The most essential part of your financial plan is cash flow; without it, your plan will fail. Cash flow allows us to make decisions based on the amount of money “moving” through our hands, not “sitting” in a bank.
But how do we increase our cash flow? We can get a promotion at work or start a business—those are easier said than done. Are there any other options to increase our cash flow without giving up too much of our time?
I have two methods to share today: investing in business development companies and selling options on the options market. Both of these methods provide a high level of current income you can use to improve your financial situation. Let’s begin.
Your Income Should Increase Every Year 2
Why use the options wheel? The options wheel technique consists of selling cash-secured puts and covered calls in a constant loop. It can be a highly effective way to generate 20% or more annual returns—as long as you are patient.
The magic of the options wheel is that you can maximize profits early and “sit around” for the rest of the year. Let’s review how the strategy works.
The most difficult part of the strategy is determining when to sell a cash-secured put. A good rule of thumb is to wait until the stock drops 5% over a couple of days before selling your put.
You want to sell puts that you believe will never get assigned. For example, let’s say Rivian’s stock price is $10. I would like to sell puts at the $8 strike price. The goal is never to get stocks assigned.
You keep selling cash-secured puts and collecting the premium into infinity. But eventually, the market maker will assign your shares, and that’s when you start to sell covered calls.
I’m High on Life with Royalties
The covered call portion is more straightforward because you know your cost basis—you know exactly how much you paid for your shares. Your goal is to make a profit by setting the strike price above your cost basis.
It’s pretty simple in reality, except that the market will sometimes drop your share price below your cost basis. For example, you may own 1,000 shares of Rivian (RIVN) at the price of $11 each. The current share price may be $9, putting you underwater.
The moral of the story is to buy shares at the lowest price by selling cash-secured puts and to sell at the highest price via covered calls. You can make great income by being patient and exercising good judgment during the options wheel.
But what if you don’t want to go through this rigmarole? What if you want to invest in one product and let the manager do all the work for you?
The Magic of Passive Index Fund Investing 2
Welcome to business development companies. Do you love receiving passive income? Well, do I have a tremendous income-investing product for you?
Business development companies (BDCs) lend money to small businesses throughout the United States. In this way, they are similar to banks, but they have some differences.
BDCs can also hold equity stakes (shares) in the companies they lend money to, which can generate additional profit for the BDC.
BDCs can also send their experts to assist companies in improving their business prospects. These experts can take hands-on action to ensure the success of their investments.
Beyond all of that, BDCs pay you (the shareholders) huge amounts of income. It’s typical to get annual returns of over 10% for the best-in-breed business development companies. You can get even higher yields by taking on more risk.
Let’s look at one of my favorite BDC investments. I own 164 shares of Ares Capital (ARCC) in my Cash App portfolio. I paid $3,237 for these shares, which are now worth $3,545—a capital gain of $308 or 9.5%.
Scarcity vs. Abundance
Over the four years I have owned these shares, I have earned $790 in dividends. The best part is that I have done absolutely nothing but kick back and collect my dividends.
The magic of business development companies is that an entire team is working to pay you dividends. They are running their company for the sole purpose of making you money.
Instead of spending your time in the meat grinder of the options market, you can simply wake up and find beautiful dividends in your account.
Juicing your returns. Why is cash flow so vital to our households? Why is it dangerous to only depend on our jobs for income?
Depending solely on your job can put your family in a terrible financial position because you have no guarantees. Trust me; I should know. My family went from -$77,000 to +$340,000 over five years once I realized the dangers of having one income source.
The Magic of Income Investing 2
The options wheel provides a good source of income because you can adjust your risk profile each time you trade. You make higher options premiums the closer you place the strike price to the stock price.
For example, if the stock price is $20, and you set your put’s strike price at $19, you may get a $1 premium per share. However, if you set the strike price at $18, you may get a $0.70 premium, but it’s less likely you’ll get assigned shares.
In this case, you assume as much risk as you want. You may want to sell puts at the $16 strike price and earn $0.15 premiums; it’s entirely up to you.
Similarly, you can adjust your BDC investing to reflect your income needs. Ares Capital (ARCC) is the top BDC, but there are many more.
You can earn higher yields by investing in less known (perhaps riskier) BDCs like Blue Owl Capital (OBDC) at 10%, FS KKR (FSK) at 13.5%, or Trinity Capital (TRIN) at 15%.
I find it extremely amusing to find and invest in multiple BDCs. You also have the option to invest in an ETF that collects many BDCs named VanEck BDC Income (BIZD) at 11%.
I’m Living My Dream Life with Dividends
Your income needs and time constraints will determine your investing style and risk profile. Using both the options wheel and business development companies can help you create an amazing cash flow system outside of your job.
Generating high yields. The main complaint you will have with both of these techniques is that they are capital intensive, meaning they require a lot of money to start and continue the process.
Therefore, you must do some fundraising to build a decent options trading portfolio or income investing (business development company) portfolio.
How do you start fundraising? The first step is to create and implement a budget. I know it sounds mundane, but a budget is the most critical element toward financial freedom.
You’ll need at least $10,000 in your options trading portfolio to generate high yields from the options wheel. This amount should earn you about $500 per month.
The Magic of Dividend Growth Investing 2
Conversely, $10,000 in FS KKR (FSK) will net you $112 monthly. That’s a massive difference, but investing in FS KKR doesn’t require much skill.
It’s vital that you start getting to know both of these products before you take the leap into retirement. Both have complexities. Options premiums adjust based on market and stock price volatility.
Business development companies, which are lenders, share prices adjusted based on prevailing interest rates. Most BDCs use floating-rate loans to improve their net income during times of rising interest rates (like in 2022 and 2023).
Become Debt-Free and Stress-Free
Conclusion. Don’t get too bogged down in the minutiae yet; you still have a lot to learn. The purpose of this article is to inform you that cash flow is vital to your household.
You can create multiple paychecks outside of your job by trading the options wheel or investing in business development companies.
The goal is to create a secondary or tertiary source of income. If you make $10,000 per month at your job, you should aim to earn $1,000 from income investing and options trading.
As a retiree, I love having the ability to continually increase my cash flow with the Options Wheel and BDCs. The more cash flow I have, the more products I have to keep adding more cash flow. It’s an amazing circular loop of cash flow. 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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