Have you ever dreamed of creating a money machine? Well, the secret to getting rich is finding a way to generate out-sized returns—and continually repeating the process.
I stumbled upon trading long strangles through my options trading journey. The returns have been magical. I am still waiting for the downside to show its face.
In the meantime, I keep hitting the repeat button, and they keep printing me money. However, this technique (and all options trading situations) require extreme emotional fortitude. Let’s begin.
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What are long strangles? Trading long strangles is the process of buying one call option and one put option to strangle the current stock price.
For example, let’s say the stock price of Palantir is $20. I would purchase one call for $20.50, and one put for $19.50.
If the stock price moves in one direction before the expiration date (I set mine one month out), I can cover the cost of both contracts and take profits. The stock usually has to move in one direction about 8-10% over a month to give me a profit.
My portfolio setup. Seems simple enough, right? I’ll walk you through my wife’s portfolio composition so you can see how we roll. Her portfolio is currently in much better shape than mine for this demonstration.
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We both started with $20,000 in our options trading portfolios. We begin our journey by selling cash-secured puts and covered calls. Ultimately, it was too much money wrapped into insufficient income. Plus, I hated owning the underlying stocks.
I was never a massive fan of margin until I learned about long strangles. Over time, I realized I could keep the $20,000 invested in dividend-paying stocks and closed-end funds.
I could then use margin of up to $10,000 to trade long strangles. In essence, I am using the bank’s money to trade long strangles while I earn dividends on my money.
Taking a deeper look. As you can see, my wife’s account is currently over $26,000. And this is with us taking out well over $5,000 in profits.
She has $1,276 in her Options Trading Debit Card. Inside her brokerage account, she has $650 in dividend stocks (MPW, KVUE), $15,000 in index funds (DIA), $7,500 in closed-end funds (ECC, PDI), and $1,600 in money market funds (SWTXX).
It’s a well-constructed dividend and growth portfolio. It covers index funds, dividend growth, and income investing. It will pay her close to $150 in dividends.
More importantly, we can use leverage against the portfolio up to 50% ($12,691). That’s more than enough to run long strangle pairs.
Setting up my trades. The first thing I do before trading is ensure my cash balance inside my brokerage is at zero. This ensures that when I buy my pairs, I will use margin.
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I trade Rivian (RIVN) on my wife’s account and Palantir (PLTR) on my account. RIVN has been on a tear lately, which is why my wife’s account is kicking my butt (I’m at $23,000).
I aim to trade a total of $8,000, which equals roughly $4,000 in calls and $4,000 in puts. As you can see above, you won’t always get it perfect.
In this particular case, RIVN went up 8% in one day and 12% the next. When I logged in, my pair was up over $4,000. I cashed out immediately, taking $4,100 in profits.
The emotional side of options trading. Of course, not every day will be this great. You can’t make a 50% return in seven days consistently.
However, I have learned to enjoy even making $200 to $400 in a trade. It’s an exciting process, but you must prepare your psyche for this mentally exhausting game.
You see, 90% of the time, your pair will be underwater and red. You’ll only see your pair go green right before you take profits.
So, you’ll think of yourself like an idiot for 90% of the time. Then you’ll be the happiest person on Earth when you win. Then, it’s back to being an idiot.
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The stock market can make anyone look like a fool. The best way to consistently win is always to take profits as they arise—even if it is one hundred dollars.
My wife’s last three wins were $1,500, $200, and $4,100. Her next trade may be $200. Either way, it’s a win.
My last two trades have been $2,000 and $75. PLTR is near its highs and hasn’t moved much in either direction. In the meantime, my index funds are growing alongside the market.
The magic of passive income. I only trade one pair at a time because it doesn’t take much time. It takes me ten minutes to set up the pair.
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Then, I can monitor the stock price from my phone. If there is a big enough move, I can log in to see if I can take profits.
Don’t forget that you will pay commission and margin fees off the top of your profits. However, using someone else’s money while mine grows is worth the costs.
Passive income can change your life. Options trading has been the windfall I need to make my retirement even better than I imagined.
I must mention that I don’t NEED money from options trading. My wife and I live comfortably on our military pension. We stick to a tight budget.
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Above our pension, we have dividends, rents, and royalties to supplement our journey. Finally, we have “options-trading” money to help with high-ticket items like vacations and appliances.
This Happy Cash Flow Retirement sometimes feels like a dream, but we worked hard to get here. More importantly, we keep our emotions under wrap as we trade long strangles.
If you can’t be happy about winning $100, you won’t be satisfied winning $10,000. Fear and greed are your two most significant enemies when trading options.
Fear will make you quit too soon, and greed will make you stay in too long. My promise is to take profits (enough to cover margin and commission) as they arise—whatever the amount.
Knowing this, sometimes I don’t check the stock market until noon or 1 P.M. If I check at 10 A.M. and am up $500, I will take profits.
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So, for me, it’s best to sometimes wait until later in the day to see what develops. Watching the screen all day is a non-starter. The stock market is as random as anything in this world. It pays to know yourself and your habits.
Conclusion. In short, I am not trading long strangles because I want to brag to myself or show off. They are part of a more extensive passive income lifestyle we have built over the years.
The excellent part about Long Strangles is that you can start with about $500. That will buy you two calls and two puts to begin running your cash machine.
Take the time to understand your larger dreams and the smaller objectives you need to achieve. Throwing your money randomly into the options market will be a non-starter.
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I recommend aiming for 10% returns on your portfolio every month. In my case, I would use my margin amount of $8,000, which gives me a goal of $800.
In the larger scheme of $26,000, even generating $800/month is massive. As I said, the dividend portfolio will generate $150/month from that same $26,000.
You can see how lucrative long strangles and options trading can be; however, it can be equally dangerous when you can’t control your fear and greed.
The magic of long strangles is that you can decide when to take profits. You have four weeks to get your pair into a favorable position. When I see green, I take profits. It has worked out well for me. 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
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