How I make $1000 per Month Passively Selling Option Premiums?

VR Investments
5 min readOct 27, 2022

Prerequisites:

  • Basic level charting
  • Basic level Options knowledge and Risk Management
  • Understanding OHLC, Supply/Demand
  • Level 3 trading enabled in your brokerage

Why should you write options?

What if i tell you that you can make money in any market conditions, whether it goes up, goes down or just stays flat.

Sounds interesting?

Buying options you need to be 100% sure of the above and you need to time the market properly and that requires exceptional charting skills. For option selling, you don’t have to be 90% sure all the time. As long as the stock remains above your strike price, you win! And that gives more flexibility than option buying or buying in cash market.

Credit spreads involve the simultaneous purchase and sale of two options contracts, either both calls or both puts, with the same expiration date but a different strike price.

The idea behind a credit spread is you are looking to capture the net credit you bring in from opening the position. The option you sell is going to be at a higher strike price or closer to the money than the option you purchase, resulting in a credit for the trade. If both strikes expire out of the money (options will be worthless) then you will get to keep the credit. Your max loss is the difference between the strikes plus commissions.

The reason this trade is in your favor is theta, or time. As the trade gets closer and closer to its expiration your options will start to experience time decay which decreases the value of the options and this is exactly what you want! So, even if the underlying stays at the same price or even slightly against the way you want it to go, you will profit.

Credit spreads is a high probability income based strategy that caps your gains but also minimizes your risk. Basically you are just letting time take its toll on your option premiums while you sit back and collect on expiration day.

Trading credit spreads is one of my favorite options strategies. Credit spreads are an effective way to generate options income because traders know the mathematical probability of profit. We like to trade high probability credit spreads with about 90% probabilities, which means there’s only 10% chance of losing a trade.

Say for example, you make $100 on a weekly option writing. $100 a week doesn’t seem much. But when you compound it, it becomes a huge sum of money.

The PnL you can make trading weekly options are,

$100 * 52 weeks * 3 (considering you collect premium thrice per week) = $15,600

You don’t have to ask your boss to give a raise in paycheck, when you can give yourself a raise ;)

  • Stocks to trade: SPY or IWM
  • Delta: 0.10–0.15
  • IV: 45–80%

I like trading SPY as there are 3 expiries per week and has good liquidity. So it gives a flexibility to collect premiums thrice a week. But it’s upto you, as long as the criteria meets, you’re free to choose any stocks.

There are different option greeks called Delta, Gamma, Theta, Rho, Vega. Most important is Delta & Theta.

What is Delta?

  1. Probablity that your options will go ITM in expiry. For option selling, you shouldn’t let your contract go ITM. I like to open delta between 0.14–0.18
  2. It also tells you, for each $1 in underlying, how much your strike price moves towards ITM

What is Theta?

  • Theta refers to time decay
  • For option buyers, it’s the worst enemy as each day passes, it represents how much your contract loses in value
  • However for Option sellers, it’s like your best friend forever. Because as a seller, it should be more so make the buyers lose, so that you win. Since it’s good, we try to open higher theta contracts for faster time decay.

Charting:

Trust me, when it comes to charting – You don’t need advanced charting skills like finding cycles or elliot wave principles. You can stick to your usual basic charting like using SMAs, EMAs, RSI, MACD. That’s the beauty of selling options. You can apply this strategy to whatever you already know.

My advice would be don’t use multiple indicators, for the same purpose. My kind of charting is based on Ichimoku, DMI and Pivots. I use all three for different purpose. Ichimoku to find the trend change and momentum, DMI – to identify directional strength, Pivots to spot retest or breakouts. But as always, price action is always the king when it comes to charting.

Once you have identified the signal, it’s time to build the strategy.

The strategy I like to use:

  • Open 85% probability spread (i.e delta 0.15)
  • Open closer to ask price (Usually it doesn’t get filled, so try using mid price)
  • As soon as it hits 50% profit, close the trade
  • Stop Loss should be 2x the credit recieved. For example: you recieved a credit of 0.20. SL should be 0.40. So loss would be 0.40–0.20 = 0.20 ($200). (It might sound like an inverse risk to reward ratio but the thing with credit spreads are, it’s high probability setups and you only lose 2 out of 10 times.)
  • Don’t let the trade expire itself. If the options expire ITM, then there’s a chance of assignment risk where you will be assigned 100 shares of stocks. So always close the trade.
  • Close closer to bid price

But why 50%? Because you want to have a higher win rate.

Below are some of the wins using this strategy:

Say for example, the maximum credit is $180, I like to close my trade when I collect $90-$100. Remember, anything can happen anytime due to macro economic events. My win rate so far with spreads is 92%. So in order to play it safe with high win rate, I like to close my positions once I collect 50% premium.

Do not open spreads when there is any macro economic events like earnings, FED rate hikes, FOMC meetings, GDP estimates, CPI/PPI data releases etc.

What passive income strategy do YOU use? Drop it in the comments and don’t forget to give a 👏🏻

I have written a complete book on Secrets of Credit Spreads where I have explained in depth on the below. This book is not just another technical analysis course. It’s my years of backtesting and my entire trading system condensed in a PDF document.

  • What is Option writing and why you should write options?
  • What is credit spread?
  • Charting techniques – From the book which is worth $89 in market.
  • How to measure Volatility and the statistics behind it?
  • What are Option greeks?
  • The important greeks for spreads
  • Strategies I use to build the spreads (My entire trading system which makes me 20% a month)
  • Walk through with Real world examples

DM me on twitter if you need a 20% discount.

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VR Investments

I write about passive income strategies, option selling and ways to optimize it.