Options trading isn’t for everyone, but that doesn’t mean most people should overlook this incredible opportunity to make passive income.
Americans put far too much emphasis on their W-2 jobs while passing over other opportunities to make money. Many times, we exclude other opportunities because of fear of the unknown or the possibility of risk.
Today, I want to follow up on “Selling Covered Calls vs. Trading Long Strangles” with more information on how to use these two options trading techniques to build the desired financial outcome.
How to FALL into Investing 3
What is passive income? Passive income is cash flow you can receive while doing something else. In the simplest sense, you are not exchanging time directly for money. The key word here is “directly.”
All passive income requires some form of set-up and maintenance to become a long-term income stream—options trading is no different. I want to review the processes of some other passive income streams so we are aware of the idea.
Dividend investing requires a great deal of capital to be a substantial part of our lives. Therefore, the set-up process involves earning money in an unrelated field. The maintenance process involves following various companies and market conditions to ensure you always know the investing situation.
Writing books requires learning how “to write to market ” and building an audience. The maintenance process consists of continuing to write books. As soon as you stop writing or promoting, your book income loses steam.
Finally, building an automated business requires creating a successful product or service and effectively marketing it. Even if you transfer all control of your business to a full-time manager, you would need to check in with that individual at least monthly.
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Now that we have a background on additional passive income streams, we can examine our options trading scenario in the context of generating passive income.
Building passive income through options trading. There are two parts of the set-up process for selling covered calls and trading long strangles: learning the ropes and building your capital.
The first thing you will need to do is raise capital. Trading long strangles requires considerably less capital to start than selling covered calls.
Looking at Rivian’s (RIVN) options chain, you can purchase one call option for $83 and one put option for $90. Therefore, it is safe to say that you can start trading long strangles with $1,000 in your brokerage account.
The second part of the setup process is learning the ropes. Honestly, it is extremely difficult to learn how to trade options from reading books. I read my first options book two years before trading my first option.
The best way to integrate yourself into this world is to read a couple of books, save your money, and start playing with small sums of real money. You’ll begin learning quickly once you have real money on the line!
Happiness Isn’t Free 3
In the above scenario, I would save $1,000 and purchase one call and one put, leaving me $800 safely tucked away in my money market fund. I would trade my options right before Rivian’s earnings call, paying attention to time decay and volatility as the company approaches the earnings call.
Keep repeating this process for a year or so. As you accumulate more money from trading options or other sources, grow your capital base but keep your same ratio (only trading 10-20% at once).
Bigger portfolio for bigger passive income. But you didn’t jump into options trading to earn $10 to $20—you want the big fish. Trust me; I made $4,000 on one trade in November 2023.
However, you’ll need to work your way up to this point. Remember, winning at options trading isn’t when you profit; it’s when you stick to your plan explicitly.
Let’s say you build your account to $10,000; now you can start doing some cool things with your options trading portfolio. Ideally, you can use selling covered calls and trading long strangles together to build your wealth quickly.
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Let’s say Rivian does its earnings calls in January, April, July, and October. That means that I would sell monthly covered calls in February, March, May, June, August, September, November, and December. Let’s dive deeper.
Trading long strangles. I would use $4,000 of my $10,000 for trading long strangles. That would give me $2,000 in call options and $2,000 in put options. My goal would be to earn $400 to $800 per trade. Let’s settle with $600 per trade four times a year for a total of $2,400.
It’s important to note that I can use margin against my shares of Rivian. That way, I don’t need to sell my shares to trade long strangles; I can double dip. And, if my shares explode on an earnings call, I can sell them for a profit—if it makes sense.
Selling covered calls. I can purchase 600 shares of Rivian today for $6,960 (at $11.60 a share). Remember, you do not want to invest all of your money in selling covered calls because it can go badly.
Trading six covered calls will net me $390 (at $65 each). If I do that eight times a year, that would give me $3,120 for the year.
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Adding it all up. For the year, I would earn $5,520 ($2,400 + $3,120) against $10,000. That would be a yield of 55%. This does not include any capital gains I would receive from covered calls (or any losses).
In theory, I only made 12 trades this year. Can this process work? Yes, I made $15,000 in options trading money in 2023. I slowed down considerably in 2024 because I would rather spend more time writing about the process (I am in full-time college).
Putting the passive in passive income. So, is this “Covered Call/Strangles” technique truly passive? I would say yes. You only need to trade an option per month. You set everything in motion and monitor it once a day.
The main thing you need to focus on is ensuring you have trading access on the day of the earnings call. You do not want to be in a meeting when all hell breaks loose on the options floor.
Once you get the hang of the 12 trade process, you’ll be able to focus on other things. Of course, things will not go as perfectly as I have written, but it will actually be pretty close.
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If you become really good, you can do the same process with another stock; however, I would open another brokerage account.
For example, I have three brokerage accounts on Charles Schwab: one for me, my wife, and my mom. I have access to all three accounts under my “supervisor” account because I did the documentation with Charles Schwab.
I can trade Rivian on my account and Palantir (PLTR) on my wife’s. When everything is neatly separated, it’s easier for me to see clearly what is happening with each stock.
Conclusion. I hope I have laid out an excellent three-year plan for your options trading career. There are lots of options trading techniques, so use my advice only as a guide to finding what works for you.
No matter what you choose, only trade 5-40% of your portfolio at once, depending on what you are doing. I can trade a higher percentage because long strangles have built-in hedging (one put, one call).
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However, you don’t want to trade one call for 20% of your portfolio. With these types of one-sided, non-hedged trades, you can quickly go down in flames.
The steps are to build your capital and learn the ropes. Start trading with a small amount of real money to get a feel for the process. Grow and protect your capital while building a schedule of events for the year.
You don’t want to become consumed with options trading by always being in the market. Nowadays, I trade my quarterly long strangles; that’s where I am on my stress profile.
I have too much going on with college to focus on options, but that’s what makes options trading so great—options.
You can tailor your options trading career around your real-life scenarios. It’s the definition of work-life balance. So, go forth and start trading long strangles and selling covered calls responsibly. It will change your life. 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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