Welcome to your 50s. For many people, the 50s are their highest earning years. They will have climbed the corporate ladder, raised their kids, bought a house, and saved for retirement.
However, the worst thing we can do before retirement is become complacent. We can’t let our money stay stagnant. Our 50s are a fantastic time to perfect our options trading strategy—one we can use until our 80s (or beyond).
The power of income. Most retirees suffer financially because they are on a fixed income. This means that every month, they receive, say, $3,500 from the Social Security Administration.
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If their monthly expenses are about $2,000, they have a chance to live a comfortable life. However, if their costs are $3,500, one emergency can send them into a debt spiral.
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But what if the fixed-income retiree could generate an extra $1,000 monthly passive income from home? Options trading can become a powerful ally if proper protections are in place.
Today, I want to discuss positioning your investment portfolio and emergency fund to allow for a safe options trading strategy.
The fun in an emergency fund. Before you get anywhere close to an options trading platform, you will need a fully-funded emergency fund.
Going into retirement, you should have one year of expenses set aside in a high-yield savings account. If your monthly expenses are $3,500, you should have $42,000 in your HYSA. Pretty simple.
Emergency funds are vital to options trading because they give you a proper piece of mind and allow you to sleep at night. Options trading is a highly emotional endeavor, so you must take all necessary precautions before getting wrapped up in the pomp and circumstance.
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Building a well-rounded investment portfolio. The best way to trade options safely is by incorporating them into a boarder income portfolio.
The purpose of an investment portfolio is to grow your wealth passively, especially during retirement. I would add these elements to your portfolio: growth stocks, index funds, dividend growth investing, and income investing.
How you allocate those elements into your investing strategy will depend on your risk tolerance. For example, my biggest allocation is income investing because it’s how my mind works best when buying assets.
Options trading for the win. Now, it’s time to add the highest-yielding but riskiest element to your income portfolio: options trading.
The most essential element of your options trading strategy is finding your sleep-at-night number. This is the amount of money you can lose and not sacrifice an ounce of sleep.
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Your number may only be $200, or it may be $5,000. You will have to dig deep down to find this number. Trust me; you don’t want to start trading options before finding this number, or you risk going on an emotional roller coaster.
Let’s say our sleep-at-night number is $1,000. This means we can lose $1,000 and not worry about it. From here, we multiply that number by ten, which gives us the size of our options portfolio.
If our options trading portfolio is $10,000, the rest of our investing portfolio should be around $100,000. So altogether, we have $42,000 in an emergency fund, $100,000 in investments, and $10,000 in our options trading portfolio. We are ready to trade.
Getting started with options in our 50s. I recommend everyone start their options trading journey by selling covered calls and cash-secured puts.
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There are many elements to trading options, but two of the most important are volatility and time decay. When you sell options, time is on your side. When you buy options, time works against you.
The best way to learn this dynamic early is by selling covered calls and cash-secured puts. These options techniques prevent you from getting too far in over your head.
To sell one covered call, you must own 100 shares of the underlying stock. To sell one cash-secured put, you must have cash to purchase 100 shares of the underlying stock.
So you see that playing in this world requires a lot of money. With a $10,000 portfolio, you can trade about $4,000 to $5,000 in the “options wheel strategy.”
The only way to lose money with the options wheel strategy (covered calls and cash-secured puts) is to sell a covered call where the strike price is lower than your cost basis.
You can always prosper if you prevent this scenario from happening; however, it may take time for your stock’s price to recover.
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The magic of long strangles. There are tons of trading strategies that can match your risk tolerance and temperament. My favorite one is trading long strangles.
One long strangle consists of “buying” one call and one put. For example, if Rivian (RIVN) currently trades for $18, I would buy one call at a strike price of $19 and one put at $17.
The goal of trading long strangles is to profit from violent moves in any direction. This is why I use these for earnings calls on volatile stocks.
The best part of long strangles is that you can manage your risk to the smallest degree. I can buy 3 calls and 3 puts that may equal $1,000.
So, no matter what happens, I can’t lose more than my sleep-at-night number. You can fine-tune this strategy in many different ways. You can stack more puts than calls if you think the price will decrease after earnings.
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You can sell your calls when the price is high and wait for the price to decrease. This means that your puts will regain value—akin to double-dipping.
Putting it all together. Ultimately, you need to find the best options trading strategies for your income needs. Let’s go back to our retiree on a fixed income.
If they need to generate $1,000 per month in options income, I recommend having a $50,000 options portfolio.
The best way to generate consistent returns is with the options wheel. However, as we discussed, it is capital intensive because you must own the shares or have cash on hand.
Let’s say selling one RIVN cash-secured put will generate you $100. To achieve $1,000, you would need to sell ten. If the strike price of the RIVN put is $17, you would need to hold $1,700 in cash per put.
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The math tells us that you would need $17,000 in cash to sell ten cash-secured puts on RIVN. You can stash the other $33,000 in a money market fund as your cash-secured puts are in play.
If we get upside down on RIVN shares, we can use the other $33,000 to generate income. We don’t want to get into a bind where we can’t earn income.
Conclusion. Going into retirement, you want to give yourself the ability to generate income. Very few people in this world can create something from nothing.
With options trading, you give yourself the freedom to control your own destiny. You want to learn how to trade options well before you retire.
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Your 50s are the perfect time to create cash flow from options trading because you probably still have a job and 401 (k).
Everything is not on the line yet. What better way to retire than with an emergency fund, investment portfolio, and options trading strategy?
You need your money to make money. There is no faster way to generate income than options trading. However, it can be quite risky for beginners and gamblers.
If I can trade options, anyone can. I am 43, and I am learning new things every day. I want to ensure I lead a Happy Cash Flow Retirement. Good Luck!
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