Hello everyone! I’ve been asked to preach tomorrow at Church and the message God provided me is about the differences between Christians and non-Christians. As I researched this topic in preparation for speaking it really boiled down to one of two choices. We’re either seeking to be with Jesus in Heaven or we’re seeking the treasures of this world. Christians have the prospect of peace and eternal life with Jesus. Non-Christians get to chase one treasure after another until their physical body gives way. Not really a great deal from where I stand but please say a prayer for me to deliver the message boldly tomorrow.
I have to start by saying, I’m not using options to pay bills. I’m personally using options to increase my bottom line and grow my investments. However, it might be possible to generate income using options to pay bills and in this post I’ll walk you through how I might do that.
Before I get into the strategy I’d use I think it’s important to have a list of stocks in your preferred price range that can accomplish that goal. I recently wrote a post, “Most Liquid Options on Stocks Under $25” that may be of some value as you consider such a move yourself.
Post Agenda
Trading with a Purpose
I’ll be brief here but I wanted to point something out before I get to using options to pay bills. That is, have you ever noticed how when you want something, it’s easy to block out all the noise? Well, I think the same is true with options trading.
Assuming we wanted to use options to pay bills we have the benefit of knowing our target. For instance, suppose I wanted to pay my mortgage with options. I know definitively that I would need $1,500 to accomplish that goal. From there I could entertain various options strategies that will meet that criteria. I personally would stay within the confines of the strategies I prefer but the options really are limitless.
I think it just simplifies everything at the outset of a trade knowing the endpoint.
Additionally, with options trading or investing we have the opportunity to throw in the towel early. Considering that, it may also be possible to make the $1,500 I’d need to pay my mortgage without having to generate $1,500 of alpha. What I mean is, maybe I use options income to pay my mortgage but make less in profit or even have a loss. In either scenario, I could still be better off than if I had just paid the mortgage with that $1,500 because I might have some amount of capital remaining. Potentially.
In any case, just some food for thought as we move forward.
Capital Requirements
Ok, so here is a downside. It takes money to make money, at least at some level of safety. For the truly risky among us it’s still possible to generate the needed income on a smaller account. It’s just been my experience that with a smaller account the options plays tend to be really close to the vest.
Now, I’m not suggesting a million dollar portfolio but I do want enough to give some wiggle room. Even better, I don’t need to come out of pocket today with that cash. As it stands, I have $17,959 in options buying power in my options account and I only have $2,535 in cash available. Thanks to margin, the broker is essentially lending a helping hand.
Thus, to keep the things simple in the next section let’s assume I have a $20,000 dollar account and I’m seeking $1,500 dollars in income to pay my mortgage. And let’s limit possible candidates to just SPY since it’s the most liquid options market. In theory, better plays could be made elsewhere but that’s really a whole bag of cats by itself.
Here is the criteria I’ll use for the options strategy section below.
- $1,500 Mortgage Payment
- $20,000 Account Value
- SPY ETF
Options Strategy to Pay Bills
Before I elaborate on my strategy, as I mentioned, every options strategy is really at my disposal. In a perfect world, I’d be able to take a trade that profits me the full $1,500 dollar mortgage payment. That way, I’m really using someone else’s money to pay my bill. Still, while it may sometimes be possible, it won’t always work out so great. Eventually, even the best laid plans will fail.
So what strategy am I going to use? The Baby Rhino Options Strategy. It’s a slow and steady trade with some degree of wiggle room for error, which I really prefer. I’m not needing a directional move since the trade is delta neutral and generally speaking the trade is of the more relaxed variety, which I also like.
For context and a visual, here is the trade I’ve constructed in ThinkorSwim’s OnDemand platform.
Baby Rhino Options Strategy Trade
Now, I know what you’re probably thinking, why not an income style trade that provides a credit to the account? Well, to put it simply, risk and potential inability to watch the market. With this strategy and a little planning, I might just as easily profit to pay my mortgage. However, let’s assume I planned to pay my April mortgage payment since that’s when this baby rhino position expires. If the trade works out, mortgage paid. If it doesn’t, I’ll just have to pay the mortgage the old fashioned way.
You’ll notice I’ve used 20 short options at $476 and 10 long options each at $487 and $459 for the wings. In this example, I have a maximum potential loss on the downside of $6,520 and a maximum gain at the peak of $10,190. The max loss to the upside is $520. From the baby rhino link above you’ll know I’m also willing to add a calendar to the upside as needed. Additionally, here is a forum post from Aeromir.com with a wealth of information on the original rhino strategy.
Below is how the trade worked out with weekly images.
Using Options to Pay Bills – Trade Progression
Week 1
Week 2
Week 3
I needed to make a calendar spread adjustment here since the delta had moved to -10. Fortunately I did since the price continued to climb. In this instance, the 2 lot calendar spread trade profited $174 dollars to buffer some of the losses on the broken wing butterfly. At this point I’ll be repositioning the entire trade structure upward to capture the calendar spread profit and move price back inside the profit tent. If I’m going to make rent with this trade I need price to go home (under the tent).
Week 4
Hindsight is always 20/20. During this week I had to adjust the trade twice which really cost me in commissions. I’ve squeaked out a small profit as you’ll see but I’m currently at a loss when subtracting for commissions.
Week 5
Price again moved considerably higher during the week which forced another calendar spread adjustment. In this instance I had to add 3 calendars to offset the negative deltas. We’ll see how it goes.
Week 6
Yet another adjustment was needed as the market continued it’s march higher moving up more than 10% since I opened the original trade. Fortunately, the calendar adjustment saved me again and added another $182 to buffer BWB losses.
Week 7
Losses are piling up and volatility is not being kind. The VIX index shot up during the week even on a relatively modest decline. Still, there is time remaining so we’ll see if it doesn’t turn around. Theta is beginning to build up nicely so any neutral price move will compensate me well. If volatility subsides I’ll be rewarded even more. Lastly, delta is higher than I prefer but to avoid the additional commissions I’m going to wait before adjusting. We’ll see.
Week 8
Price moved back up slightly but delta was a little out of range. I ended up preemptively opening a 1 lot calendar spread to neutralize the delta. It made sense given the last 2 times the calendar protected the position against a rally.
Week 9
Price moved higher again so I opened two more calendar spreads to counteract the delta. I could have elected to reposition the BWB but price is getting a little choppy so I’m thinking a decline may occur. Let’s see what happens.
Week 10
Repositioned the strategy, yet again. Only 18 DTE remaining on this position. Theta is really increasing but so is gamma and that won’t improve from here. The structure is getting very narrow at this point and generally I would roll to another expiration to keep my greeks in line. However, for the sake of this experiment I’ll proceed into unfamiliar territory.
Week 11
Yet another repositioning. I haven’t added it up yet but the commission costs alone are going to be devastating. I’m getting down to the bitter end.
Week 12
Nothing to report. I’m down to exactly one week until expiration. If price stays flat this week I’ll make my mortgage payment. If it move strong either direction, I’m out of luck. This is turning out to be a more dramatic post than I’d anticipated. I’m very curious how this plays out this week.
Week 13 – Final Week
Whew, at least I squeaked out a profit! I didn’t make the entire mortgage payment I’d intended but at least its something. In the next section I’ll break everything down to see if I actually achieved any net benefit after all those commissions.
Final Thoughts & Trade Recap
Well, if you’re still here then I think I can safely say your a geek for options, just like me! Only kidding. That was quite the ride and admittedly a little disappointing I wasn’t able to make ends meat with the strategy. If I had known the market would shoot straight up a directional play would have been more appropriate.
In any case, I made something, so at least I’m not worse off for having endured the constant adjustments. I’ve honestly never had to adjust my baby rhino positions so much. Truthfully, the volatility just wouldn’t stabilize and that was a big detractor to any comfortable trading experience. Volatility would spike without a discernable down move which I don’t remember during that time period last year.
In all, I don’t know that I would suggest using options to pay bills. This hypothetical example alone was fairly exhausting and the commissions were brutal. Still, it’s nice to know that if I ever had to it’s at least theoretically possible. I think that counts 😛
Trade Recap
| Description | Result |
|---|---|
| Total # of Round Trip Trades | 10 |
| Max Risk | $6,900 |
| Total Commission Cost | $332.80 |
| Gross Profit/Loss | $490.63 |
| Net Profit/Loss | $157.83 |
| Percentage ROR | 2.2% |
| Duration (Days) | 84 Days |
Until the next post.
God bless,
Jeff
