Photo by Yiorgos Ntrahas on Unsplash
 

As we start a new year of trading, investors have a lot of uncertainty.

• Will inflation continue to pressure consumers?
• Will the U.S. economy enter a recession?
• Will the Fed keep hiking interest rates?
• Will the war in Ukraine continue?
• Will China invade Taiwan?
• Will oil prices rebound?

I’ve got some ideas for a few of these variables. But no one knows exactly what will happen in the year ahead.

And with so many important variables in play, the stock market will certainly fluctuate back and forth this year.

The volatility will make it difficult for most “buy and hold” investors.

But there’s one investment strategy that actually benefits from this volatility. One that I use throughout the year to generate extra investment income for my own family.

Today, I want to explain how this strategy works — and why the approach is perfect for this year’s market.
 

Selling Put Contracts for Income

The income strategy I use for my own family involves getting paid to make a stock market agreement.

By selling “put option contracts” this strategy collects up-front cash in your brokerage account. And you can collect these payments multiple times throughout a given month or year.

Here’s how it works…

When you sell a “put contract” you’re agreeing to buy shares of stock at a specific price.

For example, I recently used this approach with one of my favorite energy stocks, APA Corp. (APA).

Shares of APA are currently trading a bit above $45. I sold the February 17th $42.50 put contracts and collected $179 for each contract I entered.

By selling one option contract, I was agreeing to buy 100 shares of APA at a price of $42.50. Now APA is a stock I would like to own. And I would be happy to buy shares at $42.50, given the stock is trading above that level right now.

Plus, I received $1.79 per share — or $179 for each 100-share contract — just for entering the agreement.

Looking forward, if APA is trading above $42.50 on February 17th, the puts will expire. I’ll get to keep the $179 I received from entering the trade. And the puts will then disappear from my account.

I can then set up a new trade if I like. So this income can be repeated several times throughout a given year.

If APA is trading below $42.50 on February 17th, I’ll be required to buy shares of stock. But this is a stock I would like to buy. And the $42.50 price is an attractive level that I’m comfortable with.

And remember, I received $1.79 per share to enter this agreement (which I still get to keep). So my effective price for APA is actually closer to $41.21.

Either way, I’m happy with the outcome!
 

Using This Income Strategy in 2023

With so much uncertainty for the global economy, I expect markets to be fairly choppy in 2023.

This could bode very well for my put-selling income strategy. Here’s why…

First, when uncertainty is high, investors are typically willing to pay more for option contracts. This is because traditional investors buy these contracts to hedge against the risk of falling stocks.

Since this strategy involves selling these contracts, higher prices actually work to our favor. We can sell contracts at a higher price and lock in more income from each transaction.

Second, if markets are chopping along sideways throughout 2023, holding stocks will be less profitable.

But this income strategy can continue to collect payments from selling put contracts month after month.

If the puts expire, we can simply sell new contracts and collect more income.

And if the puts are exercised, we’ll buy stocks at an attractive price (after a pullback). We can then sell the stock later after a rebound, and start the process all over again.

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