Trading Long Strangles for Passive Income

Trading options on the stock market is not for the faint of heart. However, you have come to the right place if you want big returns (for taking big risks).

Trading options can be a very emotional experience because the stock market can make you feel like an idiot sometimes.

Therefore, finding the options strategy that works for you is necessary. You’ll need to dabble in the market to learn your temperament and find the best fit.

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Start with dividend investing. I recommend starting your options journey with a high-yield savings account, Treasury Bonds, and dividend investing.

Why start with these much slower, lower-paying strategies to earn passive income? You’ll need to understand the weight of “yield” before trading options.

For example, a high-yield savings account may pay you 5% interest PER YEAR. If you invest $8,000 into an HYSA, it’ll pay you $400 per year, $33 per month, or $7.70 per week.

A good Closed-End Fund like Pimco Dynamic Fund (PDI) may pay you 11% PER YEAR. If you invest $8,000 into this CEF, it’ll pay you $880 per year, $73 per month, or $16 per week.

The numbers when trading options can be outrageous, so you’ll need to keep yourself grounded in reality. If not, you can succumb to the cycle of greed and fear.

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Getting started with options trading. Once you have a handle on yields, you’ll want to squeeze options trading into your daily operations.

I am a part-time options trader. Time is the most crucial element in my life, and I don’t want to spend it in front of three computer monitors every day.

I want to extract $1,000 to $2,000 monthly from trading options. I tailor my strategy around making this amount of money.

The two most basic strategies in options trading are selling covered calls and selling cash-secured puts.

Don’t Gamble with Retirement 10

Both strategies require you to have the money upfront but keep you from losing your shirt. They do have their downsides, however. Here are some takeaways you’ll need to learn from this phase.

1. Time is your friend or enemy. When you sell options, time works in your favor. When you buy options, time works against you every day. As you get closer to your expiration date, time will exponentially affect the price of your options.
2. Volitaily. Options prices can change dynamically based on how volatile the stock price becomes. Understand that the market “prices in” any advantage you think you may have. Learn to get in and get out.
3. Emotions. You can do all the technical and fundamental analysis you want, and the options and stock market can do whatever they want. If you have a chance to take profits, do so.

Trading Long Strangles for passive income. With that information as a backdrop, let’s trade some long strangles.

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Don’t confuse long strangles with long straddles. A good resource for learning many option techniques is “The Options Playbook.” They also have a website with the same information.

What is a long strangle? A long strangle is where you buy one call option and buy one put option to strangle (or surround) the current stock price.

The idea is to capture the momentum of a stock price no matter what direction it moves. To buy options (versus sell them), you must be a level 2 options trader through your broker.

Let’s say the current stock price for Palantir (PLTR) is $16. I would buy a call option for $16.50 and buy a put option for $15.50.

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Setting the trap. I like to call this method “setting the trap” or “controlled pairs.” The goal is to make enough money to cover the costs of all the options you purchased, plus the profit.

I trade options that are three weeks out because they are less susceptible to time decay. The final week before expiration can wipe all your profit quickly, so I avoid that week like the plague.

I like to sell my options during the first week because both sets will drop in value over the weekend. Buying options are like holding hot potatoes; plan accordingly.

Here is the secret to this technique. When you buy options, you can only lose as much as your purchase price; however, you can double or triple your money on the upside.

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As the stock price moves in one direction, one option will move toward 200% and the other toward 50%.

At first, they will move in reverse tandem, meaning one may be up 30% and the other down 30%. But, eventually, the one moving down will decelerate exponentially, and the one moving up will accelerate exponentially. 

You may see one up 60% and the other down 35%. This is where you make money while trying not to get greedy.

Knowing your limits. I aim to make $400 to $800 weekly from one “controlled pair.” To achieve this income level, I buy $4,000 of each option for a total of $8,000.

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Therefore, when my pair achieves 5% to 10% profit, I sell them both and enjoy my passive income. Let’s look at what I traded this week.

As you can see, I bought $8,245 in options on October 23 and sold $8,747 on October 24—walking away with a cool $502 for the week.

Of course, I could jump right back in and set another trap, but let’s reflect on dividend investing and high-yield savings accounts.

On a side note, I set my put options at the wrong strike price in the above picture. They should be below the strike price for my call options.

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How not to get greedy. The most important part of this strategy is not getting greedy. Remember, we are talking about earning 5-10% of your money per week.

With options, I can make $400 to $800 per week versus $7.60 with a HYSA or $16 with a closed-end fund.

The allure of making a lot of money with options can lead to poor decision-making. Yes, you can extend your successful options for a few good days on the stock market. 

You can watch your winner climb to 300%, and your loser fall to 50%. However, the longer you stay active, the more risk you incur.

The worst thing about this strategy is when your stock becomes less volatile. That means both options will drop in value instantly. This occurs after a significant event like an earning call.

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Therefore, getting in, earning 5-10%, and getting out is best. I know it is boring, but the stock market can quickly make you look foolish.

Conclusion. I love long strangles because I don’t like risking my money for long periods. I want to get in and get out in a few days while earning money for the weekend.

Having your passive income strategy well before trading options is a good idea. You do not want to ever depend on the money you earn from trading options.

Retirement Planning for the Average Person 5

The minute you NEED to make money by trading options, the minute you make a poor decision by waiting a little longer to juice returns.

I chose long strangles because I don’t have to worry about which direction my stock moves. I just need to control my emotions, take profits, and enjoy my life.

This strategy fits into my Happy Cash Flow Retirement system, so I love performing it every Monday. Have a plan before entering any options trading strategy to get the best results. 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