As the title of this post suggests I’ll be highlighting how I generate income with options. Now, before continuing you need to understand that this is my method and may not be suitable for anyone other than myself. Therefore, be sure to do your own research and never invest money you cannot afford to lose. Options can be risky, are risky, and will always be risky investments in which you might just lose your shirt.
With all that being said, my goal is not to mislead. I want to make money trading options and I only wish to educate. If it helps you on your journey to financial freedom then I’ve done my part to serve those interested.
So lets get into it…
Step 1: Pick your poison!
Like any business, in order to make some money we must first make some important decisions. The first of which is what options strategies to use. I prefer Iron Condors, vertical spreads, and an occasional long put or long call. Thus, these vehicles are my preferred “poison” if you will.
Iron Condors offer patient rewards, vertical spreads provide risk reducing rewards, and long options capitalize on short term market moves.
Step 2: Capital management
This step cannot be skipped!! Bite off more than you can chew and you’ll understand why I started this post with how risky options can be. When deploying capital it is prudent to first decide on what percentage of available capital we should utilize.
To ease understanding, let’s assume I have a $2,000 dollar account and I’m ready to invest. I’ll want to get the most “bang for my buck” in an account this size so I’ll need to use most all of the $2000 dollars available. Let’s say 80%. If you want to take a more conservative approach, use 50%, until your comfortable managing the portfolio. Of course, as a third option use whatever amount is comfortable and fits you.
Step 3: Time management
It’s at this step you must decide your time horizon. Generally speaking, the longer your time horizon the higher the return percentage can be and the lower the risk to our valuable capital. However, we wouldn’t be trading if we wanted to just squat on our money. If we weren’t trying to make money we could just stick the capital in a savings account and take whatever paltry return is offered.
For illustration, I’ll decide to use a time horizon of 50 – 60 days for my Iron Condor trades, 20 – 30 days for my vertical spreads, and less than 10 days for long options.
Step 4: Position management
With our capital requirements decided and our capital deployed into several different trades we now have the potentially daunting task of managing the portfolio. It’s at this juncture that many traders fail with options. They understand what it means to diversify their capital and they don’t usually have trouble determining how often they want to collect on their investment. Furthermore, in a perfect world, we could just set it and forget it but that simply isn’t the case with options. Many times, markets change and our once current outlook has become something else entirely. In an effort to “roll with the punches” we will always be forced to manage our portfolio.
*Side note – Iron condors are as close to “set it and forget it” as options get. Although I should also say, I never take that approach.
While this section could go on for many pages with more information than could possibly be digested the main point I wish to make is, just because a position has been opened doesn’t mean it can’t be adjusted or flat out changed to something else.
Step 5: Take profits and redeploy
In each and every trade the astute trader will have identified at what percentage of that trade he/she will take profit and risk off the table. Is your number 25%, 50%, or 200%, only you can decide. It should also not be any great news flash to understand that the lower the profit percentage decided for each trade the higher the probability of success. I generally shoot for 25-50% returns on risk for each individual trade.
For example, if I traded an iron condor with a maximum loss of $100 dollars I’d likely want to close the position once I’d made $40 to $50 dollars. At that point I’d take the money that had been earmarked in that trade, along with the return on that investment and redeploy into another investment. Don’t worry much about finding opportunities, so long as the markets exist, you’ll be able to find hundreds every single day.
There you have it, in 5 “not so simple” 😉 steps you can be on your way to generating daily, weekly, and monthly income using options. I know you were hoping this post would explain exactly what trades to make and when but that could never be concluded in just one post. My hope though is that this post has directed the thought process that must occur on your path to building a profitable portfolio capable of generating income with options.
May God bless and keep your trading profitable,
Jeff the “OptionBoxer”