YieldGenTwo ways to pursue a high yield
Both lending and selling put options can offer income in exchange for accepting risk. This comparison is a starting point, not a recommendation: understand the underlying investment, the liquidity, and the possibility of loss before acting.
| Lending Money | vs. | Selling Put Options | |
|---|---|---|---|
| How to invest $100K seeking a high yield | Find a borrower willing to pay a high interest rate on a $100K loan; lend them $100K | Find a stock and a share price for which the "promise to buy" earns high fees; promise to buy $100K of that stock at that share price | |
| Finding and vetting investment opportunities | Limited public data; highly asymmetric info between borrower and lender | Fully based on public information | |
| What form does “yield” take? | Interest payments, either along the way, or at the end, or both | Option premium up front, plus interest earned along the way on posted collateral | |
| Do you always get your $100K back? | No, the borrower may default; if they do, you need to chase them for your money | No, if the stock drops below your agreed $100K purchase price, you get the stock instead of your $100K cash back | |
| Do you always get the yield part (i.e., the interest or fees)? | No, the borrower may default on this part too; if they do, you need to chase them for this as well | Option premium is paid to you up front. Any return on collateral depends on the cash product and brokerage arrangement; it is separate from the risk that the stock may fall. | |
| Can you exit the investment early? | Depends on the terms of the loan, but this is typically complicated or impossible | Yes, you can close the option position at any point | |
| Can you mitigate the risk of a severely bad outcome? | It’s extremely difficult to mitigate the risk of a single borrower defaulting, but you can mitigate the portfolio risk by making many smaller loans out to a diverse set of borrowers, rather than one giant loan | You can buy downside protection against a single stock crashing; you can also mitigate the portfolio risk by having many smaller positions with diverse characteristics, rather than one giant position |