Options trading is a capital-intensive operation, meaning you’ll need a ton of money to fund your trading. Money is perhaps the reason why most people don’t trade options.
Today, I want to walk you through how to build an options trading brokerage account from scratch. During this article, I will use a nasty word that most people hate—budget.
Welcome back to the How to Become a Part-Time Options Trader Series (#1), where we get you up and running in the world of options trading.
The Four Principles of Income Investing
Budgeting to build a better tomorrow. You’ll need $5,000 in your brokerage account to start trading options. This is the number I recommend to begin your options trading journey.
How do you go about saving $5,000? Unfortunately, many steps proceed with growing your options portfolio. The first step is ensuring you have a solid emergency fund.
Experts recommend having 3-6 months of expenses saved in your emergency fund. If your monthly expenses are $6,000, you’ll want to have $18,000 to $36,000 in your emergency fund.
These are big dollars for the average American household, but you can achieve them. If I can reach these goals, you can too. But, you will have to do that nasty thing we don’t like discussing—budgeting.
How are you supposed to squeeze out $20,000 to put into an emergency fund and options trading account? Well, let’s go line-by-line.
The Four Principles of Dividend Growth Investing
Building an account from scratch. To understand the power of options trading, let’s look at the typical return on investment inside the average American household.
Looking at the average resources, we can deduce why Americans are in trouble: credit card debt (-30%), student loans (-10%), personal loans (-10%), cars (-5%), utilities and bills (0%), high-yield savings (+4%), dividends (+5%), and options trading (+25%).
Therefore, we aim to reduce negative assets (liabilities) and start accumulating positive accounts (assets) like dividend-paying stocks and options trading brokerage accounts.
It’s important to point out that it may take 2-3 years to position yourself to start trading options, but that’s okay. You will be in a great position when you do start.
My wife and I were -$77,000 in debt in the summer of 2019. We took a hard stand against debt—paying everything off and building ourselves a nice nest egg. You can do the same by following in our footsteps.
- Pay off credit cards, student loans, personal loans, and cars.
- Generate additional income by renting rooms, writing books, producing videos, driving Uber, working overtime, etc.
- Write down all earned income, passive income, expenses, and liabilities on a monthly spreadsheet.
- Reduce your monthly budget.
Perhaps the most important part of this “savings and investing” operation is creating a tight budget that is fair and balanced.
Retiring on Dividends 102
It all comes down to your budget. Make every penny count. Yes, we need to write down every bill, expense, maintenance action, and interest charge.
Let’s start with a monthly budget of $10,000. Our goal is to pay down $25,000 in debt and to save $25,000 in a high-yield savings account.
From the beginning, we need to include these numbers: $1,000 monthly for debt paydown, $1,000 for an emergency fund, and $1,000 for our money market fund.
That leaves us $7,000 to maintain our lifestyle. Can we live on $7,000 per month? Yes, we will have to force ourselves into these numbers.
Options Trading in Your 30s
The reality of housing. First, we must reduce our housing expenses; this is the tricky part. Some options at our disposal are moving in with our parents, moving family in with us, sending our family to their parent’s house while we rent a room, or getting roommates.
All of these options sound terrible, but they are necessary. Your life will change forever once you are debt-free and have a nest egg.
The single most difficult part of changing your financial future is building your first $100,000 while becoming debt-free. Once you achieve these two things, you can write your own future.
My wife and I had two roommates from 2019 to 2023. We received $1,600 monthly from roommate rental income, while our mortgage was $1,500.
Retiring on Dividends 101
These years were tough, but they were the key to our success. Our net worth (without home equity) in June 2019 was -$76,000.
Our net worth in June 2023 (without home equity) was +$275,000. That, my friends, is how we built wealth and retired early.
The rest of your budget. Everything else will seem relatively easy once you make the most dramatic decision of your life. You need to get a handle on your food and entertainment budgets, which is much easier than housing.
You will also want to keep an eye on your bills around the house. These utility and cable companies are known to be sneaky. I have been tracking every bill I have paid since 2017.
Options Trading in Your 20s
The magic of options trading. If you work hard enough, you’ll have a $25,000 options trading fund in two years or less. Once you start trimming the fat, things move at an advanced pace.
The magic of options trading is that you can take a static $25,000 account and generate massive returns.
Very few people can take a raw $25,000 account and turn it into $35,000 in a year—that’s where you are heading.
But before we start trading options, let’s look at our overall financial profile: debt ($0), emergency fund ($25,000), and options trading account ($25,000).
Our nest worth went from -$25,000 to +$50,000. Our emergency fund generates 4-5% yields from our high-yield savings account. We are taking advantage of compound interest; not paying it to someone else.
BCRE: Become Capitalist Retire Early
Life as a part-time options trader. Now we can start deciding how much income we want to generate from our $25,000 portfolio.
I will dive deeper into my options trading strategies in the following two articles; they are selling covered calls and trading long strangles.
We can generate $625 monthly by selling covered calls, and trading long strangles generates $1,667. Again, I will dive more into these strategies over the next two articles.
Conclusion. We have come a long way from being in debt and letting life beat us down. Now we are creating $625 a month in passive income from options trading.
$5,000 Dividend Shopping Spree
If we continue to create $625 per month in options revenue against our $25,000, that is an annual yield of 30%. We can take that annual income of $7,500 and invest in dividend stocks.
We are now fully in charge of our finances. We control our own story; nobody tells us what to do or think. That’s the power of options trading in the context of our financial freedom.
Does this lifestyle seem plausible to you? I can tell you firsthand that you can do it because I did it. I decided to change my financial destiny, and I did (along with my wife).
We got roommates, got out of debt, saved money, invested in dividends, wrote books, and traded options. We become wealthy by building a wealthy mindset, and we aren’t going back. 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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