I never imagined becoming a part-time options trader; however, things changed after reading “Rich Dad Poor Dad.”
When I turned 18, I became a government employee, signing up for the United States Marine Corps (Ooh Rah!). I did what the government asked of me inside the Corps, paying little attention to my finances.
I had an epiphany when I turned 38. With 20 years of experience, I was broke. I was not controlling my finances, and my family’s future was suffering. I needed to hit the books.
High-Yield Savings vs. Money Markets vs. Treasuries vs. CDs
To sum up, quickly, I needed to learn how to make money outside of a W-2 job. From then on, I learned many things, including writing books, running a website, renting rooms, and trading options.
Why long strangles? I read “The Options Playbook” in March 2021, which describes 40+ ways to trade options. Unfortunately, it’s hard to understand the book until you have traded options.
Shortly after reading this book, I tried my hand at selling covered calls with my AT&T (T) stocks. Someone exercised my calls, and I lost my favorite dividend-paying stocks. This was not fun for me.
However, your personality begins to shine when you trade options. Some people love risk, some reward. The key is finding a strategy that melds well with your risk tolerance, speed, and adrenaline levels.
I found long strangles to be the best technique for my personality. You don’t need a lot of capital, you can define your risk easily, and you can play the lottery (if you want). Today, I want to give some insider tips on trading long strangles after a few years of experience. Let’s begin.
The Magic of Money Market Funds
What are long strangles? A long strangle is when you purchase one call option and one put option to strangle the stock price. For example, if AT&T’s stock price is $20, you would purchase one call at a strike price of $21 and one put at $19.
For a long strangle to work, you need extreme volatility. The general estimate is that you need the stock price to move violently by at least 10% in one direction.
It’s more likely that young growth stocks like Palantir (PLTR), Rivian (RIVN), SoFi (SOFI), and DraftKings (DKNG) will move in extreme directions, so I roll with these stocks.
How do long strangles work? I discovered them by accident when I was selling covered calls. I noticed that I would receive a premium and had to watch the option for a month.
I observed that the person buying the call option from me had unlimited gains while I had a set premium. For example, my premium was $50, but the buyer could make $200 or more.
Keep Rent in the Family
I started looking into buying calls and puts safely. Here’s the key to long strangles—you can never lose more than you purchase.
If I purchase (3) RIVN call options for $60 total and (3) RIVN put options for $60, the most I can lose is $120. However, my gains are uncapped.
When the stock price moves up, my call option will increase in price, bringing my total to $180 (for example). Conversely, my put option will move toward zero; however, it will never go negative. Therefore, when I sell both positions, I walk away with $190, which is a $70 profit (less fees).
Playing the casino. The steps to trade long strangles are simple: find a volatile but trustworthy stock, set your trap around an earnings call, and get out quickly. So, how do people lose?
Sometimes, your stock price will not move the needle enough. However, if this happens, you usually can break even or get out without losing too much.
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I ensure I set the expiration dates at least a month after the earnings call so I do not lose money to time decay. Here, you need to understand the difference between intrinsic (stock price) and extrinsic (time) value.
In a nutshell, the stock price will push the intrinsic value of an option contract. The extrinsic value, or time, will erode quickly, especially around the expiration date.
Let’s just say you can lose big in the final two weeks of an options contract. Even if the stock price jumps, the time decay will be enormous. That’s why I set my trap around five business days before earnings calls but set the expiration date at least a month after.
The main reason people lose is because of greed. You can lose big if you cannot control your greed and fear emotions. Here’s how.
The emotions of trading long strangles. When trading long strangles, you are not speculating on the stock but its volatility. I love Palantir (PLTR), but that doesn’t mean I need its price to constantly increase.
The Erosion of the Family Unit
Let’s look at the numbers and see why people lose. Let’s say I trade $1,000 of PLTR calls and $1,000 of PLTR puts. For me, a good strangle results in a 20% profit.
I have $2,000 on the line, so I want to get out when I reach $2,200 in total. On the morning of the earnings call, I can see PLTR up 10% in after-hours trading—it’s going to be a big day.
When the market opens, my total moves to $2,350, and I get out as quickly as possible. I made $350 against $2,000. That is an annual yield of 210%.
But if I had stayed in PLTR the next night, it could have pushed my total to $3,000 or even $4,000. Heaven forbid if the stock kept moving up the next day, it could have easily moved the total to $6,000.
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The key to trading long strangles is to know your numbers and take profits religiously. Do not try to beat the stock market at its own game.
One time, I was playing with a total of $8,000. I was in Turkey, so the time difference in America made it so I didn’t check the market until the afternoon. I was up to $12,000; my profits were 50%.
If you want to play big, don’t check the markets until the afternoon of the earnings call. That way, your emotions will not get in the way. Trust me; you will see some big numbers, and they will persuade you to do stupid things.
Don’t play if you don’t have to. I like to set my trap long before anyone else is in the game—meaning options prices are low. Options prices rise during volatile moments, like right before an earnings call.
The Importance of Treasuries 2
Therefore, my options contracts may increase in price just from the volatility of the pre-earnings call. Many times, I don’t even have to wait for the earnings call; I just sell everything and take profits.
For example, let’s say I purchase 10 PLTR calls and 10 PLTR puts for $100 each for a total of $2,000. The day before earnings, the price on all 20 moves to $130, for a total of $2,600. I take profits.
Again, trading long strangles is about being intelligent and staying calm. This isn’t the casino, it’s a way to generate a high level of passive income.
Conclusion. Why am I king of the long strangles? Because my last name is King. Also, every time I trade long strangles, I learn something new.
I become the sum of these experiences. It’s actually quite fun when you know how to control yourself. However, it can be quite terrible if you are betting more than you can afford.
Let’s Get Started with Index Funds
The best thing you can do for yourself is to know your passive income goals. If you want to make $200 per month, you should play with $2,000. If you are playing with $2,000, you should have at least $5,000 in your options portfolio.
At no point do you want 100% of your portfolio riding on the line? It causes more stress than you can imagine. The best way to earn money with long strangles is strangle-by-strangle. Don’t attempt to win big in one round.
You can only lose the money you put into the markets. Find a number that allows you to sleep at night. My number is about $2,000 (out of a $25,000 portfolio). So, I can trade this amount without losing sleep; therefore, I stay right there.
I consider trading long strangles a part-time experience. I trade a few stocks around their earnings calls. Other than that, I watch my dividends come in daily, weekly, and monthly.
Options trading is a highly personal affair, and you must find what works for you. I love trading long strangles because I can control my narrative—as no one can control the stock market. 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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