How I Collect Cash Flow Every Month Without Fail

If you want to become financially free, you need to know how you can create cash flow from your portfolio.

So what exactly is cash flow?

Well, it is exactly as it sounds - the amount of cash that enters your pocket on a regular basis. Its kinda like rental income that you will get from properties as a landlord.

In this article, I going to share with you how I collect cash flow every single month from the stock market.

The Results

So, how did I collect this amount of cash flow every single month?

Well, I did it through selling options - both put and call options.

And to quickly address the question that are in some of our minds, "Well, it must be a huge portfolio."

At the point of writing, the portfolio that gave this amount of monthly cash flow is around $170K - which is quite a decent portfolio size. Hopefully, this gives some sensing of how big a portfolio have to be in order to achieve such amount of cash flow.

Typically, by selling options - getting 1% of your portfolio per month is very possible.

This means that for a $170K portfolio, I am expecting to get at least $1,700 per month from selling options. Of course, as you can see from the Feb 21 to May 21, I collected much more than $1,700 - thanks to the stock market volatility.

Now, let me go through the big idea of selling put and call options.

Selling Put Options

Selling put options is responsible for most of the cash flow collected - and it is the bread-and-butter strategy of any option investor.

Selling put options means that I promise to buy 100 shares of the underlying stock at an agreed price (i.e. strike price) before an expiry date. In return, I collect option premium.

If the share price is below the strike price at the expiry date, then the option will get exercised - and I will be forced to buy the 100 shares.

Most people have this mindset to selling put options, "I don't want to get exercised and own the stock, I just want to keep the premium."

Such a mindset is silly, and will only sabotage your returns as an investor.

If you understand the concept of value investing, then you will know that getting exercised is the best thing that can happen to you.

Why?

Remember that selling put options means that you are promising to buy 100 shares of the underlying company at an agreed price.

So here's is my approach to selling put options.

I will only promise to buy at the price that I am willing to pay.

Let's say that I am looking to buy PYPL shares that is considered undervalued at $250. But currently, the market is $265. So instead, of waiting for the share price to fall until it reaches my entry price of $250, I sell a put option to promise to buy at $250 and get paid option premium in return.

If it falls below $250, my put option gets exercised, then hooray - I now own PYPL shares at an undervalued price of $250 and all I have to do is to wait for it to appreciate to my exit price and profit the difference. Currently, I calculated PYPL exit price to be around $396 - so that's a $14,600 profit. (($396 - $250) X 100=$14,600)

Now, where do we get this entry and exit price? Well, it is from a watchlist. Every value investor will have a watchlist of stocks so that they know what is the entry and exit price of the stocks on their watchlist.

Wait, Gin - if the put option gets exercised, then I have to pay for 100 shares! I don't have that amount of cash, that's why I don't want to be exercised!

This above is a typical example of selling naked put options.

Naked put options means that you promise to buy 100 shares at the strike price, but yet you don't even have the cash to pay for the 100 shares if it gets exercised. This can easily result in a margin call that wipe a good chunk of your entire portfolio if there happens to be a market crash. I have heard of true stories of naked put option sellers who lost 50% of their portfolio overnight - so please don't do this. I will much rather you focus on buying call options and stocks.

Selling Call Options

Most of the time, people might think that selling call options are only applicable when you have 100 shares. The reality is that I sell call options on my long call positions as well. This is also known as the Poor Man's Covered Call. I only started doing this in 2021 after doing much research and back test, which really increased the amount of cash flow I collected every month.

As a general rule, I will only sell call options with the following conditions:

1. Weekly (Or Monthly) Options
2. The stochastics is high of > 80%
3. Probability OTM of > 85%

Firstly, when selling call options, I choose a short expiry date and a shorter expiry date means a faster time decay, allowing me to make profits faster. Typically, when selling options - a shorter expiry date is always preferred.

A high stochastics means that the stock is overbought, and is likely to retrace (i.e. come down). Remember that when selling call options, if the share price is above the strike price at the end of expiry, the sell call option will get exercised and you will sell 100 shares. So by selecting a high stochastics, it reduces the chance of the sell call being exercised.

Finally, choosing a strike price that gives a probability OTM of > 85%. The probability out-the-money also represents the probability that the sell call will not be exercised. This means that by selecting such a strike price, there is a 85% chance that the sell call will not be exercised.

Now, for those who are more observant, you are probably thinking - what if the sell call gets exercised, and I am forced to sell the 100 shares?

Well, let me explain for both scenarios.

For the 100 stocks: So if you had 100 shares and you sold a call option on it which was exercised, you will lose the 100 shares. Let's say if you wanted the 100 shares back, you could just sell a put option to get back your shares. And yes, by selling a put option, you are collecting even more option premium.

For the Poor's Man Covered Call: This is more advanced where you sold a call option on your long call positions. If your sell call gets exercised, you will be shorting 100 shares. But remember that, if your sell call option gets exercised, it means that the share price has shot up, which means that your long call positions is already making loads of money. And to cover the short position of -100 shares, I would just sell a put option to try to get back the shares, collecting more option premium as a result. If the share price continues to go up, then my long call will be making even more money.

A word of warning - please don't sell call options on growth stocks such as TSLA, SE, CRWD, etc. You should not be selling call options on these stocks as these stocks tend to suddenly shoot up a lot and you will regret selling call options. I only sell call options on quality value stocks that passes my 8-Point Checklist.

The Bottom Line

When the stock market has a correction and everyone is fearful due to the increased volatility - I will take advantage and sell put options to promise to buy shares of quality companies at strike price that I want to own. Due to the increased volatility, the amount of option premium collected is also a lot more. As you can see in March 2020, during the Covid Crash, it was the period where I collected the most amount of option premium.

When the stock market is in the bull run, and stochastics tend to be oversold - that is where I will sell call options and collect option premium on my shares and long call positions.

Can you see that whichever direction the stock market is going, I will still be collecting cash flow every single month. These cash flow can be withdraw from my brokerage account to pay for my expenses if I needed it. But if I don't need it, I could also use to reinvest these amount of cash flow and compounding my portfolio growth.

For those who are interested in learning more about options, check out the free resource I created called the Options Investing Hub. And if you find this article useful, do share it with your friends and family.