In today’s video, Options with Davis presents “The BEST Passive Income Options Strategy (For Beginners).” If you’re new to options trading or have a small account size, this strategy is perfect for you. Passive income is defined as money earned with minimal effort, and this strategy allows you to construct passive income using options. The video discusses the put broken wing butterfly strategy, which involves a combination of a put credit spread and a put debit spread. This strategy offers a high probability of profit and requires no further management once the trade is put on. It is important to choose cash settled index options to implement this strategy, and holding the strategy until expiration is recommended for maximum profit potential. The video also provides additional resources, including other related videos and a free copy of The Options Income Blueprint. So if you’re looking to generate passive income using options, this video is a must-watch for beginners.
Introduction
Welcome to a comprehensive guide on the best passive income options strategy for beginners. Today, we will explore how to construct a passive income using options, where you only put on the trade once and collect income without any management. We understand that as a beginner in the world of option trading, it can be overwhelming to navigate through the various strategies available. That’s why we are here to break it down and provide you with a strategy that offers simplicity, profitability, and minimal effort.
Passive Income and Options
To kick things off, let’s start by understanding what passive income means. Passive income refers to money earned with minimal effort, where you can receive income automatically or without putting in much work. Some examples of passive income include rental income, dividends from stocks, and interest income from fixed-income securities. With options, we aim to create a strategy that generates passive income by taking advantage of high profitability and minimal management.
The Put Broken Wing Butterfly Strategy
One strategy that can help us achieve passive income through options is the Put Broken Wing Butterfly (put BWB) strategy. This strategy combines two different types of spreads: the put credit spread and the put debit spread. By utilizing the credit from the put credit spread to finance the debit spread, we can construct a strategy that offers a high probability of profit and no management requirement.
The put BWB strategy is designed to minimize the risk to the upside while ensuring potential profits to the downside. It provides a defined risk version of the put ratio spread, making it suitable for beginners. With the inclusion of a long put option to define the maximum risk, this strategy offers a sense of security and protection against significant market movements.
Visual learners may find it helpful to refer to a chart showcasing the put BWB strategy. The chart displays two short options at the same strike, combined with a long put and another further out-of-the-money long put option. This configuration allows for a skewed butterfly shape, removing any upside risk and providing a favorable risk-reward profile.
Choosing Cash Settled Index Options
To effectively implement the put BWB strategy, it is crucial to choose cash settled index options. Cash settled index options are preferred over other options as they eliminate the risk of assignment on shares. Early assignment, or being forced to buy or sell shares before expiration, can disrupt the passive income aspect of the strategy. By utilizing cash settled index options, we can ensure a smoother execution of the put BWB strategy and maintain the desired passive income flow.
Adapting the Strategy to Market Views and Objectives
One of the remarkable features of the put BWB strategy is its flexibility. It can be adapted to different market views and objectives, making it a versatile choice for option traders. As market conditions change, adjustments can be made to the strategy to align with specific objectives.
For example, if you anticipate bullish market conditions, you may choose to shift the short strike further out of the money to reduce downside risk. On the other hand, if you expect bearish market conditions, you can adjust the strategy accordingly to benefit from potential profit opportunities.
Aligning the strategy with objectives is crucial for maximizing the potential of the put BWB strategy. By regularly reassessing market views and fine-tuning the strategy, you can position yourself for long-term success.
Leveraging the Positive Drift and Put Skew
The put BWB strategy takes advantage of two key elements in the options market: the positive drift of the overall market and the put skew phenomenon.
The positive drift refers to the historical tendency of the market to move upwards over time. By aligning the put BWB strategy with this positive drift, you can position yourself to benefit from the overall market trend and generate consistent income.
Additionally, options often exhibit a put skew, which means that put options tend to be priced higher compared to call options with the same strike price. This skew presents an opportunity for option sellers to earn higher premiums for selling put options. By exploiting the put skew in options, the put BWB strategy can further enhance the potential returns and passive income generated.
Defined Risk and Statistical Edge
Risk management is an essential aspect of any trading strategy, and the put BWB strategy offers a defined risk approach. By structuring the strategy to limit the risk to one side (the downside), traders can gain more control over potential losses.
Moreover, the put BWB strategy provides a statistical edge over time. With proper execution and risk management, the strategy has historically demonstrated a probability of profit higher than alternative approaches. This statistical edge increases the chances of generating consistent passive income in the long run.
Holding to Expiration for Maximum Profit
To maximize the profit potential of the put BWB strategy, it is recommended to hold the trade until expiration. Unlike other strategies that require active management and frequent adjustments, the put BWB strategy allows for a set-it-and-forget-it approach.
By holding the strategy until expiration, you can fully capture the potential profit generated by the strategy. This eliminates the need to constantly monitor the trade and make adjustments, making it an ideal choice for those looking to create a truly passive income stream.
Comparing Put Side to Call Side
It’s important to note that while the put BWB strategy offers high profitability and limited downside risk, the profit potential on the put side is generally smaller compared to the call side. This is a trade-off for the defined risk and reduced management required by the strategy.
When choosing between the put side and the call side, consider your risk tolerance, market views, and specific objectives. Both sides have their advantages and considerations, so be sure to analyze your options before making a decision.
Conclusion
In summary, the put BWB strategy provides an excellent opportunity for beginners to generate passive income through options. By utilizing cash settled index options, adapting the strategy to market views and objectives, and leveraging the positive drift and put skew, you can construct a strategy that offers a defined risk and statistical edge.
Holding the strategy until expiration allows for maximum profit potential, while comparing the put side to the call side enables you to make an informed decision based on your risk tolerance and objectives.
With the put BWB strategy, you can embark on your journey to create a passive income stream using options. Remember to manage your risk effectively, stay informed about market conditions, and continuously fine-tune your strategy to optimize your results.