Options Income Every Week or Interest Every Month?

Easy Income Strategy includes using Options Trading for weekly income

Dividends and interest are certainly the easiest way to earn income from investments. The problem with most dividends is that they generally only arrive quarterly. Some investments, like many REITs, pay monthly dividends. But there is an easy way to earn income if you buy the appropriate investments. Many stocks and even some ETFs are traded on the options market. I’ve talked about this in previous posts, but I think far too many dismiss options as risky or difficult to understand and apply.

It is true that many investors do not buy investments with the idea that they may want to trade options. While I still like ETFs (VYM, SCHD, DGRO), they have limits when it comes to income and options trading. They pay quarterly dividends. I like being paid more than four times each year.

VYM’s Top Ten Have Options Possibilities

I have traded options on AVGO, HD, CVX, and ABBV.

Most of the top ten investments in many ETFs can be traded as covered call options. A quick review of VYM’s top ten shows the companies that make up one-fourth of VYM’s total holdings are Exxon Mobil Corp, JPMorgan Chase & Co, Johnson & Johnson, Procter & Gamble Co, Broadcom Inc, The Home Depot Inc, Chevron Corp, AbbVie Inc, Merck & Co Inc, and PepsiCo Inc. I currently own shares of AVGO (Broadcom), CVX (Chevron) and ABBV (AbbVie). For all ten you can trade options. The average person is probably not going to want to buy 100 shares of AVGO, because at the current market price that would cost $95,752. However, CVX is far more affordable at $14,295 for one hundred shares.

CVX or AVGO as Examples

If your total investment portfolio is at least $300K, then you could buy 100 shares of CVX and have that be less than five percent of your total investment portfolio. You could then trade covered call options on your 100 CVX shares every week for additional weekly income. It is true that the dollars you might earn from options on CVX will be less than what you could earn if you owned 100 shares of AVGO. However, you are exposing yourself to far less downside risk.

There is another set of factors to consider. CVX shares are down 21% YTD while AVGO shares are up 89% YTD. Furthermore, the QUANT rating on both investments on Seeking Alpha is “Hold,” which means it might not be the right time to buy shares. However, both are dividend growth investments, so you get paid quarterly if you own either one. CVX has a 35-year history of paying increasing dividends and AVGO has a 12-year dividend growth history.

Slow And Steady Buys Reap Growing Rewards

Don’t jump in all at once! I did not buy my 300 shares of AVGO in one big gulp. The first purchase in my traditional IRA was ten shares in February 2021. I paid $467.50 per share for those shares. Then I made eight more purchases until I had accumulated 100 shares. The one hundred shares cost me $48,320 and I owned this total investment by August 2021. At that point I could start trading options on AVGO. As you can see, because the 100 shares are now worth $95,752, they have about doubled in value in a little over two years. I can afford to “lose” the shares if they were to get called away in an options trade.

One Hundred Shares of AVGO currently are worth over $95,700

I have been receiving quarterly dividends. To date I have received $9,372.50. However, because I continued to accumulate shares of AVGO, and now own 300 shares, my shares earn me $5,520 per year in dividends. In addition, the stock pays a growing dividend. So while AVGO currently pays $18.40 per share per year, it is reasonable to expect that to increase annually.

Synthetic Dividends and Total Income

In addition to dividend income, I can trade options on my AVGO shares for even more on-demand income. During the time I have owned my shares I have also received $24,192 in options income. In 2023 alone the total income from options trading is $9,971. Furthermore, because some of my shares have been called (and then repurchased), I also have a total capital gain of $8,474. If you add my income from dividends, from options trades (synthetic dividends), and the capital gains realized, I have received $42,038 in income just from the AVGO investment.

Rolling Options and Roll Again

While I have cut back on my options trading activity, there are opportunities that are easy to spot and don’t take much time. Thursday, I spent about ten minutes and earned an additional $543.65 rolling one of the AVGO covered call options from a contract price of $930 to $935. I was able to make a profit because the $930 contract expires November 10. The new $935 contract expires one week further out on Friday, November 17. This trade took about five minutes and increased my potential capital gain by $500. Here is the math: ($935 – $930) x 100 = $500.

Part one of the single trade – liquidate the $930 call. I paid $240 to close the contract.
Part two of the roll trade: sell a new call to expire next week making $785. Net gain of the roll = $543.65 after trading fees.

Then, to my surprise, the price of AVGO shares rose even more. Therefore, I did a second roll up from $935 to $950 by extending the contract until November 24. This only gained $73.64 in additional income, but it increased my total profit potential on 100 shares by $1,500. Here is the math: ($950 – $935) x 100 = $1,500.

What Happens Next?

The last trade of the week had AVGO priced at $957.52 per share. The person who bought my covered call for $950 has the potential to make a profit if the shares remain above $950 through November 24. But if the share price drops, I get to keep my 100 shares and the options income. If the shares are called away, that is also to my advantage in two ways. One, it reduces my holdings in AVGO. I currently have 16% of my traditional IRA in AVGO. That is far more than I would generally recommend. It is also 9.9% of our total investments at Fidelity. So a sale of one third of our shares reduces our risk.

Secondly, the sale could generate $95,000 in cash. Even if I just buy a 5.3% CD, I can receive $5,035 in interest income from that cash. Furthermore, that means I will receive monthly income of over $400 per month and that is also easy income.

Let’s compare that to the dividends from 100 shares of AVGO. The AVGO shares will earn less than $2,000 per year with higher potential risk and higher potential reward. However, by reducing my risk I can increase my income and make it monthly.

Success Factors for Options Trading

  1. Buy investments that pay growing dividends. Don’t buy one hundred shares all at one time. Rather, buy five or ten shares until you accumulate 100.
  2. Buy investments that also trade weekly options. Once you have 100 shares you can being to trade covered call options.
  3. Avoid trading options that expire more than a week from today. For example, if you are trading options on any stock, consider the next Friday date as the date your option contract will expire.
  4. When rolling options do the math. If you can get a profit from the options trade and add to the potential total income received if your shares are called away, then roll the option out another week.

I have written many times about options trading. If you want to learn more about this profitable way to add to your income, search for “Options Trading”, “Roll Options”, and “Covered Calls.” These are listed in the CATEGORIES on the right side of the main page if you scroll down.

Full Disclosure

I own 300 shares of AVGO as a long-term investment. As a result, it is in the top ten investments we hold.