Trading options during retirement doesn’t fit the typical narrative concerning your happy years. Trading options may sound stressful or anxiety-inducing.
However, not having cash flow during retirement is much more stressful than trading options. Without cash flow, retirees are on the raft of life without paddles.
Therefore, as retirees, we must determine how options trading fits best into the story of our lives. We want to avoid entering retirement on a fixed income, depending solely on social security or our pension to generate income. Let’s begin.
Selling Covered Calls for Passive Income 2
Rebel against fixed-income. The worst thing you can do is head into retirement on a fixed income—you need a source of growth.
Let’s imagine a typical retiree in America. Josh works for a private corporation earning $10,000 per month as an intelligence analyst.
When Josh retires at age 66, he will receive $3,300 monthly from Social Security. Josh took his retirement seriously and finished with $1 million in his 401 (k).
Using the 4% rule, Josh withdraws $40,000 annually or $3,333 monthly from his 401 (k). In year one, Josh’s monthly cash flow totals $6,633.
The trouble starts to arise when Josh’s cost-of-living expenses rise 10% going into year two. Some of these rising costs include property taxes, home and car insurance, homeowner’s association fees, and utility bills.
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Josh’s social security payment may rise by 3%; however, Josh needs to be very careful about taking out more than 4% of his 401 (k).
If Josh takes out too much money from his 401 (k) in year two, he may trigger a sequence of return risks that could jeopardize his future growth.
In a nutshell, the sequence of return risk is when you take out so much of your principal balance that it negatively affects your future returns for the life of your portfolio. This is very bad.
The need for growth. Josh needs growth. The increase in the cost of living is slowly affecting his quality of life, and he is helpless. Or is he?
Josh can turn the tides of his situation and take control of his retirement by becoming a part-time options trader.
The Options Wheel vs. An Online Business
Why options trading? Trading options is great because you can make money in any type of stock market scenario: rising, falling, and trading sideways.
As an options trader, you can determine your risk for every trade. This allows you to analyze your situation minute by minute and make immediate decisions.
Now let’s look at Josh’s situation through the lens of an options trader. First, let’s extract $100,000 from his 401 (k) and place it into an options trading account.
With this much money, he can run multiple options types. He can start by running the options wheel, which is the combination of selling cash-secured puts and covered calls.
I use my rule of 40 to determine how much Josh needs to run the options wheel. So, if Josh wants to earn $1,000 per month, he needs to allocate $40,000 to this portion of his strategy.
Boost Your High-Yield Savings
The Options Wheel Strategy. Let’s take a quick look at this strategy. In my opinion, this strategy works best with high-volume stock with a price between $10-20.
Currently, Sofi (SOFI) and Rivian (RIVN) fit this mold. Palantir (PLTR) (my old favorite) went from $15 to $61 in the last 24 months.
Today (Nov 19, 2024), you can sell RIVN call options that expire (Dec 20, 2024- one month) for $35 each. Therefore, to hit his $1,000 monthly goal, Josh would need to sell 28 covered calls.
This means Josh would need to own 2,800 shares of RIVN, which currently costs $10.11. Josh’s total spend would be $28,308—well within his $40,000 threshold.
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Trading Long Strangles. Josh still has $60,000 in his options trading account that he can use to trade long strangles.
For long strangles, I use my rule of 15—multiply your desired monthly output by 15. Let’s say Josh wants to earn another $1,000 in monthly options income.
Josh would need to set aside $15,000 to earn $1,000 monthly in long strangle income. The criteria for choosing these stocks would be the same—stocks between $10 to $20.
For long strangles, the goal is to trade around volatile moments, typically earnings calls. One long strangle consists of buying one call option and one put option to strangle the stock’s price.
Using RIVN stock at $10.11, Josh would purchase one call option with a strike price of $11. He would also buy one put option with a strike price of $9.
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If Josh purchased $5,000 of RIVN call options and $5,000 of RIVN put options, he would need a 10% return to make his $1,000.
In my experience, Josh would need the stock price to move about 8-10% in one direction to see this return in options prices.
Putting everything into perspective. Now, let’s review Josh’s retirement position. He receives $3,300 from social security and $3,000 from his 401 (k) (with his new $900,000 total).
He also earns $2,000 per month from his options trading account. He is using $40,000 in his options wheel portfolio, and $15,000 in his long strangles account. This leaves him $45,000 to invest.
Josh could invest this $45,000 into a high-yield closed-end fund like PIMCO Dynamic Fund (PDI). This would earn him $522 per month at today’s rates.
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Josh would earn a total of $8,522 per month: social security ($3,000), 401K ($3,000), options trading ($2,000), and dividends ($522).
The most exciting part is that Josh could keep growing his wealth and passive income by reinvesting his dividends and options earnings.
Let’s say Josh grows his closed-end fund account from $45,000 to $100,000 over the first five years. His monthly dividend income would be $1,160.
Do you see how Josh is now in a position of power in his retirement situation? He controls his own destiny because he took matters into his own hands.
Nobody Owes You Anything 2
Conclusion. Is there risk involved in trading options? Sure. However, you control that risk. If you avoid becoming emotional, you can succeed in the options market.
The key to trading options is knowing how much you want to earn and how much you are willing to lose. You may want to exit the trade early if your desired $1,000 is out of reach. You may walk away with $700.
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You can live to fight another day. Remove yourself from the trade, enjoy $700, and regroup for the next trade. Restraint is how you become successful in the options world.
By learning how to trade options, Josh is now on the path of powerful cash flow. He can outgrow the cost-of-living crisis and inflation.
As his dividend portfolio increases, he can slow down his options trading if he chooses. He will have some bad days in the options trading world but many more good days if he sticks to the plan.
Everybody has the opportunity to change their circumstances. Living on a fixed income will not provide a quality of life commensurate with a long, challenging career. It’s time to flip the narrative by learning to trade options. 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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