💰 Passive Income Owning Stocks You Love

Introduction

It’s been a while since I’ve been able to publish a post that wasn’t our regular The Investing Week Ahead or our Week in Review — and I’m happy to be back!

As I shared in Sunday’s Week in Review (below) — I was able to generate $1,505 in passive income from my $26,275 investment in Tesla stock last week.

In this post I’m going to:

• Further explain exactly what I did to generate this income

• Suggest a few other income-producing names I like right now

You’ll likely have questions — so feel free to share them in the comment section below. I’ll do my best to get back to everyone!

What Are Option Contracts?

Simply put, an “option” contract gives the contract buyer the “option” to either purchase or sell 100 shares of a specific stock at a specific price on a specific day.

Option contracts contain four subcategories — ticker symbol, premium, expiration date, and strike price.

These are a bit tricky to understand at face value but become much more clear once you’re walked through an example in its entirety — so stick with me here.

⚡️ Ticker Symbol

This subcategory is very straight forward — it’s the specific stock the contract is pertaining to. For example, if you’re buying or selling option contracts pertaining to Apple — the ticker symbol used would be AAPL.

Same deal with Microsoft (MSFT) or Disney (DIS) — the ticker symbol is the “stock identifier” for the contract.

⚡️ Premium

Now that we know the specific stock the option contract is pertaining to, the “premium” is simply how much the contract costs. Stocks have prices — we’re all very aware of this — and so do option contracts.

Now there are a ton of different things that go into the pricing of a contract — including the implied volatility of the underlying stock, the amount of time until expiration, and many other variables we won’t be getting into in this post.

All you need to know is that the “premium” is the price of the contract.

⚡️ Expiration Date

This one is also very simple to understand — the expiration date is the date the contract, including its terms and implications, expire.

More on this later.

⚡️ Strike Price

Now this one might be a little bit tricky to understand — but the strike price of an option contract is the mutually agreed upon price the participants of the contract are exchanging their shares at.

More on this later as well!

🚗 My Tesla Example

Now that you all are vaguely familiar with the high-level terms used when dealing with option contracts — let’s dive a bit deeper into exactly what I did to generate >$1,500 in passive income on my shares of Tesla stock.

⚡️ Let’s talk about option contracts in-depth:

The stock market is a fun place — everyone has an opinion. And if your opinion is the correct opinion, you’ll be rewarded handsomely for it.

However, there are only two opinions a person can have:

• A stock price is going to increase

• A stock price is going to decrease

If you think a stock price is going to increase, it makes sense as to why someone would want to own that stock and make money. If you think a stock price is going to decrease, it makes sense as to why someone would want to sell that stock and not lose money.

Option contracts allow people to make bets as to what they think a stock price will do before a specific date. 

For example, if you think a stock price is going to increase from $200 / share to $250 / share between now and Christmas, you can make that bet and be rewarded if your bet is correct.

Alternatively, if you think a stock price is going to fall from $200 / share to $150 / share between now and Christmas, you can also make that bet and be rewarded just as handsomely if your bet is correct.

Option contracts allow people to make bets.

⚡️ How to profit from these “bets”

Good question! You very much so can just own the shares.

If you think shares of Tesla are going to trade up in price this week, you’re more than welcome to buy 100 of them for $26,275 in cash, hold onto them for a week, then hopefully sell them for a profit.

But do you see the problem here?

You need $26,275 in cash to do that! That’s a LOT of money for a LOT of people.

This is where option contracts come in.

An option contract is a short-term bet someone is making on a specific stock (ticker symbol). They’re betting the stock price is going to either trade up or trade down to a new price (strike price) by a specific date (expiration date) and they’re willing to pay a small amount of money (premium) to place that bet.

Coming back to my Tesla example — someone made a bet with me last week that Tesla stock is going to be trading above $270 / share (strike price) by October 20th (expiration date).

To place that bet, they paid me $1,505 (premium).

Because I took on their bet, I’m being paid $1,505 in cash upfront. However, I’m now contractually obligated to fulfill the outcome of this bet no matter what happens to Tesla stock price.

In this example, the “placer of the bet” AKA the purchaser of the contract shown above is paying me $1,505 for the right to purchase my 100 shares of Tesla on October 20th for $270 per share.

If we break that down, that means their implied breakeven point is $285.05 per share — considering they paid $15.05 per share in premium.

Because they believe Tesla stock is going to trade much higher than $285.05 / share before October 20th — and by purchasing the option contract, they’re guaranteeing the fact that they can purchase 100 shares of Tesla stock from me for an implied $285.05 / share amount.

For example, if Tesla is trading at $400 / share on October 20th, they have a legal right to buy those shares from me for an implied $285.05 / share — allowing them to profit $11,425 from this bet (assuming they immediately sell these shares on the open market for $400 each).

⚡️ Specifically what I did:

As the seller of the contract, I’m the one collecting the upfront cash from people wanting to make a bet with my 100 shares of Tesla stock.

Specifically, I’ve collected $1,505 in upfront cash — and will retain both the $1,505 in cash and my 100 shares of Tesla stock as long as the stock price stays at or below $285.05 per share by October 20th.

Think about it, why would someone want to exercise their right to buy 100 shares of Tesla stock from me for an implied $285.05 per share if it’s (for example) trading on the open market for $278 per share?

And in that case, I will have generated $1,505 in passive income in only 5 weeks from owning a stock that I love.

As shown above, I’ve already withdrawn this money (and some spare change I had hanging around in my account) and deposited it into my personal checking account.

Now let’s pretend Tesla stock trades up to $300 per share on October 20th — well, the person who paid me $1,505 for the right to buy my shares at an implied $285.05 would likely want to exercise that right. I’d be forced to sell my 100 shares of Tesla stock for $270 per share (strike price) to this individual — profiting $725 on top of the $1,505 I receiving in upfront cash.

Remember, I paid $262.75 per share for this stock — so by selling it at $270 per share, I’m profiting the difference ($725) while also profiting the upfront cash I received from selling the contract ($1,505).

That’s a total profit of $2,230 — or an 8.5% profit — on my $26,275 investment in only 5 weeks time.

⚡️ Worst case scenarios:

Profiting $2,230 in only 5 weeks is the “best case” scenario — but what’s the worse?

Remember, I now own 100 shares of Tesla stock that I paid $262.75 for. Earlier in 2022, Tesla stock traded all the way down to $113 per share — which is -56% lower than what I paid for my shares!

So what’s the downside risk here? Well, like any investment in a stock, it could very well trade lower. However, I don’t think about it like that — especially if I’m a long-term believer in the company like I am with Tesla.

I purchase stock in companies whose prices fluctuate both up and down all of the time — but that doesn’t mean I’m upset about it! I’ll happily own Tesla stock at $262, just like I would at $250, $200, or even $150.

I know where this company is headed, and I’m a long-term believer in the company. So if you’re telling me that I can also generate $1,505 in passive income while owning 100 shares of this stock — I’m all for it!

Above is an incredible video that easily breaks down exactly what we’re talking about here, except they use Intel (INTC) as an example — whereas I used Tesla (TSLA).

Other Income Producing Ideas Right Now

If you’re like me and appreciate a guaranteed income paid to you for owning stocks you love, you’ll want two things to be true:

1. The guaranteed income paid to you is mid-single digits

2. In case the stock price goes down, the company should be fundamentally sound

Having both of those two things be true is sort of tricky, but I’ve tried my best to bring you all a few examples!

⚡️ DraftKings (DKNG)

• Fundamentals — online sports betting has continued to take the country by storm, and DraftKings is one of the few big players in the space. The company is also projected to become both Adj. EBITDA and free cash flow positive in 2024.

• Income — it would cost you $3,125 to purchase 100 shares of DKNG stock right now, allowing you to collect $113 in premium income against those shares assuming 10/27 expiration at a $33 strike price.

• Yield — that’s a 3.6% cash on cash return with a potential 9.3% total profit in only 5 weeks if the shares trade high enough for someone to exercise their contract.

⚡️ Spotify (SPOT)

• Fundamentals — the company’s podcast revenue is expected to continue to skyrocket through 2026. They’re expected to be GAAP profitable next year, as well as expected to double their free cash flow from $280M to $630M in 2024.

• Income — it would cost you $16,000 to purchase 100 shares of SPOT stock right now, allowing you to collect $730 in premium income against those shares assuming 10/27 expiration at a $165 strike price.

• Yield — that’s a 4.6% cash on cash return with a potential 7.7% total profit in only 5 weeks if the shares trade high enough for someone to exercise their contract.

⚡️ Marathon Digital (MARA)

• Fundamentals — this is essentially a Bitcoin mining company based out of Florida. They’ll generate $390M in revenue this year and another $560M next year. Their stock price tends to move up and down with the price of Bitcoin — and if you’re like me and believe the price of Bitcoin will again breach new all-time-highs, then theoretically this company’s stock price should increase as well.

• Income — it would cost you $930 to purchase 100 shares of MARA stock right now, allowing you to collect $82 in premium income against those shares assuming 10/27 expiration at $10 strike price.

• Yield — that’s a 8.8% cash on cash return with a potential 16.3% total profit in only 5 weeks if the shares trade high enough for someone to exercise their contract.

Quick Note — most of the names you all know and love yield around 3% cash on cash returns and a potential 6-7% total return if the option contract is exercised. When looking for new opportunities, use those figures as your benchmark.

If you find something that’s above those benchmark figures, find out why the market is paying a premium for those contracts as well as share your findings with me!

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.