Where we put our emergency fund money says much about who we are. Some people use high-yield savings, and others use treasury bills.
Investors are usually more comfortable using money market funds to house their emergency funds. These funds allow us to trade into the action when the stock market gets spicy.
The only thing that sucks about money market funds is that they are boring compared to other stocks and electronic traded funds.
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However, we can increase the returns from our money market funds by trading long strangles on the options market. Therefore, using money market funds and long strangles together can yield investment-grade results without taking too much risk.
Finding the right money market funds. I typically find money market funds that match the brokerage I use. For example, I use Wells Fargo (WOTXX) on Wells Fargo. On Charles Schwab, I use Schwab (SWTXX) and (STVXX).
Money market funds keep our money safe while earning decent yields. Some are tax-free, and others have higher yields (but you will pay tax).
Money market funds do not receive FDIC insurance like high-yield savings and certificates of deposit. However, you can accumulate them in your brokerage account, so your money is closer to the action.
Let’s say you have $30,000 in your Discover HYSA and want to quickly purchase British American Tobacco (BTI) because its shares dropped 20% in one day.
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Transferring your $30,000 to a brokerage would be a pain in the rear end. The fastest way would be to do a wire transfer, but even that is complicated. It’s not fun.
That’s why it is better to accumulate money in a money market fund. When the stock market goes crazy, you’ll want your money at arm’s length.
However, although money markets pay competitive yields on your money, you don’t want your cash to sit stagnant. You want to generate some good profits. After all, chances are you are an investor if you have money market funds.
What are long strangles? Long strangles are my favorite type of options trade outside of cash-secured puts and covered calls.
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Trading one long strangle consists of buying one call and buying one put. You set the strike prices to strangle the stock price.
For example, if Rivian’s (RIVN) stock price is $15, I would purchase a call at $16 and a put at $14. This position covers me no matter what direction the stock price moves.
When you purchase options contracts (instead of selling), your number one losing scenario is from time decay. Buying options contracts is akin to playing a game of hot potato.
So, you have two options contracts, one put and one call, that decay faster and faster as you get to the expiration date.
The goal for trading long strangles is to get a massive spike or drop in the stock price. We call this volatility. You cannot predict volatility in the stock market; however, we can make an educated guess.
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To prepare our long strangles, we can pick younger, more volatile stocks. We can also align our trading around quarter earnings calls of these volatile stocks.
You generally want the stock price to move 10% in either direction to turn a profit on your long strangles. Sometimes, it’s less, and other times, it’s more. You’ll get the hang of it over time.
Using money markets and long strangles together. Let’s say you have $10,000 sitting in your money market fund. You are collecting $42 in passive income from the money market fund at 5%.
You can take about $2,000 from your money market fund and purchase six calls and six puts. Wait for an earnings call, and your $2,000 turns into $2,500.
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You put the $2,500 back into your money market and now have $10,500. You can play this once a quarter and slowly build your money market fund over time.
Remember that you won’t win every long strangle play, so only put in what you are willing to lose. However, if you set your expiration dates far into the future, you won’t experience too much time decay.
Using leverage against your money markets. Using leverage is another way to trade long strangles against your money market funds.
Leverage can be dangerous in the wrong hands, but with the right mindset, it can be a wealth generator. We can benefit from using the banks as long as we exercise caution.
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Let’s say we have the same $10,000 in our money market fund. Instead of withdrawing our $2,000 for options, we borrow it from the brokerage account using margin.
In this case, you created $2,000 from thin air, bringing your account’s total to $12,000.
So we conduct our long strangle play, which results in a $500 win. Instead of $2,500, we may walk away with $2,440 because we must pay to use margin.
We can put the $2,440 back into the money market fund. We never had to disturb our $10,000. You can do this every three months to grow your money market fund quickly.
The key to using leverage is having a sleep-at-night number. If you lose $500 and can sleep well at night, only borrow $500.
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If your number is $2,000, use $2,000. Having a sleep-at-night number allows you to control your fear and greed emotions.
Options trading is for everyone. Although saving money and trading options seem like opposite ends of the risk spectrum, they are very similar.
Most people cannot create money from money; they must exchange their time for money. If you can learn how to generate income from stagnant money, you can quickly build wealth.
Remember, slow and steady wins the battle. If you can generate 30% returns on your long strangles, you stand to grow your wealth consistently.
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I’ve traded many long strangles, which can be pretty emotional. However, with the right mindset and sleep-at-night number, you can remove much of the trepidation you feel.
Conclusion. Anybody can put cash into a money market fund and let it sit there. However, very few people can take a small portion of that stagnant money and generate a return.
The key to trading long strangles is controlling yourself by using numbers. Only put in what you can afford to lose. In this way, it is like cryptocurrency and other speculative plays.
If you invest $10,000 into a money market at 5%, you will generate $500 in passive income from dividends. However, you can trade one batch of long strangle in January and make an additional $500.
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So, at the start of the year, you now have $10,500 earning 5%. That would bring in $525 in interest over twelve months.
That’s the power of compounding. If you trade four long strangles for a total of $2,000, you now have $12,000 in your money market earning interest.
I always recommend becoming a small-time options trader because the ability to make money from money is rare. You can take a pot of money you saved and generate a return no matter the prevailing interest rates.
Ultimately, the winner is the person who can make money whenever they like. I like to leverage my sitting cash to increase my options trading capabilities. Not because I have to, but because having the information is so powerful. Good Luck!
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