
point so i don't want to lose any money
on my basis so i want to accept selling
these shares back at the price that i
was purchasing them at because i want to
maximize this and i'm going to play hot
potato i want to toss it back to them
essentially if i can
and that would be the first scenario
where the spy rebounds right and and you
collect it's closer to the money now so
maybe instead of one percent you're able
to collect 1.3 percent for example just
to make up some numbers
so if it does climb back up there and it
gets called away well that's great now
you're up 2.3 after two months perfect
trade sideways again this is just fine
because we're going to repeat the same
process again and we're going to collect
another 1.3 at the end of the
for the third month so both good right
the only one that we're again having a
problem with is if we have a true
correction at this point where it goes
down another five percent so 12 from
where we started this initial process
and that's actually what we call a
correction that means it ain't coming
back folks right that means this is the
new value of spy that's the definition
of a correction it's corrected now
so with that well then you have a
decision to make so how are you going to
handle this if you have a true
correction so you actually have lots of
options here they might not all sound
great but first thing you can do is sell
a call at the original assignment price
and collect a smaller premium you can
sell a little bit further out and get a
bigger premium if you want
but you're definitely not going to make
that 12 right your annualized amount
might be 2 at this point but hopefully
it slowly comes back and you start
increasing your premiums over time
so that's one option you can then that
way you don't reduce your basis at all
right you could also sell a call at the
money to get the biggest premium
possible like qyld does but in that case
it has very likely that it could get
called away from you or you'd have to
close it out right so it just depends on
the volatility there if you want to go
that route
but that's not one i usually choose
myself because i want to protect my
basis
and the third one there is you could
sell a call and collect the one percent
just like we did with the put
and try to capture as much upside as
possible so again you could sell an out
of the money call option about three to
four percent above what the current
price is
and manage that position the best you
can and you might have me that might
mean that you have to
you know buy to close that position at
different times and you might have to
pay for a little bit of intrinsic value
as it moves up but if it does not you
know if it doesn't climb too quickly if
it only goes up one two three percent
you're going to be able to collect the
majority of it and this is what i would
typically do i would collect as much as
i could to the upside without you know
ruining my basis and still hitting my
goal
and the final thing you could do which
is another thing that i might do is just
average down right and sell additional
puts
if you believe that the market is strong
enough and you feel comfortable with
doing that so those are all different
ways to go about it but typically what
i'm going to do is i'm going to sell a
call
again to collect that one percent as far
out of the money as i can
uh it's to maintain my basis and control
my position and of course if you are
concerned about spy and you want to add
a protective put that's another whole
part of your game plan that you could
add so in that case i just a couple
different ideas is one you know you can
still target 12
overall return but you just sell your
put closer to the current stock price
and give up the additional premium that
you're collecting to buy a put that you
feel gives you an acceptable level of
protection
and that could be if with the same
expiration obviously that's a credit
spread but you don't have to do that you
can buy it out two months right so and
this is an example here so imagine
selling the put you had before and
collecting one and a half percent
instead of one percent every month that
gives you an extra one percent to invest
into a protective put
so use that one percent or about 470
dollars right to protect yourself over a
period of time so what you see here is
i'm you know buying to open one put may
20th expiration about two months out at
415 strike right so if there is
a significant correction well i do have
a protective put in place so
this type of plane i just think is
really important and if you think this
out it will really reap benefits down
the road now i if this is getting
confusing and overwhelming too i have
plenty of videos on my channel if this
feels confusing
they go over some more of the basics um
so go back and watch those and then you
can come back and this probably make
more sense so i'll link i will link some
of those examples below that can help so
those are the basics of my basic
strategy when it comes to trading spy
options now here's an example of one
that i have open right now just to show
you that yes i do do this one this is a
good scenario one where uh you know spy
was at 444 dollars a share and it's
since gone up to 452 since when i
purchased this on 321 it's a 425 dollar
put so stage one right so in this case
i've collected 52 percent of the total
premium already after one week and this
is one where you maybe i can close it
out even this next week we'll see how
the week starts
working for me so yeah i could even
close this one out today honestly
but it doesn't always work out this way
like we talked about so we want to be
prepared but that's just one example of
how this might work out stage one
selling a put so if i talk through that
too quickly or something just doesn't
make sense please just ask me down below
and i'll be happy to give you my opinion
then you can go verify if it's right
it's up to you but
you know trading options like this isn't
for everyone i would actually recommend
if you don't need the income don't do
this invest for the long term buying
whole good etfs and great stocks
but if you do have a reason like if
you've got a mortgage with some really
low interest and you want to do what i'm
doing put some in a pot trade something
like this against spy options well all
the more power to you but again any
questions ask down below now i really
appreciate you watching taking some time
with me uh if you wouldn't mind if you
like this kind of content please like
and subscribe and we will see you next
time have a great night
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