You’ve prepared your entire life for this moment. You are retiring from the workforce, drawing your pension, and signing up for social security.
This is the point at which most people stop their retirement planning. But I love the concept of living a Happy Cash Flow Retirement.
My Happy Cash Flow Retirement system consists of various income streams: retirement accounts, investments, rental income, and royalties.
Fruits of the DGI Tree
Options trading and dividends can play an out-sized role in your 60s lifestyle. The best way to incorporate options trading is to fund bonus expenses and luxuries. But everything starts with a budget.
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Your retirement budget. Your budget is the most essential tool during your working years. Similarly, having a budget is even more important during retirement.
During retirement, if you make a mistake or have significant expenses, you can’t go to work to revitalize your emergency fund.
Suppose you paid off your home and car before retirement, so you require $5,000 per month in expenses. Social security covers $2,500, and you have a pension of $1,000.
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That gives you a shortfall of $1,500 per month. Using my Happy Cash Flow Retirement system, you would create an income stream to cover this $1,500—DON’T use options trading for this.
There are many ways to cover this gap, such as writing part-time, renting a room or two, or getting an online job. Ideally, you want to build a dividend portfolio to cover this $1,500 per month so that it doesn’t require any extra time or effort.
This scenario is why it is absolutely vital that you start planning and budgeting well before you retire. I knew my retirement numbers at age 40, so I was able to retire when I turned 42. By keeping my expenses low, my military pension covered my entire lifestyle.
Welcome to options trading. Let’s say our final situation is $2,500 from Social Security, $1,000 from a pension, $1,000 from a room rental, and $500 from a blog.
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This is enough to cover our lifestyle but doesn’t give us much wiggle room for fun, entertainment, and emergencies. We must continue to grow our pot of money and our cash flow.
Options can play a significant role in your 60s but can be unreliable. Options trading is a highly emotional affair, so the more you have riding on the results, the more suffering you will endure.
The first step to adding an options trading income stream is determining how much you want to earn monthly. In this case, we want to earn $500 per month.
Here’s a rule: The more money you have in your options trading portfolio, the less risk you have to take. You don’t want to put yourself in a position where you must swing for the fences every time you trade.
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I use two methods to earn $500 per month in options trading: the options wheel and trading long strangles. However, there are many ways to trade options; you must find the ones that work for you.
Using the options wheel in your 60s. You want to avoid assuming a lot of stress in your later years, so building a large pile of cash is a requirement.
Remember, the more capital you have, the less risk you must take to generate $500 monthly. You can safely generate $500 per month with a $20,000 options portfolio.
The options wheel consists of selling cash-secured puts and covered calls cyclically. These products are safe because you must have the stocks or cash on hand while you trade.
People lose at these trades because the highest premiums are the closest to the stock price. For example, if Palantir (PLTR) has a stock price of $20, a call with a strike price of $21 will generate the most options premium.
The Dividend Debit Card 2
However, you want to safely place the strike price around $22.50 or $23, which will generate less cash from premiums. However, if you own enough shares of PLTR, you can sell more covered calls to earn $500 in premiums.
For example, let’s say you had a small portfolio of $5,000. You own 200 PLTR shares, allowing you to trade two covered calls.
With those two covered calls, you earn $300 in options premiums, but your strike price is as close to the stock price as possible. You are at a high risk of someone taking your shares.
Conversely, let’s say you own 1,000 PLTR shares and trade ten covered calls. You set the strike price far away from the stock price but still generate $500 in income. If the stock price reaches the strike price, you also earn massive capital gains.
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That’s why knowing your passive income number and having a nice-sized pile of money in your options trading account is ideal. The same goes for selling cash-secured puts as part of the options wheel.
Long strangles to the rescue. Another way I leverage passive income from options trading is to use a long strangle. One long strangle consists of BUYING one call and one put to strangle the stock price.
When you buy an option, time immediately starts working against you. You will need to understand time decay as you set your expiration dates, but you’ll get the hang of it as you play around.
To successfully trade long strangles, the stock price must be volatile. The goal is for the stock price to move at least 10% in one direction. That should create enough profit for you to sell both positions together for a profit.
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During a strangle, one option will head toward zero, and the other can go two to four times higher in the other direction. Again, you need a massive move in the stock price.
Stock price movements are unpredictable, but they happen mostly during earnings calls. That’s why I follow one stock and wait for its earnings call. The more money I have, the less risk I take.
Rivian (RIVN) does a quarterly earnings call, so I want to earn $1,500 at this event. If I purchase $5,000 in calls and $5,000 in puts, I only need a 15% profit to earn my passive income move.
I have earned 50% in one trade. That means I invested $8,000 and walked away with a $4,000 win (total in my account $12,000). But you don’t want to aim for this type of action every time; it’s super risky.
The key to trading long strangles is getting out early. Once I reach my number, I get out fast. Greed can take over very quickly if you don’t control it.
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If the stock has two positive (or negative) days in a row, you can easily earn 100% profits. However, it can also flip course and erase your wins in a heartbeat.
You can also use leverage to trade long strangles. This means you can invest your $20,000 in closed-end funds or money market funds (or whatever you choose) and borrow the money to make trades.
That way, you can earn dividends every month while trading long strangles every three months. This allows you to double dip but at the price of margin costs.
The Magic of Talking to Yourself
Conclusion. I have been retired for almost a year, and cash flow is king. During retirement, all kinds of random things happen, and most of them cost money.
You don’t want your cash flow situation to become stagnant. Options trading can add some life to your budget, but you must control your greed.
Set your passive income number and build a portfolio at least 40X bigger than it. For example, if you want to earn $1,000 monthly, have a $40,000 portfolio.
This strategy gives you the leeway to make easy trades and reduce your risk. Trust me; you don’t want everything riding on an options trade. You may as well go to Las Vegas.
Options trading can be relatively safe and calm. The only factor that makes it risky is you. “There are no risky investments, only risk investors,” Robert Kiyosaki said. 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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