Options Trading Strategies for consistent monthly Income

I bet most of you when introduced to Options trading, imagined of creating a fortune through it in no time. You would have heard stories where people doubled their investment, or even made it 4 times in no time by trading Options. But how many of you were lucky enough to turn this dream into reality. I guess a very small percentage, and that too because they were extremely fortunate. But in actuality, you cannot just depend on luck to become an extremely successful trader. It’s better to have a regular cash flow than a one time fortune. In this post, we would discuss some of the popular Options trading strategies for consistent monthly income. I have personally traded on these strategies and they are profitable most of the times without any adjustments.

Also Read: Options Trading Course Online: Our Recommendations

Iron Condor Strategy

This is one of the most popular Options Trading strategies for consistent monthly income. This is a non directional strategy consisting of 4 legs. That means you need to trade 4 option positions simultaneously to execute this strategy. Due to this reason, the margin required for this strategy is little higher. Iron Condor is a combination of Bull put spread and Bear Call spread.

Here is how Iron Condor is constructed:

Sell 1 OTM Put: A
Buy 1 OTM Put (Lower Strike): B
Sell 1 OTM Call: C
Buy 1 OTM Call (Higher Strike): D

Below are some of the characteristic features of Iron Condor:

Profit Potential: Limited to the net credit received. Max Profit is achieved when price of underlying is in between strike prices of the Short Put and the Short Call

Maximum Loss: Strike Price of Long Call – Strike Price of Short Call – Net credit received

Breakeven Point:

  • Upper Breakeven Point = Strike Price of Short Call + Net credit received
  • Lower Breakeven Point = Strike Price of Short Put – Net credit received

When to execute this strategy: This strategy should be executed when you are expecting a minimum movement in stock or consolidation phase.

Payoff Graph: Below is the payoff graph of this strategy

Iron Condor

Iron Butterfly Strategy

Iron Butterfly is similar to Iron Condor except for the fact that At the money (ATM) options are sold in this strategy. It is suitable for more aggressive traders, but still the risk is limited.

Here is how Iron Butterfly is constructed:

Sell 1 ATM Put: A
Buy 1 OTM Put (Lower Strike): B
Sell 1 ATM Call: C
Buy 1 OTM Call (Higher Strike): D

Below are some of the characteristic features of Iron Condor:

Profit Potential: Limited to the net credit received. Max Profit is achieved when price of underlying expires exactly at the strike price where Call and Put options are sold.

Maximum Loss: Strike Price of Long Call – Strike Price of Short Call – Net credit received

Breakeven Point:

  • Upper Breakeven Point = Strike Price of Short Call + Net credit received
  • Lower Breakeven Point = Strike Price of Short Put – Net credit received

When to execute this strategy: This strategy should be executed when you are expecting a minimum movement in stock or consolidation phase.

Payoff Graph: Below is the payoff graph of this strategy

Options Trading Strategies for consistent monthly Income

Iron Condor vs Iron Butterfly

As you would have noticed, both these strategies are very similar both in terms of execution as well as breakeven point. There is no straightforward way to select one of them. While Iron Condor is more popular among traders, Iron butterfly also do have its own advantages. Iron butterfly has higher profit potential among the two as you would receive more premium by selling ATM options. Iron Condor is better in terms of probability of winning as it has a wider profitable range.

Diagonal spread options strategy

Diagonal spread is a kind of options spread where far month option is bought and near month option is sold. For ex: Buy 8600 Nifty CE December contract and Sell 8800 Nifty CE November contract. This strategy would be called bullish diagonal spread. Buying and selling Puts will constitute bearish diagonal spread. The idea behind this strategy is that far month options contract will suffer less time decay as compared to near month options contract. So even if the trade goes against you the loss would be minimal. Even sideways trend would not cause any loss, thus qualifying this as one of the least risky Options trading strategies for consistent monthly income. We will explain this with an example in the following section.

Below are the rules to select Strike prices for this strategy:

  • For long option take strike from the next/far month. Select the strike that is at-the-money (ATM) or slightly out-of-the-money (OTM). NOTE: ATM or OTM is with respect to current month futures price and not the next month (even though the strikes are being selected from the next month).
  • For short option take strike from the current/near month that is two strikes OTM from the long strike selected.  One strike apart and the profit will start to dip after price crosses the short strike which can be a major problem in managing the trade. More than two strikes part means you will not be able to get the optimum hedge % required (see the next point about this).
  • Compute the hedge % using the formula below:
    Hedge % = (Price of short call / Price of the long call ) * 100
  • If the hedge % is above 30% this strike combination can be selected. If the hedge % is less than 30%, start the process again from #1 by going for more nearer ATM or ITM option for long and then repeat the steps and recompute the hedge %. Most of the time we end up with ITM long and OTM short which is usually the optimum combination unless one is initiating the trade close to expiry when the position has to be more ITM to provide enough protection.
  • Once you have a strike combination with hedge % greater than 30%, it can be used to enter the trade.

Read more about this strategy and download its Excel sheet at the below link:

Diagonal Spread Options Strategy

These are our 3 best recommended Options Trading Strategies for consistent monthly Income. Although there is full-proof guarantee of anything in financial markets, but these strategies if applied with proper risk management and discipline can generate a decent monthly cashflow. You cannot expect to double your money every month or two, but its not a hard target to generate at-least 25-30% every year. Good Luck for this endeavor.

Also Read: Open Interest Analysis Excel Sheet for Options

 

4 Comments

  1. Hello ​There,

    As always, I love your in depth and detailed Options Strategies and knowledge and most importantly.

    Lat​ely, I’m mesmerized with the concept of Poor Man’s Covered Call. (Its a kind of totally new to me !! )

    I believe this Poor Man’s Covered Call​ is very stable and Poor Man’s Covered Call is a fantastic alternative to trading a covered call. In smaller accounts, this position can be used to replicate a covered call position with much less capital and much less risk than an actual covered call.​

    Please kindly explore Poor Man’s Covered Call​ 🙂

    Thanks.

  2. Kudos to you for having identifying a working practical strategy.
    would be great if you could if you can map a scenario for both the Iron strategies.

    Appreciate your help and support
    Thanks

Leave a Reply

Your email address will not be published. Required fields are marked *