Is selling put options an advisable strategy for a retiree to generate stable income?
No.  In good years, the income seems free. In a down year, particularly a bad one, the investor will be subject to large losses that will prove the strategy a bad one.  On the other hand, one often hears of the strategy of selling puts on stock you would like to own. If the stock rises, you keep the premium, if it drops, you own it at a bit of a discount from that starting point. "This is a really bad idea. You are asking to be forced to pay for something at a time when you most likely NOT want to buy it. Why? There is no stability (much less any degree of predictability) to give up the right to control when and for how much you would be willing to own the S&P500. Just don't do it.....""generate stable income"" and ""selling puts"" is an oxymoron.  ===retired investment advisor" I am close to retirement and sell cash secured puts and covered calls on a regular basis.  I make 15 % plus per year from the puts.  Less risky than buying stocks, which I also do.  Riskier than bonds, but several times the income. Example:  I owned 4,000 shares of XYZ, which I bought last year at 6.50 and was at 7.70 two months ago.  I sold 3,000 shares, sold 10 Dec puts @ 7.50 (1,000 shares) for $.90 per share and sold 10 Dec calls at 10.00 for $.20.  Now I had cash from the sale of 3,000 shares ($23,100) plus $900 cash from the sale of the puts, plus $200 cash from the sale of the calls.  Price is now at 6.25.  Had I held the 4,000 shares, I would be down $5,800 from when it was 7.70. Instead, I am down $1,450 from the held 1,000 shares, down $550 on the put and up $200 on the calls.  So down $1,800 instead of down $5,800.  I began buying XYZ back at 6.25 today. "There is only one way to create ""stable"" income using options: write COVERED calls.   This means you must own some stocks which offer an active and liquid option market (FB would be good; T would be useless.) In other words, you need to own some ""unstable"" stocks, tickers that have sometimes scary volatility, and of course these are not great stocks for a retiree. But, let's assume you own 500 shares of FB, which you bought in June of 2015 for $75.    Today, you could have been paid $2,375 for selling five Mar18'16 $105 Calls. Your reasoning is:  So, the rule is: ONLY SELL COVERED CALLS AT A PRICE YOU WOULD BE HAPPY TO ACCEPT.    If you follow the rule, you'll generate more-or-less ""stable"" income. Do not venture off this narrow path into the rest of Option Land. There be dragons.     You can select strike prices that are far out of the money to minimize the chance of being exercised (and sweeten the deal by collecting an even higher price if the stock flies that high).    If you are thinking about doing this, study the subject thoroughly until you know the terminology backwards and forwards. (Don't worry about ""the greeks"" since market makers manipulate implied volatility so wildly that it overrides everything else.)" As you move toward retirement, your portfolio is supposed to move toward low risk, stable investments, more bonds, less stocks, etc.  Your question implies that you want to increase your income, most likely because your income is not satisfying your desires. First, any idea that you have that risks your savings, just eliminate it.  You are not able to replace those savings.  The time for those kind of plays has passed. However, you can improve your situation.  Do random odd jobs.  Find a part time job that you're willing to do for 10 hours a week or something.  Keep this money separate from your retirement savings.  Research the stock trades you would like to make and use that 'extra' money to play in the market.  Set a rule that you do not touch your nest egg for trading.  You may find that being retired gives you the time to do the #1 thing that helps investors make good investments -- research. Then when you make your first million doing this, write a book.  If you call it Retire - And Then Get Rich, I expect royalties and a dedication. Selling options is a great idea, but tweak it a bit and sell credit spreads on both sides of the market, i.e. sell OTM bear call spreads and OTM bull put spreads. This is also known as an iron condor, and limits risk, and allows for much more flexibility. Yes -- If you are prepared to own the stock and have the cash to buy it, it can be a good way to generate income. The downside is really no more than buying a stock and it goes down -- which can happen to any investment -- and you have the premium of the put. Just don't do it on any stock you would not buy outright. To the posters who say it's a bad idea, I would like some more info on why they think that. It's not more bad idea than any investment. Yes it has risk, but so does buying stocks in general, buying dividend stocks etc and since most options expire worthless the odds are more in your favor selling puts.
Does this technically mean that she has to pay AMT on $400,000? Yes. Well, not exactly 400,000. She paid $1 per share, so 390,000. And if so, is %28 the AMT for this sum? (0.28 * $400,000 = $112,000)?   Or does she have to include her salary on top of that before   calculating AMT? (Suppose in the fake example that her salary is   $100,000 after 401k). All her income is included in calculating the AMT, minus the AMT exemption amount. The difference between the regular calculated tax and the calculated AMT is then added to the regular tax. Note that some deductions allowed for the regular calculation are not allowed for the AMT calculation. How does California state tax come into play for this? California has its own AMT rules, and in California any stock option exercise is subject to AMT, unless you sell the stock in the same year. Here's a nice and easy to understand write up on the issue from the FTB. When would she have to pay the taxes for this huge AMT? Tax is due when income is received (i.e.: when you exercise the options). However, most people don't actually pay the tax then, but rather discover the huge tax liability when they prepare to submit their tax return on April 15th. To avoid that, I'd suggest trying to estimate the tax and adjust your withholding using form W4 so that by the end of the year you have enough withheld. Suppose in the worst case, the company goes completely under. Does she   get her massive amounts of tax back? Or if it's tax credit, where can   I find more info on this? That would be capital loss, and only up to $3K a year of capital loss can be deducted from the general income. So it will continue offsetting other capital gains or being deducted $3K a year until it all clears out. Is there any way to avoid this tax? (Can she file an 83b election?) You asked and answered. Yes, filing 83(b) election is the way to go to avoid this situation. This should be done within 30 days of the grant, and submitted to the IRS, and a copy attached to the tax return of the grant year. However, if you're considering exercise - that ship has likely sailed a long time ago. Any advice for Little Susie on how she can even afford to pay that   much tax on something she can't even sell anytime soon? Don't exercise the options? Should she   take out a loan? (e.g. I've heard that in the extreme case, you can   find angel investors who are willing to pay all your taxes/strike   price, but want 50% of your equity? I've also heard that you can sell   your illiquid shares on SecondMarket?) Is she likely to get audited by IRS for pulling something like this? You can take a loan secured by shares you own, there's nothing illegal in it. If you transfer your shares - the IRS only cares about the taxes being paid, however that may be illegal depending on the terms and the conditions of the grant. You'll need to talk to a lawyer about your situation. I suggest talking to a licensed tax adviser (EA/CPA licensed in your State) about the specifics concerning your situation. I think you are right. I hear people all the time with horror stories about futures and trading horror stories in general. I want to learn about this market, but I don't want to go in without some education on the matter. I watched their video on options on futures, but the valuation method needs a bit more explaining to be (beta, gamma, etc.). I get the basic idea of options on futures, but I need to formulate a strategy, and that is where study would come in.   I have wanted to play around with a few strategies I had in my head for regular options, and by the time I get the grasp of it, I might be able to trade options on futures. I guess my biggest thing with options on futures is not to be sophisticated, but more so I can have access to new markets. On the topic of options though, I do think there is some strategies that could boost my returns a bit on my existing strategies. I think selling various options (selling call options on weak dividend stocks stuck as bulk shipper or mortgage reits and as of late oil trusts or selling put options on some stronger oil reits or other stronger dividend stocks). The only problem is I don't know if the premium would be enough to make it worth while with the weak dividend stocks. So either way, even if you are only earning a conservative 9% on dividends, if you add in another 4% for premium, you could be making 13% off of one trade, and could repeat the process (assuming the target stayed weak or strong). (After seeing your most recent comment on the original question, it looks like others have answered the question you intended, and described the extreme difficulty of getting the timing right the way you're trying to. Since I've already typed it up, what follows answers what I originally thought your question was, which was asking if there were drawbacks to investing entirely in money market funds to avoid stock volatility altogether.) Money market funds have the significant drawback that they offer low returns. One of the fundamental principles in finance is that there is a trade-off between low risk and high returns. While money market funds are extremely stable, their returns are paltry; under current market conditions, you can consider them roughly equivalent to cash. On the other hand, though investing in stocks puts your money on a roller coaster, returns will be, on average, substantially higher. Since people often invest in order to achieve personal financial stability, many feel naturally attracted to very stable investments like money market funds. However, this tendency can be a big mistake. The higher returns of the stock market don't merely serve to stoke an investor's greed, they are necessary for achieving most people's financial goals. For example, consider two hypothetical investors, saving for retirement over the course of a 40-year career. The first investor, apprehensive Adam, invests $10k per year in a money market fund. The second investor, brave Barbara, invests $10k per year in an S&P 500 index fund (reinvesting dividends). Let's be generous and say that Adam's money market fund keeps pace with inflation (in reality, they typically don't even do that). At the end of 40 years, in today's money, Adam will have $10,000*40 = $400,000, not nearly enough to retire comfortably on. On the other hand, let's assume that Barbara gets returns of 7% per year after inflation, which is typical (though not guaranteed). Barbara will then have, using the formula for the future value of an annuity, $10,000 * [(1.07)^40 - 1] / 0.07, or about $2,000,000, which is much more comfortable. While Adam's strategy produces nearly guaranteed results, those results are actually guaranteed failure. Barbara's strategy is not a guarantee, but it has a good chance of producing a comfortable retirement. Even if her timing isn't great, over these time scales, the chances that she will have more money than Adam in the end are very high. (I won't produce a technical analysis of this claim, as it's a bit complicated. Do more research if you're interested.) "I debated whether to put this in an answer or a comment, because I'm not sure that this can be answered usefully without a lot more information, which actually would then probably make it a candidate for closing as ""too localized"". At the very least we would need to know where (which jurisdiction) she is located in. So, speaking in a generic way, the options available as I see them are: Contact the mortgage companies and explain she can't continue to make payments. They will likely foreclose on the properties and if she still ends up owing money after that (if you are in the US this also depends on whether you are in a ""non-recourse"" state) then she could be declared bankrupt. This is rather the ""nuclear option"" and definitely not something to be undertaken lightly, but would at least wipe the slate clean and give her some degree of certainty about her situation. Look very carefully at the portfolio of properties and get some proper valuations done on them (depending on where she is located this may be free). Also do a careful analysis of the property sales and rental markets, to see whether property prices / rental rates are going up or down. Then decide on an individual basis whether each property is better kept or sold. You may be able to get discounts on fees if you sell multiple properties in one transaction. This option would require some cold hard analysis and decision making without letting yourselves get emotionally invested in the situation (difficult, I know). Depending on how long she has had the properties for and how she came to own them, it MIGHT be an option to pursue action against whoever advised her to acquire them. Clearly a large portfolio of decaying rental properties is not a suitable investment for a relatively elderly lady and if she only came by them relatively recently, on advice from an investment consultant or similar, you might have some redress there.  Another option: could she live in one of the properties herself to reduce costs? If she owns her own home as well then she could sell that, live in the one of the rentals and use the money saved to finance the sale of the other rentals. Aside from these thoughts, one final piece of advice: don't get your own finances tangled up in hers (so don't take out a mortgage against your own property, for example). Obviously if you have the leeway to help her out of your budget then that is great, but I would restrict that to doing things like paying for grocery shopping or whatever. If she is heading for bankruptcy or other financial difficulties, it won't help if you are entangled too." Unfortunately, that's a call only you can make and whichever route you choose comes with advantages and disadvantages.  If you manage your money directly, you may significantly reduce costs (assuming that you don't frequently trade index funds or you use a brokerage like RobinHood) and take advantage of market returns if the indexes perform well.  On the other hand, if the market experiences some bad years, a professional might (and this is a huge might) have more self-discipline and prevent a panic sell, or know how to allocate accordingly both before and after a rise or fall (keep in mind, investors often get too greedy for their own good, like they tend to panic at the wrong time).  As an example of why this might is important: one family member of mine trusted a professional to do this and they failed; they bought in a rising market and sold in a falling market. To avoid the above example, if you do go with the professional service, the best course of action is to look at their track record; if they're new, you might be better on your own.  Since I assume this one or more professionals at the company, testing to see what they've recommended over the years might help you evaluate if they're offering you a good choice. Finally, depending on how much money you have, you could always do what Scott Adams did: he took a portion of his own money and managed it himself and tested how well he did vs. how well his professional team did (if I recall, I believe he came out ahead of his professional team).  With two decades left, that may help guide you the rest of the way, even through retirement. "Defined benefit pensions are generally seen as valuable, and hard to replace by investing on your own. So my default assumption would be to keep that pension, unless you think there's a significant risk the pension fund will become insolvent, in which case the earlier you can get out the better. Obviously, you need to look at the numbers. What is a realistic return you could get by investing that 115K? To compare like with like, what ""real"" investment returns (after subtracting inflation) are needed for it to provide you with $10800 income/year after age 60? Also, consider that the defined benefit insulates you from multiple kinds of risk: Remember that most of your assets are outside the pension and subject to all these risks already. Do you want to add to that risk by taking this money out of your pension? One intermediate strategy to look at - again for the purposes of comparison - is to take the money now, invest it for 10 years without withdrawing anything, then buy an annuity at age 60. If you're single, Canadian annuity rates for age 60 appear to be between 4-5% without index linking - it may not even be possible to get an index-linked annuity. Even without the index-linking you'd need to grow the $115K to about $240K in 10 years, implying taking enough risks to get a return of 7.6% per year, and you wouldn't have index-linking so your income would gradually drop in real terms." You seem to have a grasp of the basic principles involved, but your estimation of the risk you are taking seems a bit low. Your non-investment reserves are unlikely to cover your expenses for more than a month, so the chance that you would need to sell investments to cover additional expenses is high. You mention that I am flexible with the 'cash on hand' amount. For instance, for about three months I put a very tight spending/investing freeze on my life because I knew I'd be leaving jobs and moving (I already had the other job lined up). Those savings presumably went toward moving expenses, as your usual savings were insufficient. In the event that you are laid off suddenly, you might find yourself in the same position again, with added unplanned expenses like fees for breaking a lease. Your current plan involves selling investments to cover the gap. Based on your age you have probably only invested in a predominantly positive market, so the chance that you might need to sell investments for cash seems like a reasonable trade-off for the added potential gains. Your perception might change if the markets go south and you are forced to sell into a down market, possibly at a significant loss. You also don't indicate if your investments are currently sufficient to cover an extended period of unemployment. You are taking on a lot of risk under your current plan. Essentially you are trading possible investment gains for flexibility and time. By making small changes like saving at least enough to move as you did previously, you can give yourself time to react to job loss or other unexpected financial need. Rather than give the traditional emergency funds advice, I suggest you look at the broader picture. The total amount of savings/risk is up to you, but you should consider your current savings as insufficient to rely on as a safety net. "I wouldn't settle for 10%, and I certainly wouldn't settle for a Roth. I'd recommend not retiring.  I'd recommend building up a side business in your ""free"" time while you're working that's closer to your calling that you can ""retire into."" Don't be complacent."