UPDATE: May 22, 2017
The trade executed this morning. As the old Iron Condor closed, this new opened and we are in the trade. We collected 0.35 credit or $35 dollars. Now we will wait for this trade to develop.
We also placed buy back orders for both our short legs (to buy back our short 16.50 put and 21.00 call) for 0.05 debit.
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UPDATE: May 22, 2017 TRADE CLOSED
Today morning, our puts closed for 0.05 debit. This closes our Iron Condor with 13.20% profit in 32 days and 150.56% annualized return.
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I decided to take a second part time job to raise capital.
At first, I planned using loans (and I did it and took two business loans to use them for investing and trading) but the loans put a lot of pressure on my trading.
Our accounts do not have large enough capital to generate enough income, sustain loan payments, and grow the account.
The recent sell off of US Steel (X) basically put the account growth at a halt. I had to roll the trades and now all I can do is sit on it and wait.
And sitting and waiting brings no more cash which can be used to pay off the loan.
Because of this movement in our trades and waiting period we expect this month to be low in income. In previous months we could generate nice $2,000 to $3,000 monthly income but this month it will be way below this limit. As of now, we have made around $327 dollars only and I do not expect any significant improvement by the end of the month. I have simply no more cash available to trade and most of the open trades are sitting ducks.
This is a thing I was thinking about recently: “What it would look like when trading for a living”?
What if I get into a situation that our account will not be able to generate enough cash as a salary which would pay the bills? The current situation poses this issue as of now!
I asked this question to an experience trader from our group who trades for a living and he confirmed me what I began to suspect:
I am still too under financed to trade and generate sustainable income.
This is a question which bothers many people and I have seen it asked again and again. How much money a trader needs to trade for a living?
This all depends on every one’s individual needs but it can be calculated using the reverse process starting with what you really need.
So here is my way:
According to my needs, all bills, debt, mortgage, etc. I will need $7,000 dollars monthly income to live comfortably.
I have a 50% withdrawal rule. That means that I can withdraw only 50% of the entire monthly income. If I make $3,000 dollars, I can take out $1,500 only.
If I want to take out $7,000 dollars, thus I must make at least $14,000 dollars that month (or more).
Currently, our trading delivers average income which equals to 8.44% of the net liquidation value.
See below table indicating all account metrics such as Net-Liq growth, income growth, equity, and inventory growth:
It is really great to make 8% to 10% monthly on net-liq amount but it is too aggressive and stretching the account. What if the next month I will not make it? What if I make only 1.5% as might be the case this month?
To be on the safe side I need to plan for the ultra low income!
If I make more, it is OK and I will be happy but if I make little I will have problems to pay the bills.
If we set our monthly income to an ultra-conservative 1.5% number I can be sure that that is a number I can make even when “doing nothing”. OK, not nothing but trading a little.
The rest of calculation is simple:
$7,000 dollars to take out (50% of monthly income)
$14,000 dollars needed (this would be 1.5% monthly income to net-liq)
14,000 / 1.5 x 100 = 934,000
This means, I will need $934,000 dollars in my account to trade for a living. It is a scary number and many people will disagree with me. But we are not done here. I plan on trading using margin. In this case a portfolio margin.
I also do not use nor advocate using all your margin. I typically trade 45% of the entire available buying power (margin).
Thus the number above, the $934,000 net-liq is only 45% of the entire buying power. Thus my account needs to be:
934,000 / 45 x 100 = 2,075,560 dollars
This looks even scarier than before, but bear with me, we are not done yet. A portfolio margin typically allows you to trade 6 times your own money (depends on the broker).
Taking this horrible number of $2,075,560 divide it by 6 and the result will be $345,926 dollars.
Here is my target number I need to have in my account to trade for a living comfortably! $345,926
You may get a different number. You may settle with a smaller number because you want to be more aggressive. But I want some security in my income too. I trade aggressively and I will be trading aggressive as long as my brain, overall health and mental conditions, and TIME allow it.
But if there will be time when our trades get busted or I will not have enough time to trade, I want to have reserves. I believe, this calculation and the resulted number will provide that.
If not, I will adjust this number accordingly.
As of now though, I decided to take a second, part time job.
It is killing me as now I work from 8:30 am until 10:00 pm every day (that means my full time + part time job) and I have little to no time to post on this blog.
But all additional money I make I pay off my debt and the rest is saved to our trading account. And that is what makes me happy because I am now getting even closer to my goal although it will take longer than I wished for.
What do you think? Is this realistic?
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If you follow my posts you remember that I advocate that investors should not be predicting the market or stocks. Such behavior has no place in the stock market. If you base your trading on predictions, forecasts, or magic, you are definitely set for losing your money.
Many times I said here in this blog that you do not need to know what the stock or market will do next, but you need to know what you will do next.
If you are prepared before you enter a trade and know what to do in every outcome and every move Mr. Market throws at you then you really do not need to know what will happen in the market next. You do not need to predict the future. And all available crystal balls were sold out anyway.
This is the number #1 problem investors and traders get into. They know perfectly how to put up a trade but have no clue what to do next, how to manage the trade and how or when to get out. And when the trade goes against them and they lose money, they blame the market, Fed, high frequency trading, market makers, bad weather, or improper constellation of the stars.
Here are a few steps how you can fix deep in the money puts, jade lizards or strangles.
Once I had a trader who asked me a question what do I do when I open a trade and the very next day the stock tanks. How do I predict this and prevent myself from entering the trade right before the stock collapses.
I told him: “You can’t”.
You cannot predict future. There is absolutely no way that you can predict what event sends the stock to abyss or shoots it into the sky. All you can do is get ready for all possible outcomes of the trade, have a plan for each event, and if any of that event happens, execute that plan.
So let’s review step by step what you can do when trading naked puts, jade lizards, or strangles and the trade turns sour the very next day. Remember, the steps described below can be used (in a proper modification) for almost any trade. You can use them with spreads, naked puts, naked calls, or jade lizards. In this post I will show it as if we traded a strangle.
A strangle is when you sell a naked put and a naked call at the same time. It is a high probability credit trade (you get paid for this trade). But sometimes it can turn bad.
The picture above shows a typical strangle. Let’s say that a stock XYZ is trading at $100 a share. We decided to sell $90 strike put and $110 strike call (both legs with delta 20). For this trade we collected a premium $4.00 dollars, so our break even prices are $114 on call side and $86 on put side.
Remember, with strangle, you will never lose on both sides. Only one side can get into a danger at a time. If your put gets in danger, you calls will make you money. If your calls get into trouble, your puts will make you money.
Let’s say we weren’t much lucky and some usually unknown analyst you have never heard of before issues a warning that he thinks the company will not do well in the next quarter. Sometimes this is enough to send the stock down.
Now, our puts are in danger. What would you do?
Sometimes it is difficult to choose the proper defense. If you have a plenty of time until expiration you may choose to wait and see if the stock recovers or choose to take action and adjust the trade.
Many times in the past I decided to wait and the stock tanked more making things worse. On other occasions I decided not to wait, make adjustment, but the stock recovered and the adjustment turned against me.
Can you prevent such situation? Again, you cannot. If we knew what the future was going to be, we would be billionaires.
Let’s say we no longer feel comfortable with the trade, take the analyst’s warning seriously and decide to take action and adjust the trade.
If the stock tanks and the price goes and touches your naked put side or goes even lower but stays above your break even price, then you roll down your call side.
You buy back your almost worthless calls and sell new calls close to the current price or same delta (in our example it was delta 20). For this, you collect additional premium. That premium will further lower your break even price from the original $86 to $85 dollars.
But what if you do this adjustment and the stock recovers and continues higher? Your naked calls will now be in the money.
Many people and novice traders have a panic fear of naked calls in the money. They immediately see it as a huge danger to their portfolio. Many stay away from naked calls because they have no clue where the risk is.
What would you do then when your calls go in the money and your broker is telling you that now your risk is unlimited and you can lose everything and even what you do not have?
You can:
1) roll the calls up
2) buy stocks and make it a covered call
3) convert the calls into puts
4) or use an inverted strangle (see below)
It doesn’t make the ITM puts to go away. If you do the above described adjustment you still may end up with an ITM put and OTM call. So you may ask, what’s the point of such adjustment?
First of all, you collected more credit which may help you offset the price of the put should you buy it back at a loss. Or, if you are like me and do not want to take a loss, you may decide to roll the put lower into the next month (or week) get more credit and improve the outcome of the trade.
When you roll your put away and down, you collect a new small credit, make the puts OTM again and you may decide to sell a new OTM call against the new rolled puts making your trade a new strangle, collecting even more credit. The new strangle with lower strikes on a stock which went down has now a lot better chance to be bought back for 50% credit than the original one. Or even expire worthless. You will be out of the originally losing trade as a winner.
But if this doesn’t help and the stock continues giving you a hard time you may choose more defensive steps.
Sometimes you end up rolling the trade, making adjustments but it doesn’t help in the end. Sometimes the stock tanks and smashes through your puts side without a mercy and your puts end up in the money.
Now it is a time for an exciting adjustment – inverted strangle.
Let’s assume the stock didn’t stop at $90 a share and the very next day after you adjusted your original trade it smashed down below your break even price. You now know that there is a very little chance that the stock would move back up above your original $90 strike put. For example, you only have two weeks to expiration and the stock would have to move a lot to get back up above $90 strike and such move is highly unlikely.
You have again a few steps you can choose:
1) roll the puts down and away in time (but this will need more margin and more time blocking your buying power)
2) accept assignment and buy the stock (this may lock your money in a stock for a very long time)
3) convert the puts into calls (you would have to go near the money, most likely at the money or in the money to make this adjustment)
4) or use an inverted strangle (this will cost you no time and no margin/buying power)
How do you invert a strangle? You buy back a worthless $110 call and sell a new in the money (ITM) call at e.g. $78 strike. For this adjustment you collect another large credit. You now have in the money puts and in the money calls.
Now I can see many investors freaking out. In the money puts and calls? Are you crazy?
No, I am not crazy. It is not an end of the world and there is plenty of ways how you can further work with those options. Let’s review what outcomes can happen and how to deal with them.
First, your inverted strangle must always stay in the money in order to finish this trade as a winner.
1) Two days before expiration
Let’s says the stock stopped its selloff but it is staying down low right in between your in the money strikes. If we let it expire we will see the following to happen:
Our puts and calls will be assigned against each other. At expiration, we will buy 100 shares and sell 100 shares at the same time and realize either a loss or gain from the difference.
In our example, we will see this:
$9,000 ($90 strike put assigned) – $7,800 ($78 strike call assigned) = $1,200 loss
We collected the following credits:
1) initial trade = $400
2) first adjustment = $100
3) inversion of the strangle = $300
Total = $800 credit
Then the result will be $1,200 – $800 = $400 loss
This result will vary based on the trade and situation. I had a trade against LULU for example where I ended with $313 loss, but I had a trade against WYNN where I had only $65 dollars loss.
2) Roll inverted strangle
Two days before expiration you roll the entire strangle into the next week or month. You must roll the entire in the money strangle. Doing this you will collect another credit, e.g. $2.50 or $250 dollars. That would lower your $400 loss down to $150. You can choose to take the loss and move on or roll again and end the trade with a small gain of $50 for example. Or roll once more and end with a $300 gain (note the numbers are examples only).
You can also choose rolling to a lower put strike to improve a chance of getting a better outcome.
3) What if the stock continues falling?
This may of course happen. You make an adjustment two weeks prior to expiration and two days to expiration the stock slides to $68 a share. Now your puts are deep in the money ($90 strike) and your calls ($78 strike) are now OTM. What to do?
In this case we will let our out of the money calls expire worthless and we will roll our deep in the money putsinto the next period and down. At the same time we will sell new in the money calls, e.g. at $60 strike. For this we will collect premium. If the premium is large enough to offset the spread width loss, then in the next expiration we will let both options offset each other. If the spread is too large, we will have to roll again and try to get the options legs closer together and for credit (when rolling into the next month or week we attempt to roll calls higher and puts lower but still keep them in the money.
3) What if the stock recovers and goes up?
This is a similar situation as described above. Now our puts will be OTM and our calls deep ITM. You take the same approach as described above but reversed.
3) What if I get assigned?
First of all, remember that 90% of all options expire worthless and are used by traders. Only about 10% is used by investors as a hedge when they are actually interested in buying or selling stocks via options. So your chance of getting early assigned is low. But it can happen. We are in the money after all.
What happens if your puts get assigned?
Buy the stock, start collecting dividends, start selling covered calls, and sell a new in the money puts. This is not a big deal as we like selling puts against dividend stocks, so buying the stock is a part of our strategy anyway.
What happens if your calls get assigned?
This would be unfortunate as we end up with a short stock position while the stock is rising in price (when the stock is declining, no one will exercise your calls early). In this situation we have two options to do:
1) immediately buy the stock back with a minor loss and immediately sell new naked put (or strangle) to offset the loss
2) keep your in the money put to assign at expiration (if it is still in the money and you are close to expiration)
This is pretty much all about defending puts (or calls) using inverted strangles. As I mentioned above, you can use this strategy with any option structure.
If you only have naked puts and they get into trouble, add a naked call to your trade and then work with it as a strangle.
If you have a jade lizard (which usually consists of a call spread and naked put) then use your short options only, treat the entire structure as a strangle, and let your long call expire worthless (or buy it back if it still has some value in it). There are ton of possibilities of what you can do with your trade.
Just keep enough money (buying power) in your account, stay calm, evaluate all your options before taking a step. If you are not sure what to do and expiration is approaching, then just roll your trade as is into the next period (month or week) to gain some time to make a decision. It is not difficult to do.
Good luck!
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It is a well-known fact that almost 80% of the options traders lose money and only the remaining 20% are successful. There are various reasons why options traders lose money including lack of market knowledge and the right trading skills. Also most of the traders tend to get emotional and do not follow a disciplined approach in making their investments because of which they suffer huge losses. The top 10 reasons for options traders to lose money are listed below,
This is a problem with many of the newbie investors who are too emotional and lack good understanding of the trading strategies. An inexperienced gambler tends to stack all his chips on a single play and it never works. Similarly if you put all your money on a single trade and you lose that trade, you will not be able to invest anymore. In some cases even experienced traders give up their risk tolerance and invest too much on a single trade, hoping to make up for their past losses. This is one of the important reasons for options traders to lose money as they become too greedy and don’t follow a proper trading strategy.
The next important reason for options traders to lose money is lack of market knowledge and not being aware of what are the various financial events happening currently. If you don’t follow the market news regularly and are not aware of the trends in price movement of the underlying assets, you will not be able to place successful trades. As you know the market is always volatile and keeps fluctuating based on the investor sentiment, financial events like announcement of interest rate hikes, jobs report, quarterly earnings report of various companies and various geo-political factors. You should be aware of all these events happening in the market and follow it very closely. If you don’t have the market knowledge and are not able to predict the price movement of your underlying asset, you will always lose money in options trading.
A good trader should always have a clear trading plan which is formulated with well-defined entry and exit criteria, position size and the amount of investment. If you trade without devising a proper plan, the results will always be random and there is a great chance you might lose most of your trades. Along with proper trading plan, choosing a reliable broker and trading platform is also very important. anyoption trading is one of the reliable trading platforms through which you can minimize your losses and maximize your returns as a binary options trader.
Some traders do not clearly understand the concept of risk/reward profile. The traders who suffer huge losses in the initial stages of their career will end up fearing risk and avoid investing in the right opportunities that may come up in later stage. In the same way people who witness success in the early stages tend to become greedy and start investing heavily leading to potentially huge losses. This is all due to lack of understanding of risks and rewards associated with options trading and lack of discipline.
It’s always good to have a mentor or coach who can help you make right decisions during difficult times. Many unsuccessful investors regret that they did not have the right mentor to guide them during tough situations and was not sure of their trading decisions. If you don’t have an experienced investor as your guide to warn you about unforeseen events or sudden twists in the market, you may end up losing more money in options trading.
Traders who don’t develop the right trading skills are the ones who place losing trades. If you want to make more money in options trading, you should be consistent and make lot of trades with smaller investments. If you invest only during specific time period and remain dormant during rest of the time, you might miss the right opportunities and eventually lose money.
You should always make use of technical indicators and signals to get better understanding of the market trends, whether you are an experienced or novice investor. Only people who make use of technical indicators and trading charts will be able to predict the price movements of assets more accurately. Investors who are ignorant of such tools have a greater probability of losing money.
Traders who don’t follow effective trading strategies always have a higher chance of losing money. There are various trading strategies like Hedging strategy, Trend trading strategy, MACD entry trading strategy, risk reversal strategy etc. Investors should know which trading strategy is suitable for them based on the type of trading and follow it effectively. Traders who fail to adopt a reliable trading strategy will end up in losses.
Human psychology plays an important role in trading decisions made by investors which is an important factor for success. Fear and Greed are two destructive emotions which can influence your trading decisions and result in failure. People who take trading decisions based on these emotions are the unsuccessful traders.
Some investors are greedy and make use of leveraging which is very risky and results in big losses. If you don’t follow stop-loss orders or limit your position size, you will not be able to restrict your losses. You should also learn to use hedging techniques to minimize your losses in each trade. Traders who fail to adopt these techniques are the ones who lose more money than others.
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In our group a trader asked me a question how many positions a trader can open when selling put or call options using margin.
Many investors and traders avoid trading on margin because they are afraid of it. Margin can be very helpful and boost your trading and results. It can also work against you. It can multiply your returns and it can ruin your account.
But with a proper money management, you can navigate your trading using margin and earn a lot more money.
In this post I will try to explain how margin works and what money management I use to make three times more money than if I traded cash secured.
Also this article applies to a Regulation T (or RegT) margin type and not portfolio margin.
I trade with TD Ameritrade and use TOS, so this post is tailored to TDA and TOS. If you use a different broker, you may want to verify terminology and requirements with your broker as these may differ.
I will not go into details describing this type of margin. You can google the term “Regulation T” and find tons of details.
In short, this type of margin is an extension of credit given to you by a broker. It is regulated by FED’s board and SEC. During crisis the board may increase margin requirements and thus decrease risk in the financial markets.
So if you get approved for margin trading, under RegT you will be allowed to trade 2:1 of your own money. It means that if you deposit $5,000 dollars of your own money then your broker will lend you the same amount and you will be able to trade $10,000 dollars in your account.
It is simple as that for stocks. But what about options?
Well, it differs.
When you look at your broker’s platform, in our case TOS you may see the following:
On the picture above you can see that the Options buying power is $5,256.92 and the Stock buying power is $10,513.84.
The stock buying power is 2:1 but the options buying power is 1:1. Does it mean you cannot trade options on margin?
You can, but it is not that straight forward. Let’s review first the differences between cash secured and margin trading and get to the detail of how margin works with options.
Here is a difference between trading on margin and cash secured trading.
Cash secured
When you sell one contract of a cash secured put (CSP) with $38 strike price, you will be required to have the entire amount of money in your account in case you get assigned. If you get assigned, you will be forced to buy 100 shares of the stock at $38 a share no matter what it trades in open market. So you will need $3,800 in your account ($38 strike x 1 contract x 100 shares).
Margin
When you sell the same contract of naked put with $38 strike price and you will be assigned, you will be required to have only about 30% of the full requirement of $3,800 dollars. Therefore you will only need $1,140 dollars ($3,800 x 0.30 = $1,140).
With $10,000 dollars stock buying power you will be able to open 8 contracts! ($10,000 / $1,090 = 8.77 rounded down to 8).
If you collect 0.97 per contract or $97 dollars, with cash secured trading you make $97 dollars; with margin trading you make $776 dollars. Eight times more!
From the trading platform picture above you could notice that the options buying power is the same as your original deposit. Are you then using margin? Yes, in some way you are.
To open the same contract as above you would need only about 16% to 20% of your options buying power. Here are the equations TDA uses to determine your margin requirement for options:
20% Rule
Example:
We sell 1 put contract with 38 strike price and the stock is trading at 40 a share and collect 0.97 credit
20% x [$38.00 x (1×100)] = $760
($38-$40) x 100 = -$200
$0.97 x 100 = $97
Buying Power Requirement: $657 (760 – 200 + 97 = 657 x 1 contract)
10% Rule
10% x [38 x (1×100)] = $380
$0.97 x 100 = $97
Buying Power Requirement: $477 (380 + 97) x 1 contract)
The broker then uses the equation which generates higher requirement. In this example, it will be the 20% rule and $657 margin requirement.
Most of the time the 20% rule will be used as in many cases it will generate a higher requirement. Also note that the calculations are estimates taken from the TDA options margin handbook and the actual results may differ. From my experience, the calculations above render higher numbers than what the broker will really use.
That is good for us though as it is safer for our trading.
Here is how our buying power will be changed if we use the above examples and we sell 1 put contract with 38 strike price and the stock is trading at 40 a share and collect 0.97 credit:
Original Options buying power: $5,256.92
Original Stock buying power: $10,513.84
Stock buying power requirements: $1,140 (approx. 30% of strike price x 30%)
Options buying power requirements: $657 (the higher requirement of the two equations)
New Options buying power: $4,599.92 ($5,256.92 – $657)
New Stock buying power: $9,373.84 ($10,513.84 – $1,140)
When trading in TOS the trading ticket will show you these numbers too, so you can verify what your buying power will be when you initiate a trade. Using the equations above in an Excel spreadsheet (or Google spreadsheet) you can watch your margin requirements during the entire life of your trade.
Note: our calculations returned a higher number than the broker’s one. Which is actually a good thing as in our money management strategy it will reduce our money available for trading more than if we use lower number and that is safer for us.
If it is so easy and you can make 8 times more money than if trading cash secured options why are some investors and traders afraid of using it? Why some do not touch margin even with a long stick?
Most of the time it is their ignorance and lack of management tailored for margin.
If, for example, you opened 8 contracts as we showed to you above to make $776 dollars instead of only $97 then I can 100% guarantee you that you will lose it and end up with a margin call.
Why? Because the margin requirements fluctuate.
If the stock goes against you, the margin requirements will be increasing, your buying power decreasing and once BP reaches zero, you have a margin call.
And once you have a margin call, you will be forced to add more money to your account or close your (now losing) positions to satisfy the call.
And that is what scares people the most.
But many people look at this margin call issue without understanding how the margin requirements react to the stock price.
If your initial margin requirement from our example above was $1,140 dollars, it will reach the cash secured level ($3,800) when the stock literally drops to zero. And how many times does this happen?
Understanding how many contracts a trader can open is crucial to keep your trading running and be safe.
I will show you now (finally, right?) my money management dealing with the margin to determine how many contracts I can open at one time and avoid margin call.
Note that these rules should be flexible and you can bend them only if they improve your position and increase your security in regards to margin. If you bend these rules and dig a bigger hole under yourself, you will be punished by Mr. Market. That I can guarantee you. I have been there and done that.
And I must admit, I still make that mistake and over trade. Even recently. And I got punished for that arrogance of bending the rules.
The rule is actually very simple.
50% of the Options BP rule
If you follow my blog, you know I always advocated for trading no more than 50% of your available buying power. I usually settle for a smaller number of 40% or 45% of the options BP.
I adjust this number based on:
Here are the rules for adjusting the percentage according to the above rules:
For simplicity, let’s call this variable as “trade allowance ratio” (TAR).
Typical margin requirement of traded equity
The second part of the equation is your highest margin requirement you are about to be trading. For example, you decide to trade puts for three underlying shares STX, X, and ADM. I wouldn’t recommend more underlying at the same time than three to max four as they may overwhelm you. Again, speaking from my own experience. One symbol going viciously against you may derail you and you start making mistakes even with the other two or three symbols.
Then you check what the margin requirements for the three symbols would be. You can either calculate it as described above or use your trading platform.
Also you need to check the requirement for the expiration period you plan on trading. The shorter term you trade the higher margin requirement will be (although the equations above do not include the time value in it, but if you check your broker and for example STX stock, you will see that 10 DTE needs $684.30 margin but 30 DTE only 534.30 margin).
Checking the three stocks and 10 DTE (which currently I trade) I see the following requirements:
STX = $684.30
X = $555.50
ADM = $839.50
Now I take the largest number to insert into my equation. In this case, it would be $839.50; you can round it up to $850. Review this number regularly to make sure you still use the correct one.
Let’s call this variable a “trade allowance margin” (TAM).
Used margin + available margin
It is easy to calculate your available number of contracts if you are just starting, but what to do if you already have opened trades? Well, add together used margin and available margin.
Where do you find used margin?
In TOS it is easy. Go to your TOS Monitor and on the bottom right corner you will find your used margin for each stock and total:
Now we have the total number from the platform and we also have all we need to calculate how many contracts to sell.
Equation
(Available BP + Used BP) * TAR / TAM = number of shares (rounded down)
If our available BP is $5,256, our used margin is $32,766, our TAR ratio set to 45% and TAM margin ratio $850 then we can trade 20 shares total at one time only:
(5256 + 32,766) * 0.45 / 850 = 20.12 or 20 contracts when rounded down.
The last step is to monitor how many contracts you have opened and compare it with your allowed number of contracts. If you are over, do not open any new contracts until you reduce your current exposure.
Always treat trade rolls as a new trade counted towards the entire number.
Check your used margin regularly. I do it every week and sometimes daily.
When you consume your number of allowed trades (contracts) never open a new trade (contract) until the old one closes.
Always check your total assignment value and compare it towards your stock margin (for example, if you have 5,000 account with 10,000 stock buying power and you calculate that you can open 2 contracts at 38 strike price, you will need $2,280 margin to get assigned (38 strike x 100 x 2 contracts x 0.30 = 2,280). With 10,000 stock margin you are more than safe.
This is how I do it. You may find other information out there and maybe it will be better than this. But this way worked for me well so far. The only problem I ever had in the past was when I broke these rules and traded more than allowed.
If you have any questions, you can post them below or join our Facebook group and ask question.
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Too many people have found themselves in a position where they think that they simply do not have enough money to properly plan for their retirement. Sure, some people have more money than others. If you fall into the category of people who are not confident in their ability to save or invest money for their future because of current financial stresses, it is time to pay attention. There are many ways in which you can get the cash you need so you can retire when you are ready. You just have to know what steps you need to take.
If you take a careful look at your utility bills, you might find that you are paying a little more money than you need to be paying. Sure, you have to pay for the utilities that you use, but you should shop around exercising your power to choose in deregulated states because you need that little bit of extra money more than the large companies need it. The CEO’s of those companies have their retirement plans worked out. You need to save wherever you can in order to figure out yours.
Start sorting through all of the rooms in your house for things that you no longer want or need. If you have not used it within the past year, it is unlikely that you are going to need it anytime in the near future so sell it. Also, go through your basement, attic, garage, and storage shed. You might not think that you have anything to sell, but once you dig in there and really start to de-clutter everything, you might be pleasantly surprised.
You can have an old-fashioned yard sale, post advertisements online, call in an auction house, or take everything to a large flea market. While you want to get the most money you can, you also do not want to keep your old stuff since you do not have a need for it. Therefore, if you have to negotiate with the price some – go ahead and pocket that cash. After all, it was money that you did not have yesterday and it is money that you can invest in your future retirement.
Are you an expert when it comes to fishing? Maybe you could teach someone how to fish and let them in on some of your trade secrets. Maybe you make excellent creations with your sewing machine. You could create some unique clothing and sell those or offer to coach others on how to do the same things you can do with some fabric and thread.
Now that you have had some time to start thinking about some of the various ways you can make some money, you need to consider how to invest it. You could simply store it away in a savings or retirement account. That’s a start, but since you will probably have the need to make your money make more money for you, you will want to invest it in something such as stocks or real estate.
If you feel as though you might need a little more guidance, you will want to find a specialist who can help you craft a detailed retirement savings plan. When you follow his or her advice, as well as continuing to look for ways to make more money, you should have no problem getting yourself into a financially stable position. This way, when you are finally ready to retire, you will be able to do so without having to worry about any struggles that you might face.
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Here we are again, the end of a month! I feel like I have no time and once I get the time and sit down to rest a bit, it is the end of month.
Time to report my options trading income!
April 2017 was very successful month.
I made a lot of money while eliminating losing trades! That was the greatest achievement of the last few months and April 2017 excelled in it.
I could close many losing trades (my skeletons in the closet) and yet come out with big income.
My plan for April 2017 was to make $1,837.56 dollars of income.
I am happy to announce that we were able to make $3,716.77 dollars of option income in April 2017.
Over time since I learned trading options I went from trading spreads, single naked puts, later added naked calls and landed on trading strangles. Many people are afraid trading strangles. They do not know how to protect themselves when having naked calls trades. I was afraid too until I found out that it is not as dangerous as others say.
I am not saying that there is no risk, but if you know how to handle the risk, you will be able to navigate through strangles with no fear.
Over time I developed my own rules and strategy. You can review it in this section.
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Once you learn and get ready, start trading live account and earn monthly income similar to ours. And we will be happy to assist you with that.
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As stated above our trading in April was really great and we made $3,716.77 dollars.
Below you can see all data and progress in our trading account:
Month-to-moth trading results
(The red dots on the chart indicate income estimate, blue bars actual earnings.)
| In April 2017 we made: | 44 trades |
| Total trades in 2017: | 180 trades |
| April 2017 options trading income: | $3,716.77 (108.48%) |
| 2017 portfolio Net-Liq (net)*: | $4,256.13 (24.22%) |
| 2017 portfolio Net-Liq (gross)*: | $24,756.13 (6.67%) |
| 2017 portfolio Cash Value (net)*: | $29,494.13 (4.80%) |
| 2017 portfolio Cash Value (gross)*: | $49,994.13 (2.78%) |
| 2017 portfolio Equity (net)*: | $33,707.13 (1.13%) |
| 2017 portfolio Equity (gross)*: | $54,207.13 (0.70%) |
| 2017 Liability/Debt: | $20,500.00 (0.00%) |
| 2017 overall trading account result: | 32.67% |
* The numbers marked as “net” and “gross” are results with loan (liability) included (gross) or excluded (net).
We are presenting you our month-to-month business performance review:
April 2017 was a great month.
It could have been even better and bigger income if I had no bad trades which I decided to close rather than keep rolling them.
Our account grew well during last month and we even saw our netliq growth again. We saw our netliq growing all the way up to $27,000 +/- until we got hit by X and STX earnings report which sent the stocks down (X by 25% and STX by 8%).
I do not think it was a justified drop (its depth) and I think these stocks will do well again. Also at the end of the month we were assigned to STX stock @ $47.50 a share. Not great, but I am OK holding this stock for some time and be paid the dividend while holding and selling covered calls. The assignment was a result of my mistake. I advocate to trade deep in the money having them far away from expiration (normally we trade weeklys, but when an option gets deep in the money, go more r=than 30 DTE to prevent early assignment). I neglected to do this and let deep in the money put option with only 13 DTE sit instead of rolling it. I got assigned.
I am also happy to announce that our company account (or our blog reporting our trading results) is listed on a blog Easy Dividend run by Christopher (Chri) from Austria, a valuable member of our Facebook trading group, who lists dividend and options income achievement of a small community of traders and investors.
Every month he publishes results according to income of each member.
Our trading revenue in March 2017 resulted in #6 position among the community traders/investors.
You can review Revenue in March 2017 – Community Edition results here.
The stock market seems to become a range bound and oscilating between $2,340 and $2,400:
On one hand this is definitely an improvement from last month when the market broke up from a descending triangle and we moved higher again.
But I have one fear and that is that investors are likely realizing that Trump will not deliver his promises and that will have a negative impact on the stock market.
If we break up above resistance of the channel, we will see new highs, but if we reverse from here and continue down and even break the support, we may see correction.
Also note, that if we stay in this channel long enough, it will become a consolidation channel for another leg up.
I do not predict the market though, so do not ask me what happens. I do not know it and I do not care.
As a dividend investor I will continue investing into dividend growth stocks and as an option trader I trade strategies where it doesn’t matter which direction the market or stocks go.
What do you think about options trading? What do you think about today’s market amid the weak GDP data? Will Trump be able to positively affect the stock market?
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April dividend and options trading in our ROTH IRA account has been very successful. From the dividend income perspective it was the best month so far.
Both incomes also helped the account balance growth although the stock market shows a lot of bearishness and fear. However, last few days in the markets boosted the value of the account up.
This month, we received $91.49 dollars in dividends.
Our options income also exceeded previous months and by making $131.00 dollars premium we exceeded our entire last year options income. Last year, we made $341.00 dollars, this years we already made $342.00 in premiums.
Our average annual options income is 2.67%.
Our annual dividend income increased to $1,074.87 from previous month of $1,068.55 (0.59% increase MoM). This is a great increase compared to $883.48 annual dividend income from 2016 (21.66% increase YoY).
Here is my investing & trading strategy I use in my IRA account. If you want to read about this strategy
As I mentioned above our dividend income was 21.66% better than last year. This month we made $91.49 in dividends and all dividends were reinvested back to the companies which generated them.
Here are some numbers:
Dividend Income = $91.49 (account value = $22,479.74 +1.78%)
The account is up 10.12% for the year.
Monthly dividend Income:
In February, we purchased 100 shares of Energy Transfer Equity, L.P. (ETE) using triple play strategy which ended this month successfully with 14.18% overall profit.
After the trade ended, we started selling new cash secured puts to get back in and buy shares back. At the end of April, we were assigned to ETE again and bought 100 shares back. We expect in May a new dividend capture and income from covered calls.
Since we had some spared cash in our account we also decided to add a few Iron Condor trades.
We added an Iron Condor using TECK stock as underlying. The trade is set to expire in May. If it won’t we will roll it.
Another trade we decided to open was a covered call against AGNC stock. This trade is set to expire in June, so there is a plenty of time. We will play AGNC stock the same way as with ETE. Basically this will be a dividend capture trade. If the stock gets assigned and called away, we will immediately sell in the money puts to buy back the shares.
Last trade we have is Iron Condor using STX underlying and we will trade it the same way as TECK above. Recently, after this month earnings STX dropped significantly down (8% drop) and our short calls closed for 0.05 debit. We still hold the put spread and although the stock dropped, it still is safely out of the money.
My dividend holdings:
As I mentioned above we trade options in our ROTH IRA account to generate income which could be re-invested into dividend growth stocks.
We are in an “accumulation phase” when we deposit our sparse contributions of $50.00 dollars monthly and keep that cash in the account to trade cash secured options with it. This way we generate income from the options.
As of today, we only have approx. $3,200.33 dollars in ROTH IRA available for options trading (4.41% increase). The goal in 2017 is to reach $6,000 available dollars for options trading.
With that money available for trading, in April 2017, we generated $131.00 dollars income from options 4.09% return on invested capital.
The stock market seems to become a range bound and oscilating between $2,340 and $2,400:
On one hand this is definitely an improvement from last month when the market broke up from a descending triangle and we moved higher again.
But I have one fear and that is that investors are likely realizing that Trump will not deliver his promises and that will have a negative impact on the stock market.
If we break up above resistance of the channel, we will see new highs, but if we reverse from here and continue down and even break the support, we may see correction.
Also note, that if we stay in this channel long enough, it will become a consolidation channel for another leg up.
I do not predict the market though, so do not ask me what happens. I do not know it and I do not care.
As a dividend investor I will continue investing into dividend growth stocks and as an option trader I trade strategies where it doesn’t matter which direction the market or stocks go.
What was your dividend income this month? What do you think about today’s market amid the weak GDP data? Will Trump be able to positively affect the stock market?
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This post was originally published on March 13, 2017
As soon as I posted my article about flaws of 401k and why I stopped contributing to it I had a reader telling me that I forgot about 3% – 4% employer match which is free money.
It is a good point from him and although I replied to him in the comments, I decided to re-post my response as a separate post.
Originally, I didn’t include the match because I consider it insignificant and with no benefits to anyone to sway one’s mind and invest into the 401k “ignorance” plan.
Many used the employer match card as the most significant benefit and that you shouldn’t leave the free money on the table.
But in fact, the free money is just luring you into a trap from which there will be no escape. There will be no escape for the next 20, 25, 30, or 35 years (unless you change job and convert the 401k into a self directed plan such as IRA or ROTH IRA). But even after that period of time, at the very end, when you start withdrawing money, you will be punished for your ignorance and pay dearly for that “free money”.
The question is, is it really free money? And what are you giving up to get the free money? Is it worth it?
In my opinion, the answer is a resolute NO.
Let’s take a look at a few flaws of the free money.
Let’s establish some base point before we proceed.
In my previous post Why I stopped contributing to 401k I wrote that in order to meet the savings rate of what the financial industry is telling us to have to retire comfortably a young person, fresh from college at 27 years of age and gross salary of $55,000 per year must be saving almost 19% of his salary to meet the goal.
That means, he or she would have to save $800 every month or $400 bi-weekly.
On top of that, your employer will provide you with 4% match of free money.
That “free money” will be ~ $84 bi-weekly.
($55,000 / 0.04 / 52 = $42 weekly match * 2 = $84 bi-weekly match)
Is it still all worth $84 every two weeks to offset all negatives of the 401k when participating in the defined contribution plan?
Let’s take a look at some numbers then.
The “free money” may look nice when you are just starting your 401k, but once you save and invest 30 thousand dollars or more, this “free money” will never be able to offset benefits of your own investing or trading (for example dividends).
Once you will be able to buy at least 1000 shares of dividend growth stocks, with initial 3% dividend yield, dividend growth 3%, then after 10 years your YOC will be almost 6% and your dividend income $158/mo which matches the “free money”.
Look at the table below for the growth of your account and dividend income if you reinvest the dividends:
| Year | Income | Yield on Cost | Account Value |
| (1) 2017 | $900 | 3.00% | $30,900.00 |
| (2) 2018 | $954.81 | 3.18% | $31,854.81 |
| (3) 2019 | $1,013.84 | 3.38% | $32,868.65 |
| (4) 2020 | $1,077.49 | 3.59% | $33,946.15 |
| (5) 2021 | $1,146.20 | 3.82% | $35,092.35 |
| (6) 2022 | $1,220.45 | 4.07% | $36,312.80 |
| (7) 2023 | $1,300.78 | 4.34% | $37,613.58 |
| (8) 2024 | $1,387.80 | 4.63% | $39,001.38 |
| (9) 2025 | $1,482.17 | 4.94% | $40,483.55 |
| (10) 2026 | $1,584.66 | 5.28% | $42,068.21 |
Data used for calculations:
Starting yield: 3%
Dividend growth: 3%
Shares held: 1,000
Cost per share: $30.00
Years to hold: 10
If you buy 1000 shares and reinvest your dividends, your account will grow to $42,068.21 just on the dividends (add to it capital gains!) which is 4.02% dividend annual gain. Your yield on cost will increase from 3% to 5.28%.
Your annual dividend income will almost match the “free money”. And this example doesn’t take into account your continued contributions which will make your account growing even faster.
Imagine what I can do with the money when trading options and making 10% monthly (which is what I currently make)!
And here it is what your account would look like 30 years later:
| Year | Income | Yield on Cost | Account Value |
| (1) 2017 | $900 | 3.00% | $30,900.00 |
| (2) 2018 | $954.81 | 3.18% | $31,854.81 |
| (3) 2019 | $1,013.84 | 3.38% | $32,868.65 |
| (4) 2020 | $1,077.49 | 3.59% | $33,946.15 |
| (5) 2021 | $1,146.20 | 3.82% | $35,092.35 |
| (6) 2022 | $1,220.45 | 4.07% | $36,312.80 |
| (7) 2023 | $1,300.78 | 4.34% | $37,613.58 |
| (8) 2024 | $1,387.80 | 4.63% | $39,001.38 |
| (9) 2025 | $1,482.17 | 4.94% | $40,483.55 |
| (10) 2026 | $1584.66 | 5.28% | $42,068.21 |
| (11) 2027 | $1,696.08 | 5.65% | $43,764.29 |
| (12) 2028 | $1,817.40 | 6.06% | $45,581.69 |
| (13) 2029 | $1,949.66 | 6.50% | $47,531.35 |
| (14) 2030 | $2,094.04 | 6.98% | $49,625.39 |
| (15) 2031 | $2,251.89 | 7.51% | $51,877.28 |
| (16) 2032 | $2,424.69 | 8.08% | $54,301.97 |
| (17) 2033 | $2,614.16 | 8.71% | $56,916.13 |
| (18) 2034 | $2,822.21 | 9.41% | $59,738.34 |
| (19) 2035 | $3,051.02 | 10.17% | $62,789.36 |
| (20) 2036 | $3,303.05 | 11.01% | $66,092.40 |
| (21) 2037 | $3,581.11 | 11.94% | $69,673.51 |
| (22) 2038 | $3,888.40 | 12.96% | $73,561.91 |
| (23) 2039 | $4,228.57 | 14.10% | $77,790.47 |
| (24) 2040 | $4,605.79 | 15.35% | $82,396.26 |
| (25) 2041 | $5,024.84 | 16.75% | $87,421.10 |
| (26) 2042 | $5,491.21 | 18.30% | $92,912.31 |
| (27) 2043 | $6,011.22 | 20.04% | $98,923.53 |
| (28) 2044 | $6,592.13 | 21.97% | $105,515.66 |
| (29) 2045 | $7,242.37 | 24.14% | $112,758.03 |
| (30) 2046 | $7,971.65 | 26.57% | $120,729.68 |
Again, the calculations above do not take into account additional contributions. It only shows compounding of reinvested dividends on a one time investment of $30,000 dollars invested in a high quality dividend growth stock and quite conservative yield and dividend growth.
If you add additional contributions, mix of other dividend stock (so your initial yield would average closer to 5% than 3%), and capital gains of your stocks, then the numbers above will be even higher.
Below is an extrapolation of my own account. My account is yielding 5% and dividend growth rate is 9.44%.
My portfolio in the next 25 years:
(my retirement eligibility; quarterly dividend compounding)
My dividend portfolio, which is currently worth $21,000 dollars +/- and yields 5% at 9% dividend growth is basically set to provide me with enough income in the future.
Even if I contribute zero dollars from now on and just maintain the existing stocks in the portfolio I will end up with $906,996.63 dollars annual income (in today’s dollars) from dividends alone.
Do you still think it is worth investing into 401k because of the “free money”? Will your 401k be ever able to provide you dividend income matching that one of my existing portfolio?
Just for comparison, my 401k plan, currently worth $80,000.00 made $1,438.75 dividend income. My own ROTH IRA worth $21,000.00 brought in $883.48 in dividends.
My 401k plan, with all the free money, under-performed income of my ROTH IRA by staggering 42%!
Do you still believe, it is worth it to lock your money for the next 30 years in a lousy 401k because of free money?
If you still think it is worth to invest into 401k because of free money, let’s review what’s awaiting you at the end of the savings cycle when you reach the retirement phase and start withdrawing money.
If we compare our own self-built dividend growth portfolio vs. 401k plan withdrawals rules what it would look like?
Taxes and death.
Dividend growth portfolio (in IRA, or taxable account)
In my own dividend portfolio I will be withdrawing dividends ($75,583 monthly in today’s dollars, $906,996.63 annual dividends income; see table above).
I will not be required to sell a single stock in my portfolio. Thus if in IRA or taxable account, I will not be required to pay any capital gain taxes. If in a taxable account, will only pay 15% tax on qualified dividends. With my ROTH IRA, I will pay nothing.
If we happen to be in the middle of the crisis or panic selling you do not need to worry about the value of your portfolio. All you will be looking at is your never ending, intact, dividend income. Your income will still be safe (you just need to watch for the companies to keep paying dividends. Most of the companies in my portfolio raised dividends during 2008 crisis!
401k plan
With 401k plan, in order to get income or withdraw cash from the plan, you will have to sell your shares of mutual funds. The mutual funds do not generate cash which would be readily available for withdrawal. Any distribution or dividends are immediately re-invested and there is no option to stop this reinvestment.
You will have to sell.
And what if there will be a financial crisis and you will have to sell when everybody is panicking?
And even if you will be selling on top of the bull market, your withdrawal will be taxed as an ordinary income. And good luck getting below 25% bracket with no exemptions available.
Are you still convinced it is worth the “free money” of $84 bi-weekly?
For this initial insignificant boost of “free money” I am not going to block my savings for 30 or more years when I can achieve more than that as my calculations above indicate.
Everybody can do the same! Investing into dividend growth stocks is not difficult and not a rocket science. As I said before, if you can buy bread in a grocery store, you can buy dividend stocks. It is that simple.
Do not let the financial industry involved in providing and managing 401k plans robbing you your own money.
For example, from 1995 to 2008 the Fidelity Magellan Fund charged its clients $4.8 billion of dollars in fees! That’s $369 million dollars every year of YOUR money! The entire industry fee revenue was $88 billion dollars in 2015, up 76% from 10 years ago. (Source: “2015 Fee Study: Investors are Driving Expense Ratios Down”, Morningstar, 2015).
Let me ask you a question. What does it take to manage a mutual fund which would cost $4.8 billion dollars which you cannot do on your own for yourself?
All my calculations above were based on a one time investment of 1000 shares at $36 a share, initial dividend yield 3%, and dividend growth 3%.
I acknowledge that in the first few years the investing dynamic may not be any better than 401k or as shown in my calculations since a young person starting his/her savings will not be able to come up with $36,000 dollars immediately (which is a case for mutual funds too), so additional “free money” contribution match may be helpful.
However, at a savings rate of $800 monthly, it would only take 4 years to save enough money when the income from dividends greatly exceeds the mediocre benefits of 401k and free money addition.
Hope this helps to show flaws of luring people into 401k by providing “free money” which actually are not free at all.
In the end, you will pay for that free money dearly by lost opportunity and fees!
Any questions?
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I am also placing a new Iron Condor trade in my ROTH IRA account using 
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