Do you hate saving for your annual vacation? I used to loathe putting my hard-earned money into a slow-moving savings account that earned 0.01% interest.
I traded that saving strategy for a dividend-focused plan. Now, I use my $2,200 per month passive dividend income stream to quickly save for any vacation I choose.
Even better, my dividends continue to arrive even while I am on vacation. Therefore, I keep getting more money even during my trip—it’s simply amazing.
Stock & Bond Investing in Your 30s
Today, I want to discuss another way to expedite your vacation savings rate: selling covered calls. This strategy can yield major returns in a short time, but it also carries some risks. Let’s begin.
Saving for vacation the old-fashioned way. Most Americans cannot save $10,000. This is a difficult truth to accept because we are one of the wealthiest countries in the world.
What prevents people from saving? Americans don’t have an earning problem; they have a spending problem. I know because I used to spend the same way.
If you can save $10,000, you have the sophistication to trade options—a bold statement, I know. So how do you get started with saving?
Before considering opening a brokerage account and trading options, you must understand how to budget.
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Your expenses must be lower than your income. If you make $10,000 per month, you should spend $8,000 and save $2,000; this strategy is how you become great.
Trading options isn’t a get-rich-quick scheme, it’s actually more akin to running a household budget. The two techniques go hand in hand.
Your goal in selling covered calls is to supplement your exceptional budgeting skills. Once you have your budget in place, it’s time to sell some covered calls.
Our mission statement. Before we get our hands dirty in the markets, let’s create a mission statement for our covered calls account.
Our mission is to generate recurring passive income from trading covered calls and save the proceeds for our annual vacation.
Stock & Bond Investing in Your 20s
Our mission statement is essential because our perspective can change once money starts coming in. For example, we can add more money to the principal to increase our earnings; therefore, we want to ensure we stay on course.
Now, let’s see what we have: a brokerage account with $10,000, a mission statement, and a goal to generate $4,000 for a vacation. Let’s begin.
What are covered calls? If you own 100 company shares, you can sell one covered call. Selling a covered call gives someone else the right to purchase those shares from you at a prearranged price (called a strike price).
Let’s say you own 100 SoFi Technologies (SOFI) shares with a cost basis of $15 each. You sell one covered call at the $17 strike price. You receive a $50 premium for your effort.
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When SOFI’s price increases to $20 (for example), the buyer decides to exercise his option to purchase your shares for $17 each. You keep the premium and $2 per share capital gain but lose the shares.
Your account increases from $1500 ($15 x 100) to $1750 ($17 x 100 + $50 premium), a 16% increase in about a month—not bad.
Selling covered calls may sound confusing or difficult, but it requires only a small time investment to understand. You can do quite well if you love math and can control your emotions.
I like to keep my articles simple, but you can go down a deep rabbit hole with options trading. I attended a stock investing course with my old Marine Corps buddy this weekend.
I learned a lot about using technical analysis to position my trades. I hope to bring you some deeper tips in the future. You can find my friend, Luis Concepcion, at Strategic Profit Line Trading (https://www.spltradingllc.com)
Dividend Investing During Turbulent Times
Positioning your trading account. Our goal is to save $4,000 using our $10,000 account. Using my rule of 40, we can safely earn $250/month with covered calls.
Let’s say we purchase 500 shares of Rivian (RIVN) at $12.50 each. At a $13.50 strike price, we earn $93 per covered call. That gives us $465 for the month, minus commission fees.
More importantly, we are only using $6,250 of our account. You should not use all of your trading accounts’ resources in current transactions because you may need to “buy” your way out of a situation.
Although the RIVN premiums are high, that is because an earnings call occurs during this period. To be safe, aim for $250/month.
Becoming an Entrepreneur #6
Now, let’s calculate the annual yield of earning $250/month on a $10,000 brokerage account. The annual yield would be 30% ($250 x 12)/($10,000).
If we saved the $250/month in a high-yield savings account, we would have at least $3,000 plus any interest we earn. This sets us up quite well for our vacation.
Putting it all together. We have squared away our budget and earned additional passive income by selling covered calls.
It’s important to remember that our budget still allows us to add to our options trading account. If we had $20,000, we could aim for $500/month in passive options income, for example.
You can also trade options while on vacation. My wife and I made $4,000 in one trade while in Istanbul, Turkey.
Don’t Gamble with Retirement 10
Selling covered calls allows you to make money anywhere worldwide as long as you first set up your account in America. However, it’s much more difficult to set up an account with a foreign IP address.
Let’s review what we accomplished. Creating cash flow in our budget is the key to saving in our brokerage account.
Once we have a decent amount of cash, we can generate more money by selling covered calls. Using the rule of 40, divide your account balance by 40 to determine your monthly passive income goals.
Ensure you have a realistic vacation goal. If you set this number too high, you will do crazy things in the market.
Becoming an Entrepreneur #5
Remember that you can continue trading options while on the road, significantly enhancing your enjoyment.
Conclusion. Is selling covered calls a technique that most people can use? I don’t think most people have the emotional temperament to sell covered calls.
However, if you can save $10,000, you are sophisticated enough to learn to sell covered calls. If you remain calm throughout the process, you can make great returns.
Series “I” Bonds vs. Series “EE” Bonds
Many Americans use debt to fund their vacations—the bank charges them 10-20% to enjoy time with family.
You can flip the script by earning 10-20% returns to save for your vacation. Why give the banks the pleasure of taking your money at such a high percentage?
Selling covered calls is for serious investors. Only serious investors can save $10,000, and they should want to continue growing their stash safely.
As long as you stick with the odds, selling covered calls is a great way to harness the power of the markets in your favor. 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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