Using “Retirement Income Options”


  • Option selling is a professional technique for adding income and mitigating risk by selling options to speculators and those who need insurance on long positions.
  • The rules for selling options are very aligned with our rules for buying and selling stocks.
  • Look to sell COVERED CALLS when stocks or ETFs are approaching or already OVERBOUGHT on the WEEKLY chart using RSI and MFI.
  • Look to sell CASH SECURED PUTS when stocks or ETFs are approaching or already OVERSOLD on the WEEKLY chart using RSI and MFI.

Retirement Income Options analysis and investing ideas are designed to help retirees and near retirees with six and seven figure portfolios generate higher income and mitigate risk while still participating in equity gains. 

Our Retirement Income Options strategy makes extensive use of covered call selling and cash-secured put selling. Our experience is that by using our techniques, you can add from 4% to 12% per year to your bottom line while slightly lowering your equity risk.

Option Selling Is A Professional Move

Option selling is a professional technique for adding income and mitigating risk by selling options to speculators and those who need insurance on long positions. These are not speculative trades. Option selling by its nature is designed to coincide with a “buy low, sell high” mentality. 

There are only 4 option trades that are at the core of EVERY option strategy. Here is a very easy chart to remember for options trading. 

Our option selling strategy takes this cycle into account: 

As you learn how to handle options within your portfolio, you can come back to that image over and over again. Selling options is not “one shot” deal. It is a process that takes into account buying a stock (or ETF), selling an option and selling a stock (or ETF). 

Take the time to read the linked documents and watch my “Option Selling Call” webinar archives. Here is a popular webinar:

Option Education Links And Videos

Having a good appreciation of risks and understanding of methods is vital to using options. Please read these before starting:

CBOE Options Institute Education

Option Clearing Corp Publications 

Covered Calls – by Fidelity

You will be able to find great option trading tutorials at your online brokerage.

How I Trade Cash Secured Puts

First off, I never use margin. You should NEVER us margin. If you use margin, you can lose a lot of money. If you use margin and lose a lot of money, you will not get any empathy here. It’s called a “cash secured” put for a reason, it’s secured with your cash, not margin credit.

I sell cash secured puts for two primary reasons: 

  • To add to an existing position at a price lower than my cost basis. 
  • To initiate a position at a price lower than the current price. 

My primary reason for selling puts is NOT to generate income for the sake of income. Income generation is a by product and a secondary outcome. NEVER sell options with a primary purpose of generating income. ALWAYS focus on the security first as if were going to build a long position.

By having this approach, you are much less likely to get into trouble by selling puts on a security that might breakdown into a big losing position. 

The danger you can get into by focusing on income, rather than security quality and price, is that when a stock or ETF falls in price, volatility almost always rises, making it hard to escape your position without taking a permanent loss (permanent losses are your worst enemy) or starting very far in the hole

The best time to sell a cash secured put is when a stock or ETF is oversold. We generally look at the weekly charts of Relative Strength Index [RSI] and Money Flow Index [MFI] to get an idea of when to start considering selling a cash secured put. 

To be clear, if you do not use any technical analysis, you should not trade options at all. Never, never, never trade options without looking at basic technical indicators.

Because the market rises 3x as often as it falls. Your puts are more likely to expire than be put to you if you use RSI and MFI correctly. You can sell more puts when this happens as your cash is freed up again.

Here is a primer on technical basics you must know:

Technical Trading Basics: Using Overbought And Oversold Signals To Buy And Sell

Here’s an example of a stock I would sell a cash secured put on. The first premise is that I think it is a strong company that can rise in share price in coming years. Second, is that the stock is oversold, it’s approaching an area with structural support and the downward price momentum is starting to dissipate. 

GOLD cash secured put

Cash-secured Put Checklist

  • You want to own the stock at the strike price, which is a function of short-term valuation and projecting future value.
  • The stock is oversold or approaching oversold on the weekly RSI, MFI and/or Chaikin Money Flow.
  • You have considered the potential impact of upcoming earnings announcements, business developments and dividends.

How I Trade Covered Calls

I sell covered calls in two different situations:

  1. When a stock I own has appreciated and I would like to sell some or all at a higher net price. 
  2. When a stock I own has started to show technical weakness, but I want to own it for the long-term. 

Covered Call Scenario 1 – appreciated stock or ETF that is approaching or already overbought:

You write a covered call after a stock or ETF gets into the middle of the overbought vs oversold range, or wait until it approaches or gets into overbought. Again, using weekly charts on RSI and MFI. 

In this situation, I will generally trim, i.e. sell, some of the position, somewhere between 1/6 and 2/3 of a position and sell a covered call on much of what is remaining. If I think the stock or ETF, but generally a stock, can break out to much higher levels, then I will leave a portion of the position uncovered so I can take part in future gains. Here is an example: 

Covered Call Scenario 2 – stock is weakening, but I want to hold it long-term, for example, because I expect it to rise in price eventually and it pays me a dividend while I wait:

In this scenario, usually with slower growing dividend paying stocks, I want to add income to mitigate my risk a bit. Because the stock is stalling out or even falling a bit short-term, I sell a covered call a little out of the money.

To be sure, if I think the stock is headed for a bigger loss, anything exceeding about 12% is where I get worried, I am more likely to sell. The dividend is what might keep me in the stock though, particularly REITs, utilities and other companies with low risk of bankruptcy. Here’s an example: 


The Buy/Write Covered Call:

The scenario I do not use often, almost never in fact, is the buy-write. A buy-write is when you buy a stock and immediately sell a covered call.

Covered Call (Buy/Write) by Options Industry Council

The reason I do not like this strategy is that if you are even a little better than average stock and ETF picker, then you want your investments a chance to appreciate. Your risk tolerance will determine when you sell a covered call, either when it is in the middle of the overbought/oversold range or overbought, as described above.

If you want to do buy/writes, then simply sell a covered call after you buy a stock or ETF when it is put to you. You are dramatically limiting your upside in my opinion, but it is a way to collect premium more regularly and can cut risk a bit. 

Covered Call Checklist

  • You want to trim the holding at the set strike price because that price is overvalued versus your assessment of the stock’s value in the next year or two. This is tricky to do.
    • If the stock is overvalued relative to longer term projections of value, then you should just be selling stock.
  • The stock is overbought or approaching overbought on the weekly RSI, MFI and/or Chaikin Money Flow.
  • You have considered the potential impact of upcoming earnings announcements, business developments and dividends.

Reviewing Cash-secured Put Trades

This chart if from Fidelity. It shows the basic idea around selling cash-secured puts.

In Fidelity’s example, there is a put with a $3 premium and a $100 strike price. There are 3 outcomes: 

  • The stock falls below $97 it is put to you and you are at a net loss. Despite being at a loss, you are still better off than if you had bought the stock at $100 per share without selling the put that you received $3 for.
  • The stock falls between $100 and $97 it is put to you, but you are still net profitable. This is the perfect trade for accumulating shares at a discount to today’s price. 
  • The stock rises above $100 and the option expires with your having just collected the premium. This is the consolation prize of selling puts, i.e. you get a heckuva a return on your money market funds. 

If you think about selling puts as a way to acquire discounted shares from today’s price, then you are doing it right. If you are focused on the premiums and get irritated with having stock put to you, then you should not being trading options at all. Period. Stop. 

Use this chart to work through your trades by writing the prices and premiums for your trades. 

Cash-secured Puts vs Covered Calls

Many people will tell you that cash-secured puts and covered calls are the same thing. That is not true. While similar, there is a huge difference that must be acknowledged.

If you think about options from the standpoint of the underlying stock, this will make sense to you. If you think about options as income first, then you will be confused. 

A cash-secured put is designed to get you into a stock. 

A covered call is designed to get you out of a stock. 

Since we only sell puts on stocks we want to own, we are just looking for discounts for buying those stocks. 

Since we want our winners to run until overbought and/or overvalued, we generally will have limited use for covered calls. In fact, when a stock of ours gets overbought and/or overvalued, it is generally more important to trim the position back to a smaller size than sell a covered call.

Usually, when a stock we own is overbought and/or overvalued you want to trim back the position and sell a covered call, while leaving a portion of your position unencumbered. Why keep some free and clear? So it can keep running in case the stock is even better than you thought or more loved than you thoughts possible.

Final Option Selling Thought

If you always think about the stock or ETF fundamentals first and then overlay technicals you will almost always be alright in the intermediate and long-term.

To be sure, sometimes in the short run the unexpected, unexplained or unforeseen happen. We can’t avoid that 100% of the time. 

If we focus on quality and the technical signals the market is giving us, then we can almost always avoid permanent losses. That systematic approach is the backbone of a winning portfolio (that and a few big winners).