Trading options for income 401k

There's a little-known investment option in your 401(k) plan. A self-directed brokerage account is the most underrated investment option in a 401(k) plan. That's assuming, of course, it's even made available to the employee. div > div. group > p:first-child"> Basically, self-directed brokerage accounts inside 401(k) plans offer participants a "brokerage window" where they can trade investments (stocks, bonds, mutual funds, etc.) that aren't in a plan's official investment lineup. The benefit of a brokerage window is that it can provide a participant more choices and better control than the limited options on their 401(k) plans. However, let's be clear that the brokerage window isn't for everyone. For individuals who have investment experience, the brokerage option offers the opportunity to fine-tune an asset-allocation method. In the hands of the right people, it can be a very cost-effective and precise way to manage retirement money. Brokerage windows enable investors to choose from thousands of investment options.

But the sheer numbers can make it more difficult for inexperienced investors to choose suitable investments. In short, the self-directed brokerage option gives an investor access to a broad range of investment by way of a brokerage account versus the limited lineup offered by a 401(k) plan. It offers all the same benefits, including tax deferral and the convenience of making contributions through payroll deductions. Self-directed brokerage accounts were popular in the 1990s, and today about 20 percent of employers offer it as an option. However, popularity has grown over the years, opening new possibilities as to how someone can invest his or her 401(k). Only an employer's plan administrator can make self-directed brokerage available to an employee. If available, it can be found by accessing the account online. However, I urge employees interested in a self-directed brokerage account to reach out to their human resources department to know for sure if this option is available. The brokerage window offers more flexibility by gaining access to a universe of investment options but may expose investors to risks and fees they are not used to. It's for this reason that individuals should consider consulting with a 401(k) provider andor financial advisor before making any investment decisions. Meanwhile, the Department of Labor continues to criticize the brokerage account window, because studies show that larger numbers of investment choices confuse most participants. In addition, minimal guidance on selecting suitable investments is offered. The Department of Labor's solution is to make the self-directed option more burdensome and expensive for the employer in anticipation that they'll drop it from their plans. Your Wealth: Weekly advice on managing your money.

Sign up to get Your Wealth. But the Department of Labor fails to recognize the opportunities the brokerage window can offer. For example, this option is also a means to access strategies offered by third-party professional money managers to actively manage an individual's investments on his or her behalf. These managers charge fees for their services, but so do the mutual funds and other investments that people own inside and outside the 401(k) plan. When costs are compared, investors might find that they are receiving higher-quality services for their money by hiring professional money managers to manage 401(k) plans for them. Another attractive feature offered in a self-directed brokerage account is the flexibility to invest only a portion of 401(k) assets, as opposed to the entire account balance. This feature allows for moving assets between the employer's investment lineup and the employee's self-directed brokerage account as desired. This gives someone the option to invest a fraction of the account on their own while allowing a professional to manage the rest. Most money managers work directly with a person's financial advisor, so it's important to partner with a trusted advisor if someone selects this option. Advisors should be fluent in self-directed brokerage, with an established solution in place. They should have adequate infrastructure to support this kind of business, as well as partnerships with money managers capable of accessing 401(k) plans. Whether someone is making investment decisions on his or her own or not, it's important that the 401(k) investment is given an appropriate amount of ongoing attention. The 401(k) will be a significant source of income in retirement, so the more disciplined people are by investing early in life, the more likely they will meet their goals when they retire.

Many people are not confident they can do this on their own, so they turn to an advisor for guidance. If investors decide to consult with an advisor, it's suggested that they meet with someone with whom they are personally comfortable and who understands the specific financial situation. Once an advisor has a grasp on the individual's financial situation and distinguishes his or her goals, a risk assessment should be done to determine a proper asset allocation and then recommendations on investments. —By Andy Roberts, financial advisorportfolio manager at Charleton Financial. What to do with an old 401(k) Have an old 401(k) from a former employer? We can help you weigh your options so you can make the right decision for your specific needs. Four options regarding your old 401(k) Roll over to a Fidelity IRA. Roll over to Fidelity and consolidate your retirement accounts in one place while continuing tax-deferred growth potential. 1 You'll get a wide range of investment options that cost only $4.95 per online U. S. equity trade.* If allowed, this option lets you consolidate your 401(k)s into one account while continuing tax-deferred growth potential. Investment options vary by plan.

Stay in your old workplace plan. If permitted, this option lets you continue tax-deferred growth potential however, you can no longer contribute to the old plan. Investment options vary by plan. Cash out. If you withdraw the money from your 401(k) plan, your cash distribution will be subject to state and federal taxes and, before age 59½, a 10% withdrawal penalty may apply. 5 Also, your money won't have the potential to continue to grow tax-deferred. Learn more and explore options. Get more info about our Rollover IRA including ratings & reviews, FAQs, and more. More old 401(k) options. Read this Fidelity Viewpoints ® article on weighing the pros and cons of your options. Choosing IRA Investments. Get help selecting from Fidelity's wide range of investments.

Ready to get started? Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. 3 Options Trades for $1,000 in Monthly Income. Selling naked puts for a standard monthly return. By Lawrence Meyers, InvestorPlace Contributor. A few years back, I decided to aim for a goal of generating about $1,000 per month in options income. Sure, that particular number was selected because it&rsquos a nice, round number &mdash but it&rsquos one that I considered achievable based on the amount of risk I was willing to tolerate, and the capital available to execute trades should they occur. Originally, my method centered around selling covered calls against a part of a few core positions. Then I realized a more efficient play was to sell naked puts against stocks I either held and felt were undervalued, stocks I was considering purchasing, or stocks that were good trading vehicles. That way, if the stock price was below the strike, the stock would be put to me, and I&rsquod be happy to have it. So here are three such stocks that I&rsquove used options on to help generate my monthly goal: I had been very bullish on the long-term prospects for DirecTV (DTV). DTV stock had performed decently over the past few years, but never delivered the blockbuster returns I&rsquod hoped for. Instead, it morphed into a great trading vehicle and a stock perfect to sell naked puts against.

DTV carries a lot more debt than it used to, its growth rate has slowed, but it still generates enormous cash flow. So it&rsquos a safe company, and having shares put to me would not be any great tragedy. In selling the Jan 70 Puts for $1.40, I pick up a 2% return for just a two-week holding period, and if the shares get put to me, I&rsquod probably turn around and sell calls against those DTV shares for February. I sold two of the puts contracts for $280 in income. Bed Bath & Beyond (BBBY) Retail is a dicey place to be in this economy, so if I sell naked puts against retail, it had better be a solid stock. Bed Bath & Beyond (BBBY) is in really good shape. For one, BBBY stock has $900 million in cash and no debt. It is growing at a nice 12% clip, and free cash flow is routinely in the $800 million range annually. Like DirecTV, BBBY stock has not been an explosive performer, but has the kind of volatility that makes it a good trading and options vehicle. The Jan 80 Puts recently went for $2.75 (though have since fallen to around $2.65). I sold two of the put contracts for $550 in income, bringing the total thus far to $830. Note: BBBY does report earnings Wednesday, so the potential for volatility in the stock is extremely high. The final selection is Amgen (AMGN).

The biotech firm has beefed up earnings growth a bit, now slated to grow at 12%-15%, has $22.5 billion in cash, and solid free cash flow in the $5 billion range annually. It&rsquos a perfectly safe company, even if the stock is a bit overvalued for my taste. Still, AMGN stock has always sold at a premium to its priceearnings-to-growth ratio, and the 2.1% dividend is a reason why its price remains a bit lofty compared to what I&rsquod like. When selling naked puts, I like to choose world-class companies like this that have been around a long time. Even if shares get put to me and the stock declines, I know that sooner or later, I&rsquoll make that loss back. In this case, Amgen is one of the stocks with weekly expiration dates, so by selling the Jan 112 Put (Jan. 30) for $1.70 (for a contract total of $170), I hit my exact target total of $1,000 in income. As of this writing, Lawrence Meyers held options in all of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.

com and follow his tweets @ichabodscranium . Article printed from InvestorPlace Media, investorplace. com201401options-trades-amgn-dtv-bbby. ©2017 InvestorPlace Media, LLC. More from InvestorPlace. More On InvestorPlace: Financial Market Data powered by FinancialContent Services, Inc. All rights reserved. Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes. Copyright © 2017 InvestorPlace Media, LLC. All rights reserved. 9201 Corporate Blvd, Rockville, MD 20850. Trading options for income 401k EditorЂ™s note: Last week, options analyst Andy Crowder hosted a live chat to discuss ЂњHow to Make an Extra 3% in AppleЂ¦.Monthly.

Ђќ The response was overwhelming Ђ“ more than 300 of you tuned in for the hour-long chat, and many of you came equipped with some excellent questions for Andy. While Andy was able to answer many of those questions during the live chat, there were simply so many that he wasnЂ™t able to get to all of them. In todayЂ™s Income & Prosperity, Andy addresses some of your most pressing options questions that went unanswered during the webinar. What is your favorite method for producing retirement income? As an options trader, I am often asked this question. I have been bombarded with questions from investors for years about how to trade stocks and ETFs for income using options. In my opinion, the best way to bring in income from options on a regular basis is by selling vertical call spreads and vertical put spreads, otherwise known as credit spreads. Vertical spreads are simple to apply and analyze. But the greatest asset of a vertical spread is that it allows you to choose your probability of success for each and every trade. And in every instance, vertical spreads have a defined risk, so you always know how much you can make or lose on each and every trade. My favorite aspect of selling vertical spreads is that I can be completely wrong on my assumption and still make a profit.

Most people are unaware of this advantage that vertical spreads offer. Can you explain your process for choosing trades in your income-producing method? First, I look for efficient markets. Professional options traders know that there are only 80 to 100 products (ETFs and stocks) out there that offer efficient markets. For clarification, I define an efficient market by a tight bid-ask spread. Next, I watch for overboughtoversold extremes within the short list of ETFs that I follow. I use the RSI over different timeframes to compare an entityЂ™s performance to itself over a period of time. RSI allows me to gauge the probability of a short - to intermediate-term reversal. It does not tell me the exact entry or exit point, but it helps me to be aware that a reversal is on the horizon. Knowing that a short-term topbottom is near, I am able to increase the probability of a potential trade. Conversely, knowing that a reversal is on the horizon I am able to lock in profits on a trade. Lastly, I allow probabilities to give my method (credit spreads) the final edge.

And why do credit spreads give me an edge? Let me explain it in poker terms. Professional poker players are known to seek out ЂњsoftЂќ or ЂњweakЂќ tables as a source of income. This means that the more inexperienced players there are at the table, the easier it will be for the seasoned pro to take their money. ItЂ™s really no different in the world of options, particularly when using trading strategies with a statistical edge like credit spreads. Finding the consistent loser or novice trader is how the poker pros generate the bulk of their gains. When I trade credit spreads, I take advantage of the speculation of others, typically newbies who are buying out-of-the-money calls or puts with the hope that they will eventually move into the money. There is, however, a skill in knowing who those amateurs are and what behaviors they exhibit to clue you in on their lack of experience. In poker, the individual who shows too much emotion or doesnЂ™t truly understand the game will be cleaned out in short order. In options trading, everything is laid out in the options chain Ђ“ a list of option characteristics at different strike prices. By looking at the Ђњprobability of expiring in the moneyЂќ Ђ“ the chance that a stock or ETF will close above (for calls) or below (for puts) the chosen strike price Ђ“ the options trader can make decisions based on the speculation of others. But unlike poker, the participants show their hands when trading credit spreads.

This is THE advantage credit spreads offer over any game or investment vehicle out there. For instance, with the SPDR S&P 500 ETF (NYSEARCA: SPY) trading around $197, some traders are making wagers that SPY will move above $200 by August options expiration (August 15th). The chance of that happening is 24.17%. What about traders who think SPY will push above $202.50 by August options expiration? The chance of that happening is 7.81%. With those types of odds, why wouldnЂ™t I want to take the other side of the trade? Depending on which options I choose, my probability of success is 80% to 90%. If you would like to learn more about how I use options for monthly income, donЂ™t forget to take a look at my most recent webinar. And as always, please do not hesitate to email me with any questions you have regarding the strategies we use or anything about options. Trading Options for Retirement — Part Two. This is a continuation from &ldquoPart One&rdquo of a three-part series. It&rsquos rarely a good idea to sell a covered option if your stock position has already moved significantly against you. Doing so could cause you to establish a selling price that ensures a loss. To avoid locking in a losing trade, before you sell a covered call, always ask yourself the question, &ldquoWould I be happy if I had to close out my stock position at the strike price on this option?&rdquo If you can answer yes to this question, you will probably be OK. Remember, if your short option is in-the-money, you can be assigned at any time.

This is especially common on the day right before the ex-dividend date and anytime during the week of option expiration. The Collar (Long Stock, Long Puts & Short Calls In Equal Quantity) This is a method that combines a covered call and a protective put. Consider establishing a collar if you are primarily concerned with protecting a position at minimal expense. A collar provides temporary protection against a downturn in the equity position, but also removes most of the upside potential. Since it&rsquos generally unwise to hold a long stock position if you think the long-term prospects are poor, you should only consider employing this method if you feel the long-term prospects of your stock are still favorable. Probably the biggest benefit to trading a collar is that it can often be done for little or no out-of-pocket expense, because the proceeds received from the sale of the covered calls can be used to finance some or all of the purchase costs of the protective puts. In some instances, you may even be able to receive a net credit. Unlike many other option strategies, collars tend to get less expensive as you go farther out into the future. The most common use of a collar is to protect an unrealized profit when you are not yet ready to sell the position. A properly structured collar can help protect against a downturn while attempting to postpone capital gains obligations.

Since collars are best structured so that both the puts and the calls are out-of-the-money but have the same expiration date, the ideal situation is for the stock to increase just slightly (but not beyond the strike price of the call) after the collar is established. This will result in both the put and call options expiring worthless and a small gain on the stock. Assume you purchase 1,000 shares of XYZ at 52, and the stock rises to 72. You may be optimistic about the long-term prospects of this company, but in the short term you are a little worried. Since you have a 20-point unrealized gain in this stock, you are willing to risk a 2-point downward move, but you want to be protected against anything greater. You think the long-term outlook is good, but you do not expect any major upward price movement in this stock in the near term. A protective put could provide the downside protection you seek, but if there were no downward move, the premium you paid would be lost. A covered call could provide limited downside protection and could even generate a little income, but you could still lose all of your gains if there were a substantial drop. A stop order below the current price might protect you, but if the stock gapped down at market open, you could have larger losses than you expected and you would end up selling your stock. If your primary concern is just to hold steady without spending a lot of money, without selling your stock and without getting clobbered, a collar may be an effective method. Assume you establish a collar by selling 10 XYZ 75 calls at 2, and purchasing 10 XYZ 70 puts at 2. Your total out-of-pocket expense will be only the commissions charged by your broker.

When we display all three positions on a graph, we can see that at expiration the breakeven point is 72 (the current stock price). If the stock drops to 70 or below, you will not lose more than $2,000, but if the stock increases beyond 75, you also will not gain more than an additional $3,000. If the stock drops below 70, to avoid exercising your put options, you could sell the puts at their market value. The proceeds from the puts should offset all but 2 points of the loss on the stock. If the stock rises above 75, to prevent the assignment on your calls, you could buy your short call options back at the market price. You would probably lose money on the call options and the loss would eliminate all but 3 points of the gains on the stock. Part three of this series will cover cash secured equit puts. If you enjoyed this article, check out Part One and other articles by Randy Frederick at &ldquoThe Options Insider&rdquo Web site. Article printed from InvestorPlace Media, investorplace. com200808trading-options-for-retirement-part-two. ©2017 InvestorPlace Media, LLC.

More from InvestorPlace. More On InvestorPlace: Financial Market Data powered by FinancialContent Services, Inc. All rights reserved. Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes. Copyright © 2017 InvestorPlace Media, LLC. All rights reserved. 9201 Corporate Blvd, Rockville, MD 20850. trading+options+for+income. Narrow Your Search. Tech Culture (6005) Tech Industry (4005) Mobile (2474) Internet (1916) Gadgets (1088) Phones (799) Software (712) Security (577) Gaming (574) Sci-Tech (536) Applications (374) Auto Tech (330) Computers (307) Mobile Apps (258) Smart Home (253) Online shoppers are liking those speedy checkout options.

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© CBS Interactive Inc. All Rights Reserved. Option Strategies Used in Retirement Accounts. A brokerage IRA account can be authorized for options trading. The IRA account rules put a limit on the types of options strategies that can be employed. You also want to use those IRA strategies that take advantage of the tax-deferred growth of an IRA account and do not put your IRA value at risk. The use of options is one way to put some extra growth or generate a higher level of income in your IRA account. Almost all IRA strategies produce short-term profits, which are taxed at the higher short-term capital gains rate if you earned them in a taxable account. There are conservative as well as speculative options strategies. The more conservative option strategies could be a good match for your IRA account, which is money set aside to grow toward your retirement years. Covered Call Trading. The covered call options method involves buying shares of stock and selling call options against those shares. The goal of the method is to keep the money from selling calls as profits and possibly have the stock shares increase in value.

Selling calls against stock puts a limit on how much you can make on the stock. In the right market conditions, a covered call method can produce annual returns of 15 to 20 percent. Covered call writing -- as it is also called -- is considered to be the most conservative options trading method, and any brokerage IRA can get approval for covered call writing. Buying Puts and Calls. Buying call options profits from a rising stock price and buying puts profits from a falling stock price. The cost of buying a put or call is low compared to buying the stock shares, allowing you to earn more profits from the same stock price increase or decrease. The loss potential from buying puts or calls is the amount you spent for the option contracts, putting some of your IRA value at risk. The ability to buy puts is one way an IRA account can be used to profit from a declining stock market. Advanced Options Strategies. Some of the online discount brokerage firms that cater to options traders allow the use of more advanced options strategies in IRA accounts. The IRA rules allow any method that does not require a margin account to protect against excessive losses. An investor who wants to trade spreads, straddles and butterflies in his IRA must find a broker that allows this level of trading in an IRA. The investor will also have to show the broker that he is experienced with this level of options trading before his IRA account will receive options trading approval.

About the Author. Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch. com and various other websites. Plaehn has a bachelor's degree in mathematics from the U. S. Air Force Academy. Recommended Articles. Free: Money Sense E-newsletter. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. Zacks Research is Reported On: Zacks Investment Research. is an A+ Rated BBB. Logo BBB (Better Business Bureau) Copyright © Zacks Investment Research. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system.

Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above. NYSE and AMEX data is at least 20 minutes delayed. NASDAQ data is at least 15 minutes delayed. 3 Tax-Free Income Options for Retirement. With the tax filing deadline already passed and the reality that many of us owed more than we wanted to pay, many people may find themselves wondering, “Is there a way for me to pay less in taxes?” While your tax professional is your go-to person for this concern in the short-term, tax-free income for retirement could be a solution for the long-term problem. Your financial advisor can help you determine the best route to take for tax-free income, but a Roth IRA, Roth 401(k) or permanent life insurance are great options to investigate first. So, what is a Roth IRA? A Roth IRA is a retirement savings account you can contribute to using after-tax dollars. When you reach retirement age and need to withdraw funds, you won’t be hit with taxes on the money you’ve put away. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59.5. Depending on which vehicles you are utilizing for retirement savings, this may be one of your few options for tax-free income.

For example, if your employer doesn’t offer a Roth 401(k), or perhaps doesn’t offer any work-sponsored plan at all, this could be one of your few available options for tax-free income for retirement. But there are income limitations that determine if you are allowed to contribute to this type of account. If you are single and your adjusted gross income (AGI) is more than $133,000, you are not eligible to contribute to a Roth IRA. If you are married and filing jointly, your AGI must be lower than $196,000 to contribute. If your AGI is under $118,000 as a single person or $186,000 as a married couple, you can contribute a maximum amount of $5,500 a year, or $6,500 if you are over 50, thanks to the catch-up provision. This provision allows you to contribute an additional $1,000 a year in order to catch up if you’ve put off saving for retirement. (For related reading, see: Top 10 Mistakes to Avoid on Your Roth IRA .) In addition to a Roth IRA, a Roth 401(k) is another option to explore. A Roth 401(k) is similar to a traditional 401(k), except you contribute after-tax dollars instead of pre-tax. Roth IRAs and Roth 401(k)s are similar in that regard. Unlike the Roth IRA, contributions to a Roth 401(k) are not subject to income limitations, so if you are a high income earner, you can still contribute after-tax money into your account. A Roth 401(k) allows you to contribute a lot more money than a Roth IRA towards an account where the money can grow tax-free—$18,000 versus $5,500 for those under 50. Depending on your AGI, you may not be eligible to contribute to a Roth IRA, so your Roth 401(k) would be your other investment option for tax-free retirement income. While a work-sponsored Roth 401(k) is a great option, don’t forget to consider a Roth IRA because the Roth IRA will have more investment choices available to you. A Roth 401(k) is limited to what the plan offers, whereas a Roth IRA is not.

If you are utilizing some of the other tax-free income savings vehicles, contributing to a Roth IRA will create additional tax-free money for you in retirement. (For related reading from this author, see: The Roth 401(k): Should I Invest in It? ) Permanent Life Insurance. In addition to Roth IRAs and Roth 401(k)s, you can utilize a permanent life insurance policy as a source of tax-free income in retirement. 1 Permanent life insurance is a life insurance policy that builds cash value. Permanent life insurance could play a dual role in your method with an emphasis on insurance in your early years and potential tax-free income in your retirement years. Chances are if you have children or are financially responsible for a parent, you will need life insurance anyway. While term may be an inexpensive option for the short run, some people prefer to pay more upfront for a permanent policy so they are not limited to having coverage for a set length of time. Depending on the type of permanent insurance you buy, some products have the potential to provide income for life after you reach a certain age. Additionally, unlike a Roth IRA and Roth 401(k), it has the potential to provide you with tax-free income prior to age 59.5 if you fund it properly. (For related reading, see: Cut Your Tax Bill With Permanent Life Insurance .) With multiple retirement savings vehicles to choose from, deciding on which combination will work best for you can be tough.

Exploring your options with a financial advisor will allow you to get answers to your questions and figure out a plan to help you reach your goals. Contact your financial professional today for help and guidance with your personal situation. 1 Before you purchase a life insurance policy, be sure you are familiar with all its potential benefits and risks. Policy loans and withdrawals will reduce the policy's cash value. Loans are subject to interest charges. Guarantees are based on the claims-paying ability of the issuer and do not protect against market fluctuation. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. Please remember that investment decisions should be based on an individual's goals time horizon, and tolerance for risk. NPC does not render legal or tax advice. The information being provided is strictly as a courtesy. When you link to any of the web sites provided herewith, you are leaving this site. We make no representations as to the completeness or accuracy of the information provided at these sites. Nor are the companies liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third party technology, sites, information and programs made available through this site.

By clicking on the link above you will leave our website and assume total responsibility and risk for your use of the site. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA or Roth 401(k) must be in place for at least five years, and the distribution must take place after age 59.5 or due to death, disability, or a first-time home purchase (up to $10,000 lifetime maximum). Before taking any specific action, be sure to consult with your tax professional. trading+options+for+income. Narrow Your Search. Tech Culture (6005) Tech Industry (4005) Mobile (2474) Internet (1916) Gadgets (1088) Phones (799) Software (712) Security (577) Gaming (574) Sci-Tech (536) Applications (374) Auto Tech (330) Computers (307) Mobile Apps (258) Smart Home (253) Online shoppers are liking those speedy checkout options. Manuel BlondeauCorbis via Getty Images Apple Pay so far hasn't inspired people to burn their wallets, but there's one type of newer digital payment that's gaining traction. Visa on Thursday. By Ben Fox Rubin 06 April 2017. iPhone 7 storage options: Why 32GB is likely not enough.

1:49 Close Drag Autoplay: ON Autoplay: OFF Last September, Apple finally did away with the abysmal, 16GB model in its iPhone lineup. Starting with the iPhone 7, you have the option of 32GB, 128GB. By Jason Cipriani 23 March 2017. Apple's iPhone 7 and 7 Plus cases add fetching new color options. Enlarge Image Apple The iPhone wasn't the only Apple product that got a color update today. Along with the new red iPhone 7 and iPhone 7 Plus, Apple added new colors to its line of silicone and. By David Carnoy 21 March 2017. FCC gives states control of broadband subsidies for the poor. Alex Wong, Getty Images The Republican controlled Federal Communications Commission is taking aim at dismantling another Obama-era policy. This one helps subsidize broadband service for the poor. By Marguerite Reardon 29 March 2017. 7 Kindle tricks for iPhone users.

Screenshot by Rick BroidaCNET Reading books on your iPhone: awesome. Doing other cool stuff with the Kindle iOS app: icing on the cake. For example, did you know you can save web pages for. By Rick Broida 29 March 2017. Get Google Home for $99, Amazon Echo Tap for $89.98. If you are excited by the news that the Google Home voice assistant device has just added support for a large number of new smart home devices, Microcenter has the deal for you. They are offering. By Richard Baguley 28 March 2017. 10 tips and tricks for Apple's new Clips app. 2:19 Close Drag Autoplay: ON Autoplay: OFF Apple on Thursday released Clips, a video app that's a mix between Snapchat's playful aspect and iMovie's editing prowess. CNET's Scott Stein has been. By Jason Cipriani 06 April 2017. Aiming for a new era in airships.

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I’ve always loved tractors, and am the proud owner of a John Deere garden tractor. Since we’ve downsized and moved to the mountains, I don’t really need it anymore. So, I’ve nominated myself to serve as the “road crew” of the 1 mile long private road leading up to our cabin. I faithfully mow the shoulders of our little road, and the neighbors on the road appreciate it. It’s really an excuse to keep my little tractor, but sometimes we need to just indulge ourselves. In addition to my John Deere tractor, I also own the stock, DE. I didn’t buy it in a normal fashion , however, and that’s the focus of this article. Rather than buying the stock outright, I used a simple option trading method which I’ve developed, and which I’ll share openly with you today. As my regular readers know, I like to mix in “technical” financial planning concepts with “softer” retirement lifestyle articles. This one will be an example of the former, but I really encourage you to read through it, and understand the concept. If used correctly, this option trading method will result in an improvement to your returns. An Option Trading method to Improve Your Returns. On July 11, 2014 I decided to buy 100 shares of John Deere (DE) stock. I like the dividends ( 3%) for future retirement income, and I like the diversification play into agriculture. At the time, DE was trading at $88 share, too rich for my blood. Rather than buy the stock, I decided to use my option trading method to improve my returns, and ultimately got paid to buy the stock at $84 share, a price 5% below the level at which it was currently trading.

Less than two years later, I’ve now reduced my actual cost basis on the DE stock to $74 share, a price 16% below the $88share level “most” people would have bought it for at the time! I still own the stock, and I still get paid the dividend. Today, I’ll tell you how. In simple terms, my option trading method focuses on the use of only 3 basic option trades . Selling a put, selling a call, and rolling a position. I do these trades frequently, and have had great success in improving my return as a result. This article will focus only on these three fundamental option trades, which I’d seriously encourage you to consider in your own investment portfolio. Some people get intimidated by options, and believe they’re a tool only used by “experts” and “speculators”. I firmly disagree, and believe they are a misunderstood tool that should be used by “average investors” to improve their returns. I’ll walk through my option trading method in simple English, using my DE examples along the way to show you how this simple method works. On July 11, 2014, rather than BUY DE stock at $88, I SOLD A PUT at $84. I execute my trades online via TDAmeritrade, and they have a very useful options screen in their ThinkorSwim platform. I’ll forgo the details of that for this article, but can walk anybody through it if interested (just send me an email!). What does selling a put mean?

When you sell a put, you’re making a commitment to buy the stock if it’s at a level below your put price at a certain date in the future (called the expiry date). In simple terms, I sold the DE put at $84, with an expiry date of Sept 20, 2014. If DE was trading below $84 on Sept 20, I’d be obligated to buy it at $84. Since I wanted to own it anyway, and was comfortable the $84 price, I was fine with that. In return for selling the put, I received a payment of $110. To insure I had the money available to buy the stock if it was below $84, I needed to have $8400 on reserve at TDAmeritrade. Options trade in “lots” of 100 shares, so the smallest trade you can make if for 𔄙 lot”, which covers 100 actual shares of the stock (I’ll avoid the topic of trading on margin and sublots for the sake of this discussion). Think about it for a minute: I received $110, in return for tying up $8400 for 2 months. Do the math, I just earned a 7% annualized return!! For those who want to check my math, it’s simply (110 return 8400 reserve) * (2 months 12 months). There are MANY times (the vast majority) when that’s the end of the trade.

If DE is trading ABOVE $84 on 920, my put expires and I keep the $110. I just earned a 7% annualized return, and am free to execute another similar trade. To give you a sense of how often I do this, I currently have 18 option trades open on my TDAmeritrade account, with expiration dates ranging from June – October 2016. In this case, DE was trading at $81 on Sep 20. Since I had an obligation to buy at $84, I was forced to buy 100 shares. As I mentioned earlier, I was paid $110, so this confirms my statement that I was paid to buy the stock at $84, which was below the $88 when I decided to buy DE back in July. Not a terrible thing, since I had decided in advance that I was comfortable buying DE at $84 as a long term retirement income method. It’s important for you to have this attitude BEFORE you sell the put, as you do run the risk of “getting exercised the put”, which is the term for being forced to buy the stock at expiry (as happened to me in the DE example). There is an alternative to buying the stock at the time of expiry, which is covered under the “Rolling A Position” trade later in this article. As a final note on the put side of this option trading method, there are also times I will “buy back” the put that I’ve sold prior to expiration date. If the stock has increased significantly in price, the cost of the option will fall.

If I sold a put for $100, and can buy it back for $10, I’ll net a $90 profit on the trade without having to wait for expiration. This frees up my “reserve” money, which can then be redeployed into selling a new put. On Sept 20, I became the proud owner of 100 shares of DE, which I paid $84share to purchase. This was predetermined by the $84 “strike price” and the Sept 20th expiration of my put. To be clear, at this point I had “lost money” on the trade. I paid $84 for the stock, which was actually trading at $81. I did make $110 on the put option premium, so my actual net cost was $82.90, which was still a $190 negative position ($84 – $1.10share = $82.90 on a stock currently trading at $81. -1.90 per share @ 100 shares = $190 loss). I was fine with that, this was a long term holding, and I prefered owning it at $82.90 than the $88 DE was trading at when I first sold my put. The next phase of my option trading method is to sell a “covered call” (which means you already own the physical stock). On Oct 31, 2014, I sold a call for 1 lot of DE at $90 share, with an expiration date of Jan 17, 2015. What Does Selling A Call Mean? Selling a call means that you are making an obligation to sell your stock at a certain price in the future. In the case of my trade with DE, I had sold a call at $90 with a Jan 17 expiry. If DE were trading higher than $90 on Jan 17, I would be forced to sell it at $90. Since I only paid $84 for it, I was fine having an obligation to sell at $90. In return for selling the call, I received a payment of $86. My risk: what if DE were trading at $100share on Jan 17? I’d be frustrated, and be forced to sell my stock “below market” at $90. That’s the risk you take in return for selling the call (and, it’s why you get paid to sell a call). On Jan 17, DE was trading for $84. Since this was below my $90 call, the option “expired worthless”, which means I wasn’t forced to sell the stock.

The trade expired, and I was free to do it again. Since I bought DE in Oct 2014, I’ve sold calls on these 100 shares a total of 7 times, and have been paid a total of $968 in “call premiums” (the money you get paid when you sell a call). I STILL OWN THE STOCK! I STILL EARN THE DIVIDEND. IN ADDITION, I’VE EARNED A 7% ANNUALIZED YIELD IN CALL PREMIUMS! The final element of my option trading method is “Rolling A Position”. In fact, I did it this morning. On DE. What Does Rolling A Position Mean? Using today as an example, I was in a bit of a spot. I had a DE call which was facing expiration on May 16. My call price was at $80 (meaning I was obligated to sell if the price were over $80, and DE was trading at $82. I really didn’t want to sell the stock on May 16th, so I “rolled” my position from a May 16 expiration out to a Sept 16 expiration, and GOT PAID another $252 for the trade. Since I had initially “sold a call” with a May 16 expiration, I now needed to BUY the call back.

That cost me $320. Ouch. To offset the cost, I simultaneously SOLD a call with a Sept 16th expiration. For that trade, I was paid $572. Net the two together, and my net revenue was $252, and I rolled my expiration from May to Sept. That’s what “rolling a position” looks like. Another way the rolling trade can be used is on the initial put you sold in step one. If your stock is trading below your put strike price, and you’d prefer to NOT buy the stock, you can “roll” your put using the same technique as outlined above. This will move your “obligation to buy” out to the new expiration date. My Cost Basis On DE is now $74. Although I paid $84share for DE when I bought it back in Sep 14, my “cost basis” is now down to $74 . Essentially, that means the total revenue I’ve received from my initial put trade and my subsequent call trades totals $1,000. If I divide the $1,000 of revenue by the 100 shares I own, it equates to $10share, or a 12% “cost reduction” . Essentially, I could sell the stock today at $74 and be “break-even” on the overall trade. Even if I’m only able to sell the stock at the $84 I paid for it, I’ll still keep the $1,000 in “option premiums” I’ve received, and net a $1,000 profit in spite of the stock price not increasing. Using the revenue of selling calls helps reduce your cost basis on any stock you own.

I’ve heard stories of folks that have been selling calls on some stocks for so many years that they’ve actually earned more in call revenue than they initially paid for the stock. Essentially, their cost basis is zero, with the entire stock purchase having been “paid for” by the revenue they’ve earned selling call options. Risks & Other Considerations. No stock trading comes without risk, and it’s the same with options. The biggest risks in the method I’ve outlined above are: You may be forced to buy a stock at a price higher than market price when your put expires. You’ll have to maintain sufficient $$ in your account to pay for the purchase, or run the risk of paying to borrow money “on margin” You must be approved by your trading company to trade options and establish a margin account. You may be forced to sell a stock at a price lower than market when your call expires. Your call may be exercised before expiration date, which means you’d be forced to sell the stock at the call price. Frequent trading can increase your trading expenses (I track all of my returns as a net number, after expenses). Start small to insure you understand options before getting too carried away. My first option trade was stupid, and I lost about $1,000. I didn’t really understand what I was doing, and played the trade entirely wrong. That’s why I only trade options in my “trading account” at TDAmeritrade, which represents less than 10% of my overall net worth. I learned from my initial trading mistake, read a lot more articles on option trading, and ultimately developed my personal option trading method I’ve outlined for you in this article.

Not every trade ends well, and there are times you’ll lose money. You need to focus your efforts on finding a stock you’re interested in buying, and only sell puts for that stock. Do some Google searches on option trading or talk to your trading company for more details before you start to trade. Study this article in detail as you’re considering making your first trade. Start small, trade 1 or 2 lots on a stock with a value of less than $50share. Let it run through expiration before you place another trade, and insure you fully understand how options work before you expand your use of this option trading method. I’ve been trading options for about 5 years now, and fully understand my option trading method. Even after 5 years, I keep my method simple and make only 3 types of trades (selling a put, selling a call, or rolling a position). I wish I had started earlier, as it’s proven to be a nice way to earn some additional income on my stock portfolio. Don’t be intimidated by options.

Start small, learn from experience, and you can easily follow my example of: Using Options to Improve Your Returns. 25 comments. I’ll be reading this multiple times before implementation! Thanks for sharing your financial knowledge with us, Fritz. For those that don’t know you personally, I would also note that your integrity and character add to my comfort level in using your instruction to strike out into financial areas where I’m less comfortable. As I said, I’ll be reading quite a few more times before evaluating and diving in! Thanks!! Great article Fritz! We share the same method. I only have 10 months on the counter and look forward to reach a 5 year track record! Fritz, good, simple method and explanation.

The biggest risk is a large drop in stock price with selling the PUT call. When used on very large caps like DE, it’s OK because the probability of it dropping 30 or 40% in short period of time is low. On a smaller stock, it’s not rare for stocks to drop 30 or 40% in a quarter. Also, for smaller stocks, pay attention to the spread when you sell the option. That can be large. With the right attitude and risk understanding, this is a good method. Viper, you’re spot on with both warnings. I simplified my article (and it STILL ended up too long!), but both of those are valid issues which I’ve experienced, and watch out for. Same with high volatility trades, like the VIX (I’ve made a killing, and been killed, with the VIX!

). Hi Fritz, I had no idea you were interested in investing in dividend stocks, much less in option trading. Wonders never cease. I thought you were a Boglehead, only interested in index funds. Well my friend, you keep on impressing me! I’ve been investing with TDAmeritrade for 20+ years (mostly mutual funds), but the last 3 years in nothing but dividend stocks. I have about 20 positions currently. Last year I started my “Mad Money” account with the ability to use option trading, but I can’t get myself to pull the trigger just yet. I start getting headaches just thinking about options. I need to do a lot more homework before I’m comfortable with option trading. Your article gives me hope that maybe I can finally figure out how options can improve my investment toolbox. Brandon, you’re two for two for comments! LOL great comments, and glad I shook you from the “Boglehead” image. Now, to really destroy you, I AM A BOGLEHEAD!

I LOVE low cost, index funds, and have the vast majority of my investment money in Vanguard. I Dollar Cost Average, rebalance my asset allocation annually, and then I leave it alone. The “fun money” represents just 10% of my net worth, and I “have fun” with that pile. I’ve learned a ton, and enjoy “trading” as a hobby. I’ve done ok, overall, and I’ve definately learned some lessons along the way. Don’t risk money you can’t lose, but if you have the play money, take advantage of it. This is an area which may become another “side hobby’ in retirement, along with writing this blog! Psst, don’t tell anyone but I’m a BOGLEHEAD too! My real money is in Vanguard index funds in my 401k. Only about 10% of my retirement accounts is currently invested in dividend stocks. However, my plan is to flip some of that 401k money at 59-12 to my TDAmeritrade IRA accounts to increase my dividend income stream.

I’m building multiple income streams prior to retirement to replace my paycheck. Fritz, what a great article and I appreciate Viperflt’s comments as well. I have not ventured into this space as of yet, so you are well beyond me in this area however its certainly something I’ll look into when I am done hiking long distance and can spend a little more time reading and researching. You know, just a thought, this may be a topic that you could hold a class (virtual live mixed perhaps) for a couple hours this fall. Keep up the great work, and BTW – my yard could use a run around with your mower if you get board. Nice to have you back in the modern world, Kirk! Good idea on the class. I’m actually talking to a podcaster who liked the article, he may have me on as a guest to discuss the method. Fritz – I’ve never really considered options trading but now that I’m retired and have time to study I may do so with a small amount like I’ve done with P2P and Dividend Stocks investing. You mention that your cost basis is down to $74 for DE. I assume that’s just a personal accounting of your overall cost less income you’ve received via puts and calls but when you sell the shares your cost basis for tax reporting is still the $84 and you’ve paid taxes on the options income in the year you receive it. Is that correct? Is the options income reported on a 1099-DIV? Thanks for another interesting article. I really like seeing these real world examples. I’ve almost done all my investing in mutual funds.

I’m also considering using Treasury Direct for some fixed income investing. Have you done anything like that? Bert, sure, rub in the “now that I’m retired!!”. Happy for you in your first month of retirement! Yes, the cost basis is purely a “personal accounting” approach. My cost basis for tax reporting is $84. I’ll have capital gains based on that cost basis. Unfortunately, the option revenue is inefficient from a tax perspective, being taxed at full marginal tax rate (and yes, reported on 1099-DIV). Regarding Treasury Direct, I’ve thought about it. Roger Whitney (Retirement Answer Man) was suggesting iBonds, purchased from Treasury Direct. I’ve not yet investigated direct bond purchases, but everything I read says “bond ladders” do have a place in a retirement income method. This is exactly what I am doing in my portfolio since last year. I make very good progress, and hope it lasts forever 😉 this is a very good blog. I am glad I ended up here.

keep up the great work! best regards from Austria. Welcome, Austria! Pleased to see my blog getting global traction, and also nice to hear that the techniques I describe can be applied in your European portfolio as well. Thanks for the comment, I’m bald you ended up here as well! Fritz, nice blog! You left your card at our booth at the Blue Ridge Arts in the Park event last week. I’ve been trading options such as those you described for ten years now. I’ve had great success. I published a book eight years ago, “A Conservative Approach to Trading Options” now in its second edition.

You might check into Chapter Seven which describes the “covered combo” technique, that uses short puts and calls on the same stock with the same expiration date, both out-of-the-money. It works exceedingly well when the market is going East. Ed, Thanks so much for your comment!! Sorry I missed you in Blue Ridge, we should try to get together for lunch, my treat! Email me, we’ll set something up? Thanks – Fritz. Great post on options. Your method is the same as mine. And as you described keeping it simple with a few strategies is the way to go. Nice work. Great article! I follow a very similar method, but I also combine some technical analysis to the mix as well as excellent company fundamentals. Have you considered focusing your option selling to your Roth IRA to avoid the large tax burden associated with option selling? I’m not an accountant, but here in Canada, writing options is considered as income, not capital gains, so it’s best for us to consider a way to avoid these high taxes all together.

Thus Roth IRA (or TFSA if you’r a fellow Canadian). Just something to consider. Thanks! Ryan, great point, and technically you are correct. I would be best served from a tax perspective by focusing my option selling within my Roth. Unfortunately, my Roth is inside my employer 401(k), and it doesn’t offer option trading. I trade options in my TD Ameritrade account, which is after tax. You’re on it, and make a great point! I sell put and call options (especially puts), and do about 2 per month, each involving one or several contracts. Usually I sell long-term ones, like typically 3 months or up to 13 months. Takes about 10 minutes per month and boosts returns a lot. The good news is I read this and tried to understand.

The bad news…I’m obviously not ready to understand finances at this level. It’s not you. It’s me. Thanks for the excellent article. Could you continue this article now thatime has passed. I,’m very interested in how you handled things as the price rose after mid-2016 go its current $119.89. Thanks! Carolyn, thanks for reading this “Oldie But Goodie”! Eventually, I let my call option expire, and my Deere stock was called away (sold at the pre-determined price). Since Deere was over my target price, I chose to move elsewhere, and used the DE proceeds as margin for selling some puts on other assets (most recently, some Junior Gold Mining stocks). Again, this $$ is in my “Fun Money” account, and I do some very speculative trading. It’s fun…(and, thus far, the gold put method has been working well for me). Hi Fritz, another great piece! I like that it explains the strategies you use in a simple manner. I have sold some puts earlier this year for the first time and learned a bunch. Still keen to get back in to it since I enjoyed the challenge and learned a lot. Mixed results first time but I now chalk that up to inexperience.

I have a few questions on the specifics of your method, would you mind if I sent you a note to discuss further? Hey Mofi – thanks for the compliment on the article. I have received your e-mail, will answer you directly. Thanks for following The Retirement Manifesto! My broker has been doing this for me and it has been outstanding. I call it. renting out my stocks. The money adds up quickly and enhances your returns.