Let’s pretend that you’re a real estate investor. Let’s further specify that you are interested in passive income–you want to own properties and have tenants pay you every month. You’re not super rich, so you still need to take out mortgages on your properties, but you’ll be happy to have your tenants pay down those mortgages for you over the next 30 years. And every month, you’ll collect a little extra for a small net profit.
How does this type of real estate investor think? S/he is not really concerned with the overall fluctuations in the market value of his/her properties. Instead, s/he is focused on collecting rent from tenants and paying down the mortgages.
This type of mindset is exactly the type of mindset we need to have as options sellers (especially those employing the Wheel strategy). What we’re doing every week is essentially buying “properties” with our available capital. We’re then being paid weekly “rent” on those properties. We shouldn’t really care about the market value of our properties at any point; as long as we’re getting paid every week, we will come out ahead in the end.
Take a worst-case scenario example. Say you sell a put on fictional stock “ABC”, which is currently priced at $23 per share, at a strike price of $20, and you collect $40 in premium (2% ROI). At expiration after the first week, ABC has dropped to say, $18. So the value of your “property” is now down. Well, the next week, you will sell covered calls at or above your break even price (which is actually now $19.60 due to the premium you’ve collected so far), and you’ll collect more premium. In fact, every week, you will collect premium (“rent”) that will go towards paying down your “mortgage” (your original $2000 investment). If you collect $40 per week, then in less than 1 year (50 weeks, 50×40=2000), you will have completely paid off your “mortgage” and you will own the “property” (100 shares of ABC) for free!
So even if ABC literally never comes back above your original strike price ($20), there is always a finite amount of time in which your property will be completely paid off due to your continuous collection of weekly premium.
So stop thinking like a stock market investor and start thinking like a real estate investor!
