Financial Freedom Road Trip #2: Options Trading

This is my sixth time driving between San Diego, California, and Pensacola, Florida. And this will be my last time doing it as a US Marine.

Arriving in Tucson, Arizona, is always a welcome feeling. Again, I love the desert more than any other environment, and Tucson has that old-school Western vibe.

Welcome back to the Financial Freedom Road Trip Series (Part 1), where I drive across the US talking about passive income and retirement.

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What are options? As I drove from Yuma to Tucson, I kept thinking about the options I had trading this morning.

I find myself checking the stock market first thing in the morning and the afternoon after it closes. Options trading can be as active or passive as you like. But what are equity options?

Options are contracts between two parties stating an agreement if the stock reaches the strike price. Options are derivatives of their underlying stocks.

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Call options give the buyer the option to buy 100 shares of a stock from the seller. For call options, the seller sets the strike price above the current stock price.

Put options give the buyer the option to sell 100 shares of a stock to the seller. For put options, the seller sets the strike price below the current stock price.

Learning and more learning. I know that the last two sentences may sound confusing, but keep reading. It took me two years to completely wrap my head around options trading.

I am glad I learned the ins and outs, although I still have much more to learn. If you love math, options trading will be a fun detour in your passive income journey.

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Why trade options? I love options trading because it is exciting but can also be lucrative. However, you can get carried away without self-restraint.

I am the lowest-level options trader, selling only two types of plays: covered calls and cash-secured puts.

First, I only sell options, not buy them. When you sell options, you provide the buyer insurance for their stocks. The buyers typically trade 2-4 leg option plays, with your option just a part of the overall picture.

I sell covered calls because I hold 100 shares of the underlying stock. There is not much more risk than holding the 100 shares outright.

I sell cash-secured puts because I hold the cash to buy 100 shares of the underlying shares. Keeping cash is safer than selling cash-secured puts, but not by much.

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My options-trading strategy. Between covered calls and cash-secured puts, I have a nice flow of buying and selling shares.

This strategy can become a little complicated because, most times, it’s best to sell your contracts before they expire—if they are doing well.

This means you should monitor your options once or twice a day. It doesn’t take long, and your brokerage does all the math for you.

Let’s say on Monday you sell ten puts for a total premium of $1,000, and it expires Friday. You will receive $1,000 on Monday. 

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If, on Wednesday, you can buy back your ten put contracts for $200, you should take it. Yes, you would keep the full $1,000 if your contracts expire worthless on Friday, but that’s two more days of risk.

Remember, when you sell first (as we do), you must buy to close your position. It is the reverse of buying first and selling to close your position.

Is trading options worth the learning curve? I aim to earn 10% interest on the money I invest in my options trading account—per month. That’s right, per month.

I currently have over $20,000 in my options trading account, and my wife also has over $20,000 in her account. Therefore, our goal is to achieve $2,000 per month in options income each.

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If you keep your money inside the options account, you should double it yearly. That’s unbelievable! And seeking 10% per month is actually very conservative, as there are much more risky and lucrative plays out there.

Yes, trading options is worth the learning curve. I am still learning, but documenting and writing about my experience. 

I can reach the point where I perform one trade per month to reach my desired income. It’s all about balancing risk, greed, and fear. In short, it’s the human condition in the form of trading.

Fitting options into your life. But how does options trading fit into your passive income picture? Well, you can do it from any laptop, anywhere.

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Next, you don’t need much money to start; I recommend $5,000. Remember, each option contract is 100 shares of the underlying stocks. With $5,000, you can trade at least two contracts with a stock at $25 or under.

Options trading provides me enough income to allow me to pursue my other creative works like writing and blogging.

I also take 50% of my options premiums out of my options trading platform to invest in dividends and help with any life needs that arise.

In short, it’s nice to have an extra $4,000 flowing through our house. We can always add more by adding more cash to the trading account.

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However, I want to get a year’s worth of data before going in with more cash. I prefer to get rich slowly. Trading options can give you a rush similar to gambling or cryptocurrencies.

It’s best to stick with your initial cash outlay (say $5,000) until you double your pot ($10,000). At that point, you will have learned enough to proceed with more.

Conclusion. Options trading is not for the faint of heart. It takes restraint and discipline that most people do not have.

However, you can build a significant income stream if you can control yourself and avoid leverage and margin.

There are only so many investments where you double your money every year. However, trading options without a plan can be an expensive mistake.

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I set my monthly goals at 10% of my invested capital. You can set yours at 5%, allowing you to make super-safe trades.

Or you can set it at 20% and make much riskier trades with contacts that are in-the-money (ITM). This means they have already surpassed their strike price, and you need a violent stock price movement to push your contact out-of-the-money (OTM).

It’s best to start small, learn the ropes, avoid margin, and create your own playlist. Many retail investors jump into options trading without reading books or websites—don’t make that mistake. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing