Is It Possible to Live Off of Just Selling Put Options?
Is it possible to make a living from selling put options? The answer is technically yes, but it’s not a cut-and-dried strategy. While it is theoretically viable, the reality is that the majority of traders may not be able to sustain themselves solely on this income. This article aims to explore the potential and risks of this strategy, offering insights and advice from a seasoned trader’s perspective.
Risk and Reward: The Fine Line
The core of selling put options is essentially earning a premium by betting that a specific stock’s price will not fall below a certain strike price by the expiration date. While the premium collected can be substantial, the potential for loss is also high if the stock price plummets. For example, a premium of $1,000 on a $20,000 position could be wiped out in a single trade, turning a profitable strategy into a financial disaster.
My Personal Experience
To provide a more comprehensive understanding, I have been involved with this strategy for most of my life. However, there are several critical considerations that traders must keep in mind:
Understanding Small Positions. It’s easy to believe that small positions carry minimal risk, but during high volatility, these minor losers can quickly turn into massive financial downturns.
Staying Unbiased. Diversify into as many uncorrelated products as possible, but remember that high volatility can make even uncorrelated products correlated.
Waiting for Volatility. It’s frustrating to wait for volatility, but you need to be patient before entering positions. Low volatility can persist for extended periods, leading to missed opportunities.
Details Matter. Even if you plan to solely sell naked spreads, it’s crucial to understand various strategies like debit and credit spreads, verticals, horizontals, diagonals, iron flies/condors, and calendars. This knowledge will help you better manage your positions.
Keeping Cash. A significant portion of your portfolio should be parked in cash to act as a cushion. If you have a $100,000 account, consider keeping 70% in cash to react to unexpected high volatility.
Financial Implications and Living Off Income
While the average annual returns from selling put options can reach up to 30%, a smaller account can still produce respectable returns. For instance, 10% of $100,000 is $10,000. Is this enough to live on? It depends on your lifestyle. Personally, I would feel more comfortable living off this income if I had at least $500,000 in my account. This would provide a safety net to weather any uncertain years.
Illustrious traders I have met have consistently used this strategy to generate substantial income. For example, a trader I met managed an account that consistently produced over 30% annual returns, allowing them to live off the income. Another trader did well with 10% annual returns, showing that consistent performance is possible with this strategy.
It’s worth noting that selling put options is an incredibly stressful lifestyle if it is your sole source of income. However, if you are passionate about it and willing to dedicate the time and effort to understand and master the strategies, it can be a very rewarding endeavor. If you incorporate this strategy into your income but primarily rely on a base salary, you could still achieve substantial growth over time, thanks to the power of compounding.
Conclusion
In conclusion, while selling put options can be a viable income-generating strategy, it is not without its risks and challenges. By understanding the underlying mechanics, remaining patient, and diversifying, traders can turn this strategy into a dependable income source. Whether you want to live completely off the income or supplement your current earnings, selling put options can be a valuable tool in your financial toolkit.