How Much Money to Make $1,000 a Month Selling Options

To make $1,000 a month selling options, divide the yearly goal by the annualized premium yield you can keep. At a 12% yield, that takes about $100,000 of stock or cash collateral. Higher yields need less money but come from more volatile stocks, and the stock's downside comes with every dollar of premium.

The formula behind $1,000 a month

Selling options for income usually means one of two trades. With a cash-secured put, you sell a put and hold enough cash to buy 100 shares at the strike. With a covered call, you own 100 shares and sell a call against them. Either way, the buyer pays you a premium up front, and your capital backs the promise.

The capital you need follows from one line of math:

Capital needed = monthly income × 12 ÷ annualized yield.

For $1,000 a month, the yearly goal is $12,000. At a 12% yield, $12,000 ÷ 0.12 = $100,000. Put another way, the trades have to earn 1% of your capital every month, after the months that go badly.

The formula works the same for covered calls, with one difference in what counts as capital. There, the capital is the market value of the shares you own. Holding $100,000 of stock and selling calls that average 1% a month would cover the goal. When shares get called away, though, the income pauses until you buy back in or sell puts, and the stock's price swings still land on your account in full below the strike.

How much capital does each yield need?

This table runs the same $1,000 monthly goal across six yields. The last column is the return each month has to average.

Halving the capital from $100,000 to $50,000 means doubling the yield to 24%. Premiums that large come from stocks the market expects to swing hard, which raises the odds of a month that erases several months of income.

What does one month of trades look like?

Say a stock trades at $50 and a 30-day put with a $47 strike pays $0.70 a share. One contract needs $4,700 of cash and returns 1.49% on it, or 18.1% annualized.

To clear $1,000 in one month, you would sell 15 contracts. That brings in $1,050 of premium on $70,500 of collateral. If the stock stays above $47, every put expires and you keep the $1,050. Run your own strike, premium, and contract count through the cash-secured put calculator to see the cash required and the annualized yield.

All 15 contracts sit on one stock in this example. Spreading the same $70,500 across several stocks limits the damage from any single one, but each still carries its own downside.

What a 20% drop does to the income

Now say the stock falls 20%, to $40, by expiration. All 15 puts are assigned at $47. You buy 1,500 shares for $70,500 that are worth $60,000 on that day.

The $9,450 loss equals nine months of the $1,050 income. The Options Industry Council describes the maximum loss on a cash-secured put as "limited but substantial," because the stock can fall to zero and only the premium offsets it.

After an assignment like this, the income often keeps going in the form of covered calls on the new shares. That is the wheel strategy, and the wheel strategy tracker keeps its adjusted cost basis. Premium lowers that basis over time, but the $10,500 paper loss on the shares stays until the stock recovers or you sell.

What yield is realistic?

Premium yield works nothing like a CD's rate. It moves with each stock's volatility, with how far your strike sits from the stock price, and with how many days the option has left. The same stock can pay twice as much in a nervous month as in a calm one.

Three things pull the long-run average below the yield of any single good trade:

• Assignments and rolls. Months spent holding shares that fell, or buying back calls, earn less than a clean expiration.

• Idle cash. Weeks between trades earn only what your broker pays on cash, if anything.

• Fees. Commissions on 15 contracts a month add up across a year.

Interest helps in the other direction. If your broker pays interest on the cash held against your puts, that adds to the yield. The cash-secured put calculator has a field for it.

The way to find your own yield is to price real trades. Pull a quote from your broker's option chain, enter it in the calculators, and read the annualized figure. Your broker also has to approve your account for options first. FINRA's investor page on options says firms grant that approval and points to the Options Clearing Corporation's risk booklet, which you receive before trading.

Taxes and the $1,000 that reaches you

Most option income is taxed as a short-term gain. IRS Publication 550 says premium from an option you wrote that expires is a short-term capital gain. The IRS's Topic 409 adds that net short-term capital gains are taxed as ordinary income.

If your top federal bracket is 22%, $1,000 of short-term gains leaves $780 before any state tax. To keep a full $1,000 after federal tax at that rate, you would need about $1,282 a month in gains, which pushes the capital at a 12% yield to about $128,200.

The trades behind this goal are broken down in cash-secured put vs. covered call, how to calculate covered call return, and when to roll covered calls. The options income hub has a goal calculator that works this formula at any yield. To check one trade against your goal, the covered call calculator gives the annualized return on shares you already own, the number to plug into the 12% slot above.