The world of high finance is a fantastic place to build wealth and live your dreams. However, without financial education, your dreams can become nightmares.
If you can save $10,000, you can consider yourself an Elite Saver of America. But now it’s time to make your money generate more money.
Dividend investing and options trading are great ways to earn passive income (using the term loosely), but they vary wildly.
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The pros and cons of dividend investing. Investing in dividends gives you a plethora of ways to generate returns from 1% to 15% annually.
You can build a portfolio of stocks, bonds, closed-end funds, and ETFs that suit your risk tolerance and income needs.
Once you understand the different types of dividend investing (index funds, dividend growth, and income investing), inserting money into your portfolio is relatively passive.
However, getting the money to invest will require active earned income or a business. In short, dividends need lots of capital to produce healthy results that allow you to retire.
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The pros and cons of options trading. Options trading gets a bad reputation as being risky and a form of gambling.
You can get in over your head using leverage and margin; however, there is also a safer way. If you have some capital, you can trade options with minimal risk.
I am a Level 1 options trader, which means I use cash-secured puts and covered calls to generate income from my positions.
I can safely generate 5-10% monthly returns (60-120% annually) on my capital. The main concern is ensuring I don’t erode my starting principal over time.
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Let’s start with $10,000. If I received $10,000, how would I invest it into dividends and options? First, let’s start with my goals.
My goal is to live entirely on dividends; however, this lifestyle requires lots of capital (say $1 million).
The book “Mean Reversion Trading” says you can grow a $2,500 options account to $25,000 in 1-2 years. This method requires using debit spreads (buying and selling options).
For now, I am using the safer way of only selling options. My goal is to grow my dividend portfolio using income from options trading. How would this work?
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I would start with $8,000 in my options account and $2,000 in an income investing portfolio. My target for my options portfolio is 5-10% yield per month, and my income portfolio is 10% annually.
Building an income portfolio. I would use M1 Finance (affiliate) to create an income investing pie (portfolio).
It would consist of the six types of income investing products. Here is a picture of one of my income portfolios.
M1 Finance makes it easy to add a large deposit into your pie and automatically distributes it across your securities based on your allocation preferences.
We will transfer large deposits from our options trading platform directly into our income investing pie.
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Building an options trading portfolio. I would use Charles Schwab as my platform of choice. Again, I am not a day trader or full-time options guy.
Full-time options traders have a unique platform and use multiple monitors to track minute-to-minute stock movements.
I am more passive in my options trading performance. I can actually perform one trade per month to reach my monthly goals.
Starting with $8,000 will allow me to generate $400 to $800 monthly. Now comes the part that requires me to use the art and science of investing.
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There is a delicate balance to simultaneously growing your options trading platform and dividend portfolio.
Growing both accounts at once. The best way to increase your account is to set goals and stick to them. Let’s set our first-year goals.
I expect to make $4,800 to $9,600 in the first year of options trading. I could grow my options account to $10,000 and my dividend portfolio to $4,000.
That amounts to adding $2,000 in both accounts. It may not sound like much, but I literally doubled my dividend portfolio.
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With $10,000 in my options account, I expect to generate $6,000 to $12,000 next year—not bad at all.
What to do with the extra cash flow. I have some additional cash flow that I didn’t invest. How should I spend it?
Well, life happens. Remember to build wealth slowly. The world of options is seductive, especially to people who just “want” money.
You can take big risks in options and slowly erode your principal. Some of your extra cash will go to maintaining your initial capital investment.
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Although your options premiums will look great, sometimes your underlying stocks will drop in price. You can lose principal if you sell these stocks for less than you bought them.
The key is to make intelligent trades while keeping your cost basis (purchase price) in mind. You may have to sit out of trading for a few weeks to see how the prices recover.
Or, you may have to make some trades and keep the options premium inside the portfolio to regrow your capital. It’s all a balancing act to maintain principal and generate healthy returns.
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Conclusion. If you can keep your wits about you, your portfolios will continue to grow without much effort.
You can use the $10,000 to go hardcore into options trading and build a portfolio over $100,000 in 1-2 years.
Be careful to remove your earnings from the portfolio once you hit your targets. One or two bad trades or poor stock performances can “blow up” your account.
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I believe that dividends are the end goal. I prefer a $100,000 dividend portfolio to a $100,000 options account.
Ideally, having both accounts at $100,000 would allow me to build the life of my dream. A $100,000 options account would allow me to generate $5,000 to $10,000 monthly.
This type of money gives me enough cash flow to invest in dividends in a big way. I could create my dream retirement in 2-5 years.
The perfect scenario is to live entirely on dividends (say $10,000/month) while generating $10,000 per month in options premiums for your pleasure. Hey, it can happen. 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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