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Three Things You Must Know About Your Monthly Income Strategy


Instant riches aren't guaranteed, but consistent profitability is possible.

Monthly Income

Warning Number 1:

Despite the hype that you find all over the Internet, a steady income isn't guaranteed. Instant riches aren't yours for the taking. Please don't fall for that nonsense. But, you can create a portfolio with a high probability of consistently being profitable. This isn't a "gimmie." You must understand how options work and expend some time and effort learning how to manage risk.

Warning Number 2:

There's no magic strategy. Most of the hypesters buy iron condors, and if you're looking for an income-stream strategy, that's at the top of my list. But other strategies can be used to provide an income stream. Here's where I differ from those who promise wealth for only x amount of dollars per month:

It's not the strategy that delivers the gains.

It's you ability to manage money.

It's you ability to manage risk.

If you're interested in managing a portfolio with the objective of earning monthly income, any of the premium-selling strategies can work. Some methods are riskier than others (covered calls and naked puts) because they have very little protection against a market downturn. If you have a market bias, you can be bullish (sell put spreads, write covered calls, sell naked puts); bearish (sell call spreads); or neutral (buy iron condors).

To generate those profits, you want to have a good understanding of how these strategies work. The Rookie's Guide to Options teaches, in detail, how to use these methods. There are also many blog posts both here at Minyanville and at my blog that will get you off to a good start with these methods.

I've also spent a good deal of time discussing risk management, so if you dig, you can find more than enough information to get you off to a good start. Take the time to learn -- you don't have to begin trading tomorrow.

Warning Number 3:

The problem with calling it an "income" strategy is that there becomes a need to make money every month. That's just not going to happen. Taking extra risk in an attempt to squeeze a profit from a position that's turned against you and has made the chance of losing a bundle reasonably likely -- well, that's a position you must learn to fix immediately.

In fact, for best results, you don't want to be in the situation of owning such a position. Perhaps a minor adjustment or 2 could have been made earlier to make the position safer to own. But the bottom line is that needing an income every month can result in too much risk-taking. If you avoid that risk, you'll make money over time.

Then there's the collar strategy that eliminates all major downside worries. The questions are: Which options do you trade? How willing are you to accept smaller returns in the name of almost complete protection? That's too conservative for many, but you must find your own comfort zone when seeking an income strategy.
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No positions in stocks mentioned.

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