An investor can get a monthly income by buying stocks that are paying off a nice dividend. But they are not the only way to make a cash flow from a stock, why stop there? By selling put options an investor starts the trade off right by already making money before even entering the position.
If you do sell a put you will be obligated to buy the stock at a certain strike price on or before some point in the future. For example if you sell the $30 put on stock XYZ you may make say $2 from the put, but you would also be obligated to buy it at $30 should it go below that price.
Now some of you may be thinking, why on earth would I want to do that? You can either be forced to pay more than the price of the stock or you will miss getting into the stock entirely.
While that is true you do keep the $2 you made from selling the put. If the stock goes up then you will not get into it, but who cares when you can simply sell another put and make even more money. The consistency of selling puts alone can do much better than the simple buy and hold strategy at least from my experience.
On the other hand if the stock does go below $30 you would have to buy it at $30. However, because you made $2 from the put you would have done a lot better then someone who would have simply bought the stock.
Also if the stock is a nice dividend paying stock with unbelievable fundamentals and you don’t mind hanging onto it for a while then it can be fantastic. The only catch is, you have to be willing and able to buy the stock if you do get put the stock.
Personally I see this as a great way to get into a stock that I want to get into, and once I am in I can always start covered call writing to increase my returns further.
