everyone wants free money and in today's
video i'm going to show you what i
consider to be the closest thing to free
money in the stock market and that is by
selling options now look i know you
might be skeptical and so was i before i
learned the strategy but by the time you
finish watching this video you'll have
everything that you need to start making
passive income right away ladies and
gentlemen welcome back to pandrea
finance my name is alex pandrea and in
today's video i'm going to show you my
strategy for selling options for passive
income how i enter trades which strike
prices i choose and more importantly how
i close out of my trades to continuously
collect that income on a weekly or
monthly basis now at the end of this
video i am going to share with you my
exact step-by-step game plan that i
follow whenever i sell options so if
you're ready then so am i let's just
jump into it the first thing that you
need to understand is the difference
between buying options and selling
options and what our goal is for each
now i know you might know the general
difference but there is one specific
piece of information that we must
understand before making any trades and
that is that buying and selling options
are opposites
wow great observation there alex all
right all right just hear me out because
this is important for the overall
strategy when you buy options you pay a
premium for that option when you sell
options you're collecting a premium the
money goes from the buyer of the option
to the seller of the option since both
the buyer and seller are betting on the
same option only one can win the trade
as in the option could either expire in
the money or out of the money the buyer
is hoping that the option expires in the
money and the seller is betting that the
option expires out of the money this is
in essence the ultimate goal of buying
and selling options and you make profit
along the way as that goal becomes a
reality in the markets but here's the
interesting part the percentages of
winners between buyers of options and
sellers are not equal the reason for
this is that ninety percent of the out
of the money options expire worthless
now this statistic doesn't take into
account things like closing the options
early taking profits along the way
exercising the options but nevertheless
the point is you have a way higher
percentage of winning your trades if you
are on the side of selling options
rather than buying options because well
math so if you've always tried buying
options and you see you're losing money
well that premium that you paid goes to
the option seller who's just collecting
that free money basically and laughing
all the way to the bank
accounting is all right let's jump into
the option chain and take a look at an
example we're gonna go ahead and take a
look at facebook or as it's now known
meta platforms
we're gonna go ahead click trade and
trade options and let's go about a month
or so out so i'm gonna choose expiration
date of december 17th and make sure
you're on sell and call at the top
you'll notice that the closest at the
money strike price the 345 calls has a
69 chance of profit in other words it
has a 69 chance of expiring out of the
money remember that is what we want when
we're selling options and 69 is good but
we can do a little bit better so let's
scroll up a little bit and let's go to
the 365 calls which have an 80 chance of
expiring out of the money this
translates to 8 out of 10 times you will
win this trade if you sell this option
this also means that if you are on the
other side of this trade buying the
option you will only win 2 out of 10
times or 20 which is the opposite of 80
now robin hood is sneaky because they
don't give you the percentage when you
click on buy and call if you notice over
here so if we switch it to buy and call
you'll see that instead of the
percentage of profit you'll get the to
break even price because let's be honest
if people see that they only have a 10
to 20 chance of winning the trade then
people might wise up and realize they're
just throwing money away but for you
guys if you want to know the percentage
just know it's the opposite of what the
sell call percentage shows so the key
takeaways from this first section are as
follows when selling options you want
the option to expire out of the money
second the majority of out of the money
options expire worthless so the math is
in our favor when selling options and
third you have the percentage of winning
that trade clearly listed on your
brokerage for selling options so you
know mathematically your chance of
success and all of this is great because
it takes the guesswork out of options
and trading we're going to follow the
numbers follow the percentage and we
will be successful moving on to the
second part of this strategy the
different ways that you can make money
selling options selling options can be
broken up into two categories basically
selling puts and selling calls and of
course there's a combination of these
two with spreads and iron condors and
fancy stuff like that but basically
you're either selling a call or you're
selling a put so let's go over what it
means for each of these categories
selling puts selling puts gives the
seller the obligation to purchase stock
at a given strike price if that option
expires in the money and the option is
exercised if we want to sell options for
income we do not want our stock price to
drop below our strike price
if that happens we may be forced to buy
100 shares of the company for every one
option contract we sold we must have
collateral in the form of cash to cover
our position in case we are forced to
buy the stock if the stock price does
not drop below our strike price then we
get to collect the entire premium
selling calls selling calls gives the
seller the obligation to sell stock at a
given strike price if that option
expires in the money and the option is
exercised if we want to sell calls for
income we do not want our stock price to
exceed our strike price if that happens
we may be forced to sell 100 shares of
the company for every one option
contract that we sold to cover our
position we must have collateral in the
form of shares 100 shares for each
option contract if the stock price does
not exceed the strike price by
expiration then we get to keep the
entire premium so to summarize the
process of selling calls and puts the
first thing that you do is make sure
that you have collateral necessary to
start selling options okay so you have
the collateral good then you have to
pick an option you want to sell and well
sell it
once you sell the option you can collect
the premium to ching and that money is
then put into your account right away
that money is now yours to do with what
you want but keep in mind that you'll
need to close out your position by
buying back that contract at some point
the best case scenario is of course the
option will expire worthless as in the
premium is now zero dollars and you
don't have to buy it back anymore but in
a lot of cases you might have the option
be worth pennies so not quite zero and
you don't want to wait until expiration
so you'll decide to buy back that option
at a lower price than what you sold it
for and keep the difference in profit
remember when buying options we want to
buy low and sell high right but when
selling options we want to do the
opposite sell high and then buy low so
our ultimate goal when selling options
should be to get the most amount of
premium possible for that option and
then watch that option decrease in value
as that option decreases in value that
means that you will end up keeping more
and more of that premium that you
collected at the start once you close
your position you can go ahead and put a
new trade on and do this over and over
collecting premium each week each month
and he'll be the one this time laughing
and also laughing at your past self who
used to buy options never making any
money
okay now putting it all together let's
take a look back at the option chain and
see how much money we can really make
selling options before we do it's
important to keep one thing in mind and
to understand that this is a percentage
game and the money that you're going to
make is going to be in percentage terms
relative to how much collateral you have
to put up so we always want to take a
look at the return on collateral to
determine if a trade is a good trade or
you can live without it typically i look
to make around two three four percent
per month on the money that i have as
collateral for selling puts calls
spreads all that kind of stuff and from
my personal experience it usually
averages to around two percent return
per month overall which i think is a
great return remember the average stock
market return is 10 per year so if we
can beat that overall by making the
average of 2 monthly as consistent as
possible what more can you ask for now
look if you're here thinking that you
can just double your money overnight or
have unrealistic expectations of your
returns in this market then i hate to be
the one to tell you this but it just
isn't realistic especially at the win
rates that we're going to have one
selling options of course you can make
much higher returns by taking way more
risk but then you are not having a
disciplined strategy that can
consistently make you gains so if you
want to do things correctly and safely
without losing all your money then in my
opinion shoot for two percent per month
and i think overall in the long run
it'll be a much wiser decision for our
first example let's take a look at gaap
we're going to hit trade trade options
and go about a month out so let's say
let's choose december 17th and make sure
you're on what you want to sell so sell
call or sell put now for me i don't own
100 shares of gaap but i do have cash so
we're going to be selling puts so make
sure you click sell put and we're going
to go down to let's say the 22 put which
has a 76 chance of profit we're gonna go
ahead and click on the option and enter
one contract and you'll see that we're
going to get a minimum credit of 72
dollars and then if we hit review it'll
show you the collateral that you have to
put up to receive the seventy two
dollars in this case it's two thousand
two hundred dollars that you have to put
up as collateral in cash for that
seventy two dollars to be put into your
account and if we do the math on it
seventy two dollars is about a three
point five percent return on your
collateral which in the context of an
individual trade is very good so you're
gonna put up the money grab 3.5 percent
try to collect as much premium out of
that as possible if the option decreases
in value you can buy it back and
hopefully end up with an average of a
two percent return second example let's
go to mgm resorts hit trade trade
options and again we're gonna use the
same expiration date of december 17th
and let's check out what we have for
sell and put make sure all the time that
you're on the right thing on the top
because the last thing that you want to
do is buy the option instead of selling
it that would be
we're going to go down on the option
chain after we click sell put we're
going to go down to about the 47 put and
you can see that we have a 74 chance of
profit so we're going to click on that
option and we're going to enter one
contract and we see that we get a
minimum credit the premium that we
receive of 129 now if we click review
you'll see that we'll have the post
collateral of 4 700 and 129 of 4 700 and
percentage term is about a 2.5 something
like that between 2.5 and 3 return not
as good as the gap premium return but
still pretty good now of course this
goes to show you that different stocks
have different option premiums some
premiums may be higher based off of
implied volatility and other factors if
you want to learn more about this and
more in depth you can click on this
video here that explains further about
option premiums so you know what to look
for when choosing an option with a lot
of premium baked into it speaking of
volatile stocks let's take a look at the
third example amc let's go trade trade
options hit the same expiration date
december 17th make sure you're on sell
and put again if you have cash sell put
if you have the stock itself and you
want to sell covered calls you sell
calls let's scroll down in the option
chain to
let's get a good percentage the
31 dollar put has a 75 chance of
expiring out of the money so you have a
pretty good chance of winning this trade
we're gonna go and click it and hit one
contract and you'll see that you'll get
a minimum credit of two hundred and one
dollars and if we hit review you have to
post collateral of thirty one hundred
dollars now the return on this trade
will be about 6.5
off of your collateral which is a very
good return and that's because the
premium on a stock like amc is very high
so you collect a lot of premium you let
the value drain out of it and you
collect more than you would let's say
with the first two examples now you can
see that an important trait in selling
options is slow and steady you are not
looking to make huge gains and you won't
be screenshotting your returns anytime
soon to post them on wall street bets
i'm afraid but what the strategy does
allow you to do is mathematically
guarantee a percentage return to some
degree and make a steady income off of
the capital and the collateral that you
have without putting it at a lot of risk
like you might do with other investments
now of course when starting out with a
small account you're going to be making
a small percentage on an already small
amount and it might not seem like a lot
to begin with but just like any good
compound investment it grows over time
so the goal is to collect premiums
slowly but surely add that premium to
your capital and then the next time you
make a two percent return that dollar
amount would be higher because you're
making that return on a higher amount
and that's no balls on and on and that
is how i started see for me i have a
separate long-term account that i sell
options in so i do a combination of
selling covered calls on the stock that
i own selling puts on the cash that i
have and different things like fancy
iron condors and spreads and i grew that
account to now about one million dollars
and like i said i can average about two
percent monthly selling options which is
about five thousand dollars per week
give or take again some weeks or higher
some weeks are lower sometimes when a
trade is going against me i might just
close it out so i don't get assigned or
have to buy shares but on average this
is how i make passive income on my
long-term stock portfolio now look i
don't do this to show off my gains to
you because in all honesty two percent
might not even be impressive to some of
you out there but rather to show you
that eventually when your portfolio is
at a decent size you can start making
really good income just by selling
options and it sure beats a four percent
return a year on your dividend stocks if
you're
one of those dividend investors now here
comes the most important part of selling
options and that's closing the position
and buying back the option for profit
now as you know our ideal scenario is to
have the option expire worthless at
expiration this way we collect 100 of
that premium but is that really the
ideal scenario well let's think about
this for a second let's say you sell an
option expiring one month out and you
collect the full premium boom it's in
your account right away now you want to
hold on to that premium and not have to
give it back that's the ultimate goal
but let's say next week that option
loses 50 of its value well in that case
what i would do is buy back that option
and only keep 50 of the value and then
open up a new position rather than
having to wait another three weeks for
the other 50 of that premium right makes
sense i mean typically the old saying
holds true profit is profit and when the
option loses value fast and there is no
harm taking profit and moving on to the
next trade this is typically why i don't
sell weekly options see weekly options
don't have a lot of time value in the
premium so you're already starting out
not collecting much the option doesn't
lose a lot of value until the last day
or so so you're having to wait until the
last day or the day of expiration to see
whether or not the option will expire in
the money or out of the money i
personally like monthly options much
more because you can collect more
premium i can then close my positions
early if necessary at 50 profits 60 70
percent if they lose value quickly and
then turn around and open up a new trade
rather than having to wait until
expiration to get the rest of that
premium this ultimately will make you
more profit in the long run so here is
my strategy put together in a
step-by-step formula you want to pick
options that will give you a probability
of success of 75
or higher now typically a one standard
deviation move will put you at around 84
percent chance of profit now i broke
down why you should be looking at
standard deviation moves in one of my
previous videos so you can click here to
watch that and go over it step by step
but studies have shown that around 75
is that perfect sweet spot for
collecting a good premium and having a
good chance of success in the trade and
based off of my experience 75 80 percent
works for me you want to pick an option
that will return two to five percent on
your capital on your collateral that you
put up on a monthly basis by picking
stocks that have higher premium you'll
get those three four five percent
returns or even higher sometimes and
when closing out your positions at fifty
percent even you can easily average that
two percent goal every month at least
that's what i try to do now studies have
shown that about 30 to 45 days out until
expiration is the best to sell options
so i would look to go about 45 days out
and start closing the position a week or
two early depending on how much value
that premium has lost so i would close
the position and then open up a new one
after closing the position i open up a
new one so i don't have to wait the full
45 days until expiration i start closing
my positions at about 50 profit if the
value of the premium decreases by 50 i
start buying back the option at 50
60 75 and typically at around 75 percent
i'm out of the option completely now
this of course depends on how quickly
you got to that 50 to 75 range how much
time is left on the contract but i
rarely let the option expire worthless
because i don't want to wait and i want
to get that collateral back and move on
to the next trade so small gains boom
boom boom don't get too greedy and
repeat the process so the key to this is
not to just do it once or twice but to
do this repeatedly as many times as
possible making small profits each time
have patience and be persistent nothing
great ever came easily and even though
that yes in my opinion this is the
closest thing to free money and it is
relatively easy you still have to know
as much as possible about what you're
doing to be great at it you can continue
your journey learning options by
watching my other videos on options here
and here and if you've learned something
in this video i would really appreciate
just a little like on that video just a
little tap and please subscribe if you
haven't already because there is a lot
more content to come thank you so much
for watching and we will see you on the
next video