Should You Include Options in A Retirement Portfolio?

Investors tend to focus on the total value of their retirement nest egg when they might be better off zeroing in on how much income their portfolios generate. After all, when you retire, you’ll be living off of the money in your investment accounts. Consider thinking about how to do this in relatively non-traditional ways. 

Generally, people approach retirement investing with a magic number of $1 million in their head. Once they get to that or some other (often arbitrary) figure, they quit their gig and start drawing from their million bucks. But what if you didn’t have to touch that money or, at least, could put less of a dent in it over the course of your retirement?  What if you could have a consistent strategy of selling options on top of your retirement portfolio? Wouldn’t it be nice to generate income in addition to the dividends you are collecting in a very conservative way? This is what closed-end option income funds do. Why not do it yourself without a hefty management fee?

That ought to be the dream. Retirees typically get their income via dividend-paying stocks. Great strategy, however, you can improve it even more by constructing or complementing it with an income portfolio using options. 

Imagine owning a portfolio of dividend payers — from Apple (AAPL) to Lowe’s (LOW) to Walmart (WMT) — and generating income not only from the dividends themselves but via basic to intermediate options strategies. 

Building Positions with Options

Let’s start with the slightly riskier and more advanced strategy first — using options to build positions in stocks you want to own. We’ll give Investopedia ​ the honors of explaining what it means to sell a put option: 

Selling (writing) a put option allows an investor to potentially own the underlying security at a future date and at a much more favorable price. In other words, the sale of put options allows market players to gain bullish exposure, with the added benefit of potentially owning the underlying security at a future date and at a price below the current market price.

As an example, let’s say you want to add to your position in Walmart. Accumulating WMT shares would increase the dividend income you generate from the position. 

With WMT trading at $119.63 on July 2, you could sell the WMT July 24 $118 put option for $0.55. By selling this put, you instantly collect $55. Consider that income. From there, you agree to buy WMT at $118 if the put buyer exercises his or her option to sell you the stock at that price. If WMT never drops to $118, the option expires worthless. Still, you keep the aforementioned $55 in income for your time and trouble. 

Do not enter this type of strategy unless you like the underlying stock. If WMT drops below $118, you risk buying it at $118 entering, at least on paper, a losing position. However, thanks to the $0.55 in premium income, your breakeven on the stock trade is $117.45. In other words, you don’t lose money (on paper) until WMT drops below that level. Put another way; you would only be paying $11,745 for 100 shares of WMT (instead of $11,800) because of the $55 premium. 

If you have the cash in your account to cover purchasing the underlying stock (and it’s highly advisable to take this route), you have sold a cash-secured put. If you rely on margin, you have sold a naked put, which is a risky proposition, particularly for inexperienced investors or those with insufficient resources at the ready. 

This is a bullish strategy. But it’s not simply bullish; it’s long-term​ bullish. Because if you end up buying WMT below around, at, or below your breakeven, you’ll need to (A) have the conviction that it will increase in price over the long run and (B) wait for this actually to happen. 

You can execute this strategy repeatedly on the same stock or on any number of stocks you find attractive going forward, particularly ones with meaty premiums. If you’re put shares of the underlying stock (meaning you have to buy it at the strike price), you’ll build your position and, as noted, increase your dividend income. 

Generating Income With Options 

You could always combine selling cash-secured puts with selling covered calls. Several factors can make selling covered calls in a retirement portfolio a good idea. 

Because you run the risk of having to sell shares of the stock you sell the call on, it’s often a good idea to execute this strategy on stocks you expect to stay range-bound. To maximize the effects of the premium income you’ll receive by selling calls, and it’s great to participate in this strategy with dividend-paying stocks. 

Let’s stay with Walmart as an example. 

You own 300 shares of WMT. You bought the stock when it got hit at the start of the pandemic and have a cost basis of $105 a share, or $31,500. 

On July 2, you set your sights on the following call options with WMT trading at $119.21: 

  • WMT July 31, 2020, $120 at $2.02 per contract
  • WMT July 31, 2020, $122 at $1.19 per contract
  • WMT July 31, 2020, $125 at $0.50 per contract

You decide to sell one of each call option against your 300-share position in WMT. You collect

$202, $119, and $50, respectively, for a total of $371 in premium income. The premium is yours to keep.

While this level of income is attractive, it comes with moderate risk, in that you stand a good chance of having to sell some (or all) of your WMT shares. 

Let’s say WMT closes at $123 on options expiration day. In this scenario, you will likely have to sell 200 shares of WMT at $120 and $122. You’re leaving $3 and $1 per share on the table. However, you still made a pretty penny on WMT, given that your cost basis is $105. But, if you wanted to own the stock long-term, you’re left with only 100 shares. 

I choose these strike prices on purpose to illustrate where you can get into trouble with selling covered calls. You still make money in this scenario — both on the ultimate stock trade and via premium income –, but you reduce your position in WMT. To give yourself a better chance of hanging onto your full position in WMT, you would need to sell calls with higher strike prices. If you do this, you’ll collect less in premium income. Still, WMT will have to run considerably higher for the call buyer to exercise the options you sold him or her in the first place. 


As with any investing strategy, there is no one size fits all. When you’re selling puts or calls to make a bullish bet, you have to do the math to determine how much money you’ll make or lose if you have to buy or sell a stock. You will factor premium and dividend income into that equation. The examples in this article make it easy for you to input your numbers to see where you stand in your real-life portfolio. 

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