There is nothing quite as feared as options trading. Whenever people think of options traders, they think of stressed-out bankers on the brink of disaster.
However, options trading is really quite logical. There are only two directions that the stock market can move: up and down. From there, you set up your desired options strategies to hedge, protect, speculate, or earn.
Today, I want to explore the psyche of a part-time options trader. Most people should be able to trade a couple of options a year to generate additional income; however, there are a few barriers to overcome first. Let’s begin.
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The fear of gambling. I’m lucky enough to not have a gambling addiction; I can walk into a casino and never spend any money at the tables or machines.
If you don’t have a gambling addiction, then you should be able to trade options effectively—at least on the surface. I assume gamblers want to earn their money back when they lose, which leads to making poor emotional decisions.
Options trading has garnered a reputation as a gambler’s game, but that isn’t the case. Successful options traders put rules in place that ensure they control the narrative as much as possible. They set profit and loss limits to generate consistent income without “betting” against the house.
Therefore, the first step to overcoming limiting beliefs about options trading is to read, read, and then read some more. The more you read, the less fear you will have about the possibility of losing money in the markets.
I read my first book on options trading in 2020 but didn’t trade an option until 2022. The terms options traders use were foreign to me. Things like time, volatility, and the Greeks all went over my head.
But as I started trading little amounts of money, I understood much more. I would think of different option plays as I took showers and went to sleep. It really is an entirely new world to discover.
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It’s okay to have fear about trading options because it goes entirely against everything we learned growing up. Options trading is the extreme opposite of saving money in a standard (low-yield) savings account, so why do it?
Why trade options? When I was 38 years old, I dreamed of having a massive savings account. However, I had a wife and two kids, two mortgages, and severe credit card debt to overcome.
Specifically, I dreamed of having $15,000 in my checking account, $15,000 in my savings account, and $15,000 in my emergency fund. This is 2019, and I dreamed of having all of this money in a Wells Fargo standard savings account that paid 0.1% interest.
To me, the ultimate way to protect my family was to be debt-free and have a savings account. It’s not a bad outlook, but I was playing defense, not offense.
I was letting the fear of financial failure dictate my outlook and problem-solving. The problem with saving money is time. You need “time” to save money.
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Let’s say it took me three years to save $15,000. I spent that $15,000 when I needed a new roof. Now, I need to take another three years to save that money again.
This process is pretty straightforward when you are working a job. It’s easy to save $15,000 from age 35 to 38. However, what about people aged 60 to 63? Those years are much harder on the body.
The moral of the story is that saving money doesn’t teach your mind about financial problem-solving. It teaches you how to budget and save but not how to go on the offensive. By the way, I have over $60,000 in Wells Fargo today (five years later).
Building financial sophistication. As I read more, I learned about getting a 4% return on a high-yield savings account, which is 400 times more interest than 0.01%.
But then I learned about dividend growth investing, followed by income investing. As an income investor, I aim to earn 9-10% returns on my capital.
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Finally, I learned about options trading, where I can control my own returns. I can set the pace of how much money I can earn throughout the year. I am in full control of everything except the stock market’s direction.
Now, let’s examine how I can use everything I have learned since 2019 to generate $15,000 for my new roof.
Currently, I earn $2,100 per month in dividends. I can save $1,000/month of that for the entire year for a total of $12,000. Now, I only need to generate $3,000 for the year from options trading.
I can do that in one fell swoop by trading long strangles, or I can take a more measured approach by selling covered calls and cash-secured puts. It’s all up to me.
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What I learned as an options trader. Now, I generated $15,000 without any income from my job. It also took me 66% less time than working my job and saving money (one year compared to three).
As an options trader, I learned that it’s much easier to trade when I have a goal in mind. I cannot go into the market with the mindless thoughts of “making money.” I need specific goals to ensure I do not get in over my head.
Now, it’s time for you to reflect and ask yourself some tough questions. Do you have credit card debt? If so, how are you going to pay it off? What is your debt payoff date (read Ramti Sethi’s book)?
How long will it take you to save $15,000? Do you have any sources of passive income to expedite your savings goals?
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If answering these questions is challenging for you, then you have some work to do. Trust me; I was there five short years ago.
Options trading is an essential tool in your financial toolbox. It’s not about replacing your job and becoming a high-powered (and stressed out) full-time options trader.
It’s about looking at your financial situation and saying, “I need to generate $10,000 in options income this year. Which strategies are best for my current situation?” That’s the power of options trading.
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Two emotions accompany trading options: fear and greed. You’ll need to understand both of these emotions and devise ways to counteract them.
Conclusion. You can defeat greed by having a plan and sticking to it. For example, if you want to generate $800 per month in options, stick to that plan.
You can defeat fear by only playing with money you can mentally afford to lose. If you can lose $200 and sleep well at night, that’s your limit. You can buy a couple of “calls” or “puts” at a time. There is nothing wrong with that.
If you can lose $1,000 and sleep well at night, then that’s your number. Don’t trade more than your number; you will feel immense fear.
Overall, we all have limiting beliefs about money. We are especially skeptical about fast money. Options money is not “fast money.” It is accelerated gains with accelerated risk.
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Instead of putting your money in a low-yield savings account and waiting 20 years to earn $10,000 in interest, you put the same amount into the markets with no guarantees.
You must use your cunning, intelligence, patience, and wisdom to create the returns you want. Then, you must have the courage to remove your money, even when things look like they are going your way.
That’s what options trading is all about—mental gymnastics. I served in the Marine Corps, where our core values were honor, courage, and commitment.
You can come up with similar values for options trading. You have to put your core values ahead of your strategy. It’s easy to get lost in the Wild West of options trading.
However, you can overcome your limiting beliefs by reading strategy books, setting financial boundaries, and understanding your emotions. If you can do these things, you can become a successful part-time options trader. Good Luck!
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