There are only two ways to become wealthy: reducing expenses and increasing income. Most people fail to get rich because they don’t succeed at both.
If you can lower the stakes on one side of your life, you can increase the risk on the other. For example, you can fund your options portfolio if you get a roommate.
Today, I want to discuss how we can use our budgeting prowess to create a high-yielding options portfolio where we trade long strangles.
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The goal of living below your means is to reduce the risks you must take and your dependence on a W-2 job. Let’s begin.
What is living below your means? Most people hear the term living below your means and start freaking out. They assume that they will drive a car that is 20 years old and move into a rough neighborhood to save $400/month on rent.
That’s not the case at all. Living below your means simply means you have enough cash flow to cover expenses and investments.
Let’s explore what expenses we must cover. Of course, housing is the most costly part of our lifestyle. We can reduce our housing costs by getting a roommate or moving in with family.
Other expenses are water, sewage, internet, phone, and insurance. There are no doubt many things in our monthly budget that we cannot remove.
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However, there is also a lot of fluff, like expensive car payments, beauty products, self-care, and subscriptions. The goal here isn’t to cut these out entirely but to assign a reasonable budget to keep these things in check.
What is the ultimate goal of living below our means? The goal of living below our means is to create enough room in our budget to save and invest. The money that we invest will receive a return on investment.
Eventually, the return on investment will allow us to increase our budget because new money is coming in every month. We will build wealth slowly by continuing this process over years and decades. Let’s play this scenario out in real-time.
Creating wealth slowly. Let’s say the Stevens family earns $10,000 per month. Currently, their monthly expenses total $10,000, so they don’t save or invest anything.
The oldest son in the Stevens family goes to college but stays home. He meets a classmate who needs a room to rent. The Stevens family invites him in and charges him $500 per month.
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The Stevens also pay off their car, and their college son starts paying his own cellphone and car insurance bills. The Stevens now have a $10,500 monthly income and $9,000 in expenses, leaving them with $1,500 in cash flow.
The first thing the Stevens do is build a $5,000 emergency fund; this takes four months. The Stevens family then decides to create a $5,000 options trading portfolio.
The goal of trading long strangles. What is the goal of starting an options portfolio and trading long strangles? Trading long strangles is a high-yield investing opportunity that can significantly increase your cash flow.
Notice that I said cash flow, not wealth. I don’t recommend trading long strangles to build wealth, meaning don’t keep growing your options trading portfolio.
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I like to keep the same amount of money in my options trading portfolio and remove my winnings. I then invest the winnings in high-yielding income-investing assets like closed-end funds and preferred shares.
Many people try to build wealth through options trading by growing the size of their portfolio. In this case, people would try to grow from a $5,000 portfolio to a $20,000 portfolio (for example).
However, the problem with growing your options portfolio is that it will become a full-time job, and you can easily lose control of the situation. I like to manage one trade at a time. The more stocks and trades you manage, the more time-consuming and stressful the process becomes.
Long strangles to the rescue. Let’s help the Stevens generate income from their long strangles portfolio. Trading one long strangle consists of buying one call option and one put option to “strangle” the stock’s price.
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If Palantir (PLTR) sells for $30, I would buy one call option at the strike price of $31 and one put option at $29. The stock price would need to move roughly 10% in either direction to have a profitable trade. That’s why I set my long strangles a few days before earnings calls of volatile stocks.
You don’t want to put your entire portfolio in play at once. To successfully trade options, you must remember you can lose whatever is in play.
Therefore, I would place roughly $2,000 in play at one time. This means purchasing $1,000 in call options and $1,000 in put options. Let’s say that means 10 PLTR calls and 10 PLTR puts.
I recommend aiming to make 10% to 20% on each trade. In this case, that means $200 to $400 based on the $2,000 trading amount. You can make more, but it comes with additional risks.
Helping the Stevens build their wealth. Since earnings calls only happen every three months, the Stevens would need to follow a few more stocks to generate monthly income.
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Now, let’s examine the Stevens’ financial situation. They have $1,500 of cash flow, plus an additional $200 to $400 from trading long strangles.
They can take steps to build some serious wealth. Of the $1,500, they should invest $500 per month in Series “I” Bonds. They can invest the remaining $1,000 in index funds.
They can use the earnings from trading long strangles to build an income-investing portfolio that yields 10%. They can use the cash flow from the income-producing portfolio to save for vacations, reinvest in more dividends, or move into money market funds.
Let’s take a look at the results if Stevens kept this situation going for five years. They would have $10,000 in their emergency fund, $5,000 in their options portfolio, $30,000 in Series “I” Bonds, $60,000 in index funds, and $18,000 in an income-investing portfolio.
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The income-investing portfolio would generate at least $150 per month in dividends. If they reduced their living expenses further or got another college student as a roommate, they could continue to grow their income portfolio.
Conclusion. The goal of life (outside of building a family) is to build wealth slowly. The first step is reducing expenses, followed by increasing income.
The lower your monthly bills, the sooner you can generate enough passive income to leave the workforce. Options trading can play a major role in generating passive income.
Trading one long strangle per month is rather passive; however, it can quickly become a lot of work. The more plays you add, the more stress comes with it.
You want to balance your options trading by living below your means. Imagine if you had no extra cash flow within your budget.
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When you traded options, that was the only money you earned outside your budget; instead of trading $2,000 out of $5,000, you traded $5,000 out of $5,000.
Your stress levels are through the roof because you could lose it all in one day. We don’t want to put ourselves in this position. We want to live and trade below our means.
The best advice to give an options trader is to leave most of your money outside of the trade—knowing that one trade will not “blow up” your account is fantastic.
In reality, getting a roommate is the highest and safest return on investment you can produce. Everyone should start there.
However, learning to trade options gives you the ability to make money from anywhere. Very few people can earn money from a pot of money. Living below your means while safely trading long strangles can be a winning financial combination—it’s what I do! 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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