Who doesn’t love getting a paycheck? Receiving our weekly, bi-weekly, or monthly paychecks is perhaps one of the greatest feelings you can have while in the workforce.
Do you know what’s even better? Getting a paycheck when you didn’t work for it is much more exhilarating. That’s the magic of income investing; it allows you to build a custom paycheck for your lifestyle.
The magic of dividends. We will still need a paycheck as we transition into retirement. We can sell the assets in our 401K or use dividends to pay us continuously.
Become Middle-Class PLUS
I prefer dividends because I never have to sell shares to generate income. The dividends keep hitting my account, and I decide whether to spend, save, or reinvest them.
However, even in retirement, we must remain vigilant not to fall victim to inflation. Inflation and increases in the cost of living are our number one concern as retirees.
The best way to stay ahead of inflation is to aim for an 8-10% return on your money. You can achieve this income level with an income-investing portfolio—while sacrificing growth.
There is a way to grow your portfolio faster than the inflation rate while keeping your money invested in dividend-paying stocks. The answer is to add some options trading to your dividend portfolio.
The magic of options trading. There is only one reason to trade options—to make money. However, the reason we need the additional capital is entirely dependent on our personal situations.
Create Money, Spend Money, Grow Money
We must start with US Treasuries to truly understand the power of options trading. Let’s say we invested $20,000 in US Treasuries at 4%. That account would give us an annual income of $800.
If we had $20,000 invested in our income investing portfolio at 10%, it would generate $2,000 annually. That equates to $167 per month.
We can take that $20,000 portfolio and easily generate $1,000 per month by trading options. We can make even more with a bit of additional risk.
Have your cake and eat it too. But why should we choose between an income investing portfolio and an options trading account; we can use them in conjunction with one another.
That’s right; we can fully invest the $20,000 in our income-producing products that pay us dividends and trade options on the side. We do this by using leverage.
Income Investing vs. Inflation 2
I used covered calls and cash-secured puts to generate income when I started trading options. However, these methods always put my stocks and cash in jeopardy.
I would need to tie up a large amount of cash to sell cash-secured puts. For example, selling one AT&T (T) put at the strike price of $16 would cost me $1,600. It would generate $40 over two weeks.
I need 100 AT&T (T) shares to sell one covered call. It would give me $60 over two weeks.
The main thing I didn’t like about cash-secured puts and covered calls was constantly transferring from owning a stock to having cash on hand. All this flip-flopping for not a lot of money.
Inflation Ate My Paycheck 112: Inflation for Longer
As I went through the paces in the beginning as an options trader, I began to learn specific patterns. I started understanding how leverage worked and wanted it on my side.
The magic of leverage. I recommend everyone start options trading the same way I did because it will give you some humbling lessons.
I started with $20,000 in a Charles Schwab brokerage account. I began trading cash-secured puts and covered calls on the $20,000.
I had my money tied up in Palantir (PLTR) stocks to where I was underwater. This means I had a cost basis of $17 per share, and the stock was trading for $15. I couldn’t sell covered calls without losing $2 per share. I had 1200 shares—do the math.
This continued for two months, and I decided I never wanted to own shares again. That meant I didn’t want to sell cash-secured puts again because I could wake up and find shares in my account.
Every Day You Create is Great
As I finally got out of that position, I bought some index funds (DIA) as a way to slow myself down. I purchased $17,000 in index funds that day.
However, I realized something magically—I could use leverage on up to 50% of my assets. That meant I could trade up to $8,500 in options using leverage.
At this same time, I transitioned to using Long Strangles as my options strategy of choice. With this revelation, I could keep my money invested in whatever I wanted and use leverage to create more money for trading.
Does this method work? You can be the judge. I started with $20,000 in my options trading account. I now have $24,475 in the account, with $4,0000 in a money market fund.
On top of that, I have $2,313 in my options trading checking account. I can spend money on emergencies, groceries, and entertainment.
Leaving the Workforce in 10 Years: For Families
I have a total of $26,771 in my options/dividends account. My $17,555 in index funds has grown to $19,382. I would say this method is paying off in spades (it only started eight months ago).
For my wife’s account, I bought much more income products. She has two high-yielding closed-end funds (PDI, ECC) that each pay her $50/month. She also has $14,000 of DIA.
The downside of using leverage. The most challenging part of using leverage is controlling your fear and greed cycle—that’s the voice in your head.
You must learn how to control this voice and put everything into reason. That’s why it’s vital that you understand how much a safe return in US Treasuries pays you.
Start Your Season of Savings: Let’s Save $100,000
Let’s look at an example from this week. I made $2,000 from trading Palantir (PLTR) this week. That was the goal I wanted to reach as they went into their earnings call on Monday (February 5, 2024).
I set my calls at $17, and the price blew past it to $21. I sold and made my $2,000. However, the price continued to climb to $25. If I had stayed in, I would have made almost $6,000—that’s the greed talking.
Every time you trade options, you risk losing everything involved. This means you can control your own fear/greed factor by controlling the amount you trade.
For example, let’s say you have $10,000 invested in index funds and dividend-paying stocks. Your goal is to make $200 a month from trading options.
Leaving the Workforce in 10 Years: For Couples
You can borrow $2,000 per play and consistently beat your $200 monthly goal. You have a solid game plan, and you know your limits. The higher you make your monthly goal, the more risk you will assume.
Staying ahead of inflation. Options trading isn’t for everyone, nor is income investing. However, I’ll tell you something: being way ahead of inflation feels good.
I started trading options to stay ahead of inflation in retirement. My wife and I retired early, and I don’t want to fall victim to the high cost of living increases (property tax, insurance) or inflation.
You can see that I created a checking account with $2,313 in it just from trading options. I can keep this money in that account throughout the year for when something outrageous happens.
How to Channel the Velocity of Money
Wouldn’t it be nice to create $2,300 that you can use in emergencies or for a vacation? I know it looks like everyone is rich, but that’s all an illusion.
Conclusion. True wealth comes from understanding the systems around us and learning to leverage them in our favor.
My dividend/options account has $2,300 in a checking account, $4,000 in a money market fund, and $1,800 in gains from my index funds. That’s $8,100 I can trim from my initial investment.
Leaving the Workforce in 10 Years: For Singles
Don’t look on Instagram and TikTok for inspiration. True wealth comes in your day-to-day actions. You must learn to invest for interest, dividends, and options; I call it becoming a capitalist.
Ultimately, my account is growing at 10% per year just from the index funds. I can juice my returns by trading options on top of my standard holdings.
Trading options does add a level of risk to your overall portfolio. Still, you can control your risk by setting reasonable goals and taking profits without getting greedy.
If you do this consistently, you can earn 30% on your portfolio annually (and much more). 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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