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High Yield Income Opportunities using OptionsPlay

Tony Zhang
August 16, 2021
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High Yield Income Opportunities using OptionsPlay

Option income strategies can be used to increase the yield of an equity portfolio by generating an income stream and by purchasing stocks at a potential discount. This post will cover which options strategies to use based on your primary goal, how to implement these strategies and how you can instantly scan the entire market for opportunities using OptionsPlay. Investors looking to generate a consistent income on their existing equity positions could sell Covered Calls while investors wishing to obtain a stock could use Cash Secured Puts. Additionally, we recently added a new feature for users to instantly view opportunities on our Daily Income Reports within the OptionsPlay platform.

What is a covered call?

A covered call is the most popular strategy to generate income with options. There are two steps required for an investor to utilize this strategy – owning at least 100 shares of a stock and selling an “out-of-the-money” (OTM) call option. This income strategy is generally most effective with a neutral or bearish outlook on the stock. Selling the call option obligates the investor to sell the stock at the strike price of the call option upon expiration when it is favorable to the holder of the call (i.e. the buyer). The goal of this strategy is for the option to expire worthless when the stock is trading below the strike price at expiration, keeping the income from the call option. The seller can then repeat selling covered calls to generate a stream of income until the stock is above the strike price upon expiration. When this occurs, the stock is sold to the buyer of the call option at the strike price.

For example, if a Bank stock is trading at $100 and an investor sold 1 Bank $105 call for $1 per share, the investor would be obligated to sell the stock in the event that the Bank stock is above $105 at expiration. If the Bank is trading below $105 upon expiration, the investor keeps the $1 income and can continue to sell covered calls to generate an income stream.

Covered Call Best Practices

  • Sell strike prices above the current stock price.
  • Lower delta strikes are suitable (15-20 delta)
  • Sell short-dated options (3-7 weeks) as they take advantage of higher time-decay (theta)

Learn more about selling covered calls with our Practical Guide to Selling Covered Calls 

What is a Cash Secured Put?

A cash secured put simply involves selling a put option while setting aside cash to buy the stock in the case of assignment. The cash secured put is primarily considered to be a stock acquisition strategy but can also be an income generating strategy. A put selling receives the premium from selling the option and can generate an income stream while acquiring stocks. For example, if the Bank stock is trading at $100 and an investor sold 1 Bank $95 put for $1 per share, the investor would be obligated to buy the stock in the event that the Bank stock is below $95 at expiration. This allows the investor to use the income received to net against the total cost of buying the stock at the strike price. The overall effective cost of buying each share is therefore reduced to $94 ($95-$1).

If the market price rallies, the investor profits from the premium received and if the price drops, the investor will purchase shares at the strike price plus a discount ($1 premium).

Cash Secured Puts Best Practices

  • Sell strike prices below the current price.
  • Higher delta strikes are suitable (35-45 delta)
  • Sell short-dated options (3-7 weeks) as they take advantage of higher time-decay (theta)

Learn more about selling Cash Secured Puts with our Quick Guide on Selling CSP

Optimal Covered Call and Short Put Reports

OptionsPlay, in partnership with TMX, provides investors with Daily Optimal Covered Call and Short Put Reports that utilize the best practices that we outlined in this post. These reports are designed to save investors time in scanning for income opportunities in the market. Both reports follow the best practices mentioned above and scan hundreds of symbols for optimal income opportunities daily.

Image – OptionsPlay Income Opportunity Report

Source: OptionsPlay

The Analyze Link is a new feature added to the Daily Covered Call and Short Put Income Opportunity Reports that saves investors even more time! This feature allows investors to seamlessly open a trade in the OptionsPlay platform from the report. Simply click on the link in the report for any trade, and the OptionsPlay platform will instantly open and populate exact details of that trade setup for quicker analysis and execution. By eliminating the inefficiencies of manual input, investors can make quicker trading decisions and immediately analyze important metrics such as probability of profit, Greeks, breakeven, and maximum risk and reward. Additionally, investors can adjust and analyze the trade based on their directional view on the underlying stock and expiration date.

Take advantage of free access to OptionsPlay Canada: www.optionsplay.com/tmx 

 

Disclaimer:

The strategies presented in this blog are for information and educational purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

Copyright © 2021 Bourse de Montreal Inc. All rights reserved. Do not copy, distribute, sell or modify this document without Bourse de Montreal Inc.’s prior written consent.  This information is provided for information purposes only. The views, opinions and advice provided in this article reflect those of the individual author. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this article, and we are not responsible for any errors or omissions in or your use of, or reliance on, the information.  This article is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied upon for such advice.  The information provided is not an invitation to purchase securities listed on Toronto Stock Exchange, TSX Venture Exchange and/or Montreal Exchange.  TMX Group and its affiliated companies do not endorse or recommend any securities referenced in this publication.  Toronto Stock Exchange, TSX, TMX, the TMX design, The Future is Yours to See., and Voir le futur. Réaliser l’avenir. are the trademarks of TSX Inc. and are used under license.  Montreal Exchange and MX are the trademarks of Bourse de Montréal Inc.  All other trademarks used herein are the property of their respective owners.

Tony Zhang
Tony Zhang http://tmx.optionsplay.com

Head of Product Strategy for OptionsPlay

OptionsPlay

Tony Zhang is a specialist in the financial services industry with over a decade of experience spanning product development, research and market strategist roles across equities, foreign exchange and derivatives. As the current Head of Product Strategy for OptionsPlay, Tony leads the research and development of their OptionsPlay Ideas & Portfolio platform. He has leveraged his interest in financial technology and product development to provide innovative, reimagined solutions to clients and the users they seek to serve. Previously he spent 7 years at FOREX.com with a capital markets and research background as a market strategist specializing in equity and FX derivatives markets.

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