How to Target Consistent Monthly Cashflow with Option Selling
Building your Premium Ladder by “Staggering”
Whether you are building an option selling portfolio for income or simply targeting compounding growth, achieving steady monthly cashflow can be good for both your bottom line and your psyche.
Unfortunately, the way many new option sellers approach the market is often in a “willy-nilly” manner. Sure, you have to wait for your opportunities and pick your premiums carefully. But having an organized plan for doing so is critical if you are approaching your portfolio as a serious long term asset.
For achieving this, you may want to consider the simple strategy of staggering.
Staggering your options throughout different calendar months can provide a more consistent equity curve as well as help reduce risk.
Staggering short options is a popular strategy with both income and total return investors. You may hear some comparing this strategy to building a bond or CD "ladder", in which you have paper maturing in every month of the year.
What is Staggering?
Staggering or “layering” your options is a concept of selling groups of options with different expiration months with the objective of having a certain amount of options expiring every month.
For instance, an investor wanting to stagger his portfolio may take the following approach:
Option Premium Ladder using Staggering
Month 1 – Sell options 90 days out
—————⟶Month 2 – Sell options 90 days out
——————————⟶Month 3 – Sell options 90 days out
The objective of this approach is to set the portfolio up so that you have options “scheduled” to expire in every month of the year – thus providing a steady stream of income or rate of return. By the end of the first 90 days, your first set of options will be expiring. As these expire, you continue to roll them into another set of options 90 days out and continue this cycle throughout the year.
Of course, you could do this at 120 day intervals or 150 day intervals as well. However, by incorporating this ladder building approach, you should have at least some options expiring nearly every month.
Positioning your portfolio this way not only targets return, it targets consistency. That is a quality that is increasingly hard to come by in today’s markets.
To learn more about staggering options and other option writing strategies for high net worth investors, be sure to order your new copy of McGraw-Hill’s The Complete Guide to Option Selling 3rd Edition.
About the Author
Michael Gross is Director of Research at OptionSellers.com, a specialized investment firm providing managed option selling portfolios to high net worth investors. Michael has co-authored three books on writing premium, including 2014’s The Complete Guide to Option Selling 3rd Edition. His articles and insights on selling options have been featured by Fox Business, The Wall Street Journal, Barrons, Yahoo Finance and Forbes.com. For more information on working directly with OptionSellers.com visit www.OptionSellers.com/Accounts.
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.