Making Your Money Work Harder For You
With fixed deposit rates currently ranging from 2.7% to over 3.6%, there are smarter strategies for passive investors to generate higher returns.
One approach is to sell cash-secured put options against your fixed deposits.
Selling put options requires the cash be held in reserve in case the stock price falls below the option's strike price at expiration. However, by treating your fixed deposit cash as collateral, you can generate additional income from option premiums while keeping your principal aside earning an extra yield as well.
Some key considerations for this strategy:
- Thoroughly understand options and their risk-reward mechanics before trading. Options derive value from expected stock price movements based on a company's fundamentals.
- Only write put options on companies you wouldn't mind owning long-term if assigned the shares. Carefully research businesses to ensure solid fundamentals and prospects.
- Target options with minimum 6 month expirations to benefit from time decay and give the underlying stock breathing room to appreciate over the longer run.
- The premium proceeds can be reinvested to boost your fixed deposit returns. However, do not automatically roll over deposits in case the put is assigned and that cash is needed to purchase shares.
- Make sure put option expiration occurs after the fixed deposit maturity to avoid needing to withdraw funds prematurely.
- When choosing potential stocks, large cap companies with high relative volatility tend to offer more premium for selling puts.
For me, a company like Tesla, a leader in the burgeoning electric vehicle industry, presents an ideal opportunity for this strategy. Despite experiencing frequent volatility in its share price in the short-run, I believe Tesla possesses formidable long-term growth drivers that make it well positioned for continued success (probably write another article in the future).
|Tesla Model 3|
By carefully selecting quality companies in high-growth markets that also trade with volatility, investors can sell options to generate additional income from their fixed deposits while maintaining downside protection. With discipline, such techniques can help maximize returns for fixed income portfolios in today's low interest rate environment.
I have written this strategy on X as well.