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⚡What Are Options? The Good, The Bad, and The Profitable! | Karsten Jeske & Brad Finn 🤔
894 Plays20 days ago
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🪙 Karsten Jeske and Brad Finn reveal the essentials of Options Trading and how it can be a game-changer in your journey to Financial Independence.
They break down the basics, demystify the risks, and share powerful strategies like covered calls and cash-secured puts to help you make informed decisions. 📈
🎨 This conversation explores why Options Trading can be both profitable and risky—with practical insights on how it can supplement your investment portfolio and enhance retirement income.
In this episode, we discuss:
1️⃣ What is Options Trading? Karsten and Brad explain the fundamentals and how options differ from other investments.
2️⃣ Call vs. Put Options: Understanding the types of options and when to use each.
3️⃣ Covered Calls and Cash-Secured Puts: How these strategies can generate income and protect your portfolio.
4️⃣ Risks and Rewards of Options Trading: Myths about options trading and how to manage potential downsides.
5️⃣ Options and Financial Independence: How options trading can play a role in achieving long-term financial goals.
6️⃣ Getting Started with Options Trading: Practical steps to begin trading, whether for income or retirement.
🔗 Karsten Jeske's Links:
💼 Karsten Jeske's Options Page
🔗 Brad Finn's Links:
🔗 David's Links:
🍏 Forget About Money on Apple Podcast
🎧 Forget About Money on Spotify
📜 Karsten Jeske & Brad Finn Quotes:
💡 "Options trading isn’t one-size-fits-all—it’s about finding the right strategy for your risk profile." — Karsten Jeske
🔗 "Covered calls are like collecting rent on your stocks—steady income with lower risk." — Brad Finn
#optionstrading #financialindependence #coveredcalls #cashsecuredputs #optionsstrategies #retirementincome
🎧 Listen & Subscribe: Hit subscribe for more strategies on building wealth and achieving financial independence. Tap the bell icon 🔔 to stay updated!
Disclaimer: This episode is for entertainment and educational purposes only and does not constitute financial or legal advice. Always consult with a professional regarding your specific financial situation.
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Transcript
Introduction to Options Trading
00:00:00
Speaker
What is options trading? We break down the basics, we tackle the risks, and we share why this strategy may boost your retirement portfolio. Here we go.
00:00:12
Speaker
Welcome to the Forget About Money podcast, where we encourage you to take action today so that you can focus on what matters most to you. Today's guests are Karsten Jeska and Brad Finn. Karsten is known as Big Earn and is widely considered the expert on sequence of returns risk. And Brad is an entrepreneur, financial independence enthusiast, and ultra runner. Welcome, gentlemen.
00:00:36
Speaker
thanks for Hey David, how are you, bud? Thanks. Yeah, thank you for being here.
Basics and Strategies of Options Trading
00:00:39
Speaker
Karsten and Brad, you are both experienced options traders and you're going to share your insights on whether options trading is worth pursuing, ah focusing on a beginner friendly explanation, hopefully for my sake. Brad, let's do a quick introductions to options trading. Can you start simply by explaining in simple terms what options trading is and how it works?
00:01:02
Speaker
To be honest, they even know. There are simple approaches, but I think I'll just lead with one of the most common misconceptions about options is that it is one particular style of investing. And because it's only in quote one them one style, it only fits one person, it only has one risk tolerance. And I just i really want to start with like options are It's a vague term, trading options. There are so many different ways to use options inside your portfolio. But with that said, i like my personally, my options trading strategy of choice is to sell options where I'm using shares that I already own as collateral to collect extra money by trading these contracts these options contracts.
00:01:50
Speaker
or I'm using cash to write options and collect money. It's all about collecting premium from my side, the seller. The other side, the buyers, they're looking to use options as a high leveraged vehicle.
00:02:06
Speaker
to maybe make some more money as opposed to just owning shares where shares go up by a penny or down by a penny. There's so many other factors which kind of makes options intimidating, which allows that value of that options contract to sometimes go up very quickly and down very quickly as well. The term options trading is very vague. It's like saying, I like sports.
00:02:28
Speaker
you know There's so many different ways you can look at that particular option and many different ways you can trade it, as you mentioned, depending on your own risk tolerance. Okay. You said a lot of words, even I wasn't so sure I could follow. In extreme layman's term, Carson, when you when somebody thinks of options, what's the most basic way someone can participate in options?
Understanding Call and Put Options
00:02:49
Speaker
Right. So as Brad said, there are many different flavors and obviously because for every option buyer, there has to be a seller or for every option seller, there has to be a buyer, right? So the the strategy is obviously very different, right? So it's basically the options market is think of that as people with different preferences and and intentions get together and the buyer has certain intentions and preferences and the seller has.
00:03:18
Speaker
I think Brad and I, we probably we have one thing in common, we like to mostly sell options. So that we have in common. Now, the way we execute that in practice every day is probably going to be very different, and which is good. So you have potentially the whole spectrum of different option sellers on this channel.
00:03:38
Speaker
and So as as Brad already said, there are different types of options, different different strategies that people pursue with them. And so um um ah my ah explanation to somebody who is a novice in options is that ah so the buyer of a put option is somebody who wants to ensure the downside. right So it might be because you have a portfolio of stocks and you want to have insurance in case that portfolio drops below a certain point.
00:04:05
Speaker
Think of that almost as homeowners insurance right so you have almost a deductible right so you you might not ensure. Any loss you might loss you might ensure a loss beyond a certain percentage target right so you might say yeah okay i'm willing to take a of five or ten percent loss in my portfolio but after that i want to have insurance against further losses.
00:04:24
Speaker
So almost like ensuring some property with the deductible, right? So the the drop up to the strike price would be the deductible and after that the insurance company covers it for you. Or a call option is something where the buyer of a call option is wildly optimistic about a particular stock and instead of investing in the stock directly,
00:04:47
Speaker
Buy the call option and the call option might be very far out of the money so the strike price where you start earning money. Is far above today's price and you might be able to scoop up this call option for very little money so with a very small wager you may you may lose this wager and well then then then then that loss is all you have.
00:05:05
Speaker
But then if the stock price goes above the strike price, that's when you start making actually getting anything back. If they actually the stock price has to go above the strike price plus the option premium for you to even break even, sometimes the price of the option might be very small. So the the there' the the the the movement up to the strike plus the premium, after that you start making money, but then you make money one for one and you might have some fantastic returns beyond that. I mean, we're talking about not not percent, we potentially could be talking about hundreds of percents of return on that very small wager. but Well, like actually most of the time you lose the wager and it's so almost think of that as a lottery ticket. So think of call option buyers as lottery ticket buyers and put option buyers as somebody who wants to pursue something like an insurance
00:05:56
Speaker
against the losses and so ah history has told us that most of the time buyers of these options make money that will lose money on average. So the the person who is desperate to buy insurance is overpaying for this downside insurance and the person who buys lottery tickets well we all know so but all know what happens to buyers of lottery tickets on average you lose money even though occasionally there are some fantastic returns and very big prices involved, but to ah in order to to achieve this very big payoff, so you potentially lose money on average, so which educates me to basically be on the other side of these types of actors in financial markets. And this is why I'm selling options, because on average, I am making more money than I'm losing.
00:06:49
Speaker
Okay, thank you. I ah like how you've kind of characterized put options as insurance and call options as lottery tickets that's or at least the hope for the gain, right? so So taking a step back and I'm going to try to So I'm very lucky to have you here because y'all were both on this podcast before and you both expressed during our conversations after or before even during that you were into
Mechanics of Options Trading
00:07:17
Speaker
options. So that's why we're having this conversation now. That's why you're back here. I know very little about options. I know a lot about general money stuff, but not a lot about options. So I'm going to try to define it in a way that makes sense to me. And you can tell me where I might be wrong or where I might be getting at least some of it right.
00:07:33
Speaker
Awesome. So traditionally when you're purchasing stocks, you're actually buying a piece of that company. And that's what we all think of. Like we're in mutual funds that, you know, you're doing it like via third party, but, or you can buy individual stocks. That's buying ownership in a company. Whereas the options are you're buying a contract, thinking that you're buying a contract in order to buy a share of that company at a particular price.
00:08:00
Speaker
And then, and you can position yourself in such a way to whether if it goes up, you can make money or if it goes down, you can make money. Is that correct? Yeah. Let me, I'm going to actually start with a little bit of vocabulary because it's going to be vocabulary that we're using a lot. Okay. And you did say something that's really correct.
00:08:17
Speaker
When we trade on the open market, we are buying shares. When we trade options, we are not trading shares per se. We are trading contracts which represent 100 shares. And there's two major parts of this contract. There's the strike price and there's the expiration price.
00:08:35
Speaker
and If you think about the words call and put from the buyer standpoint a buyer wants to call away a hundred shares that contract is worth a hundred shares the buyer wants to call away those hundred shares and buy them at a lower price than they currently are and they make the difference.
00:08:52
Speaker
That's what the strike price is. So say your strike price is $100 and the share price goes up to $120. They are going to make the difference, give or take, just for back of the envelope math. They're going to make that difference.
00:09:07
Speaker
Buy the expiration date that they set where on the other side the put side is i want to put a hundred shares into the seller's hands. Add a price that's not favorable for them and once again i'm gonna make the difference on that so what the auction is between the buyers and the sellers.
00:09:27
Speaker
is how is that contract price going to change? And the buyer is looking to profit on the one side and the seller profits if it never makes it there. So if you think about those two people who want that, then the insurance and the lotto is is a great example. So you say, okay, I want the insurance. Well, the seller is kind of saying it's never going to go that low. So I don't need to worry about that.
00:09:53
Speaker
But to take that risk, the buyer has to pay them, right? When you buy an option, you have to, or when you buy anything, you have to pay money. Well, who are you paying? You're paying the seller of the option, the premium price for that contract. And then we're going to see what the value of that contract is going to do. And it's going to do one of two things, really. It is going to exceed that strike price. And we call that in the money. And now the buyer is in control.
00:10:17
Speaker
Or it is going to stay on the other side of that strike price and be out of the money and the seller is now going to be in control and then an expiration. It's worthless. So it's all about managing as the seller. Do we think the buyer is being a little bit risky here? And as the buyer, it's all about managing. Am I being too risky, too greedy?
00:10:39
Speaker
And the way that the buyer is risky and greedy is by when they choose their expiration, the further they're going to go out in in time and expiration, the more time they have for things to go their way. Which if you want to buy, because i I buy too, I like selling, but I also buy. But when I buy, the way that I lower my risk is that I push my expiration way, way out in the future.
00:11:03
Speaker
because what that's going to do is allow time to be on my side where the seller, when I sell options, I'm looking for expirations that are really, really near and dear because I don't want time to help the buyer. I want that to expire worthless. That contract goes void and I get to keep all the money he paid me to open up the contract. So there's two major things, the expiration,
00:11:26
Speaker
which is going to raise the value of the contract or not, and then the strike price. How close is it right now to the share price? That's when it's going to be the most money, and then we can push it farther away from the current price or bring it really, really close at the money to that price.
00:11:42
Speaker
and Okay, Karsten. Yeah, so but i I agree with everything. So okay we should we should say, so options are derivatives, right? So derivatives means that these are not the actual underlying when it it takes two to tango, it takes one buyer, one seller, and we actually create an options contract out of nothing and consider that as basically a side bet on the underlying. And by the way, the underlying could be anything. It could be a specific stock, it could be Google, Amazon,
00:12:09
Speaker
It can be the overall index, the S and&P 500 index, the SPX options on that. they are There are options on ETFs that track the S and&P 500 index. Actually, the SPY is the most liquid, probably S and&P 500 index fund ETF. And then the options on the SPY are then also quite liquid. There are also options on futures contracts. so What is your future is already derivatives and then now you have derivatives on the derivative which is future options which i used to do very early on because they have a little bit lower. Multiplier they have only a fifty x multiplier where is the s spx options have a hundred x multiplier so with bigger account size now i can do the hundred x army.
00:12:51
Speaker
And then there are also options on on everything else, on everything else that pretty much trades on ah commodities, any kind of commodities, whether cows, pigs, cattle, halves, wheat, corn, oil, gold. And then also, so for example, the VIX index, right? That's ah that's a volatility index on the S and&P 500
Real-world Options Trading Examples
00:13:12
Speaker
that's traded as a futures. And then there are again options on that VIX index. So everything that somehow somewhere trades can have an options market. and So I personally trade only the s SPX index options, but so you have basically an entire ocean of potential underlyings and option contracts to choose from. Yeah, if i can give I'll give you a real world example, which also might help, David. We'll use a very popular stock like Apple. Now, if I want to sell an options contract, a call options contract on Apple, first requirement is I need 100 shares of that. so
00:13:50
Speaker
The barrier to entry on some of these can be pretty high. For example, Apple right now trading for $221, you have a $22,000 position in Apple already just to be able to do this. And I'm going to use those 100 shares as my collateral for this call option. Remember, the buyer who I'm going to buy the contract from wants to call those 100 shares away from me. Those are now mine.
00:14:15
Speaker
and my job is to protect those 100 shares. So what I might do is I say, okay, right now Apple is trading for 221. By Friday, I don't think it is going to be at 225. So I'm going to go onto the options market and I'm going to look for buyers buy that are trying to buy call options for 225.
00:14:38
Speaker
I see one, I say, great, I'll sell you an options contract right now. You have to give me, the buyer has to give me $225, whatever that number could be, could be $500. The premiums for the the amount and value for that contract changes. So the buyer says, it's going to be more than 225. I'm going to win this bet by Friday. And I say, it's not going to win. Now, during that time between now and Friday, we're going to watch the share price.
00:15:06
Speaker
And if on Friday, it's below 225, I keep all the money that he bought that contract from me. that's why we're That's why we're selling options, to collect that premium from buyers. Now, if the price goes over 225 by Friday, he was right. And he gets all those shares called away from me and I lose my shares. Now, there's there's other things that we can do, but that's very that's the very basics of it.
00:15:32
Speaker
The buyer is selling, hey, by Friday, the share price is going to be at this strike. And the seller is saying, nope. And if the buyer is right, he gets a hundred shares at a lower price than they're currently worth. right Because he made the contract for $225. So if it goes up to $230, he just bought a hundred shares for $225. Now he can sell them back to the open market for $230. He just made $500 extra dollars on that contract.
00:15:57
Speaker
where I wanted to stay low and I want to keep my 100 shares. On the flip side, let's say I did not own any Apple whatsoever, but I thought the price, I think the fair market value of Apple is $200. So as a seller, I'm going to put $20,000 up in collateral and find a buyer that will buy a contract from me for $200. Now, if Apple goes down to 200, I get those shares for 200 bucks.
00:16:27
Speaker
If they don't, I keep all of the premium and I rinse and re repeat. And I think that's where you're going to see very, very wealthy people that are doing this. They are selling put options because they see the market is very, very overvalued. So they're finding a fair market value price.
00:16:44
Speaker
And they are writing puts. When we say writing, that just means selling. They are selling put options at a much lower price than the shares are currently trading for. And then as the price stays high, they just keep collecting premium and keep collecting premium. And like we're dealing with 100 shares at a time. But these big, wealthy people that have hundreds and thousands of dollars of shares they're making hundreds and thousands of dollars just with their cash as collateral against these put options, which is the really the beauty. I get to choose all my risk. I either get to choose the strike price that I want to buy the 100 shares at, or I get to choose the strike price that I'm willing to sell my 100 shares and have them called away.
00:17:29
Speaker
So when we sell options, in my opinion, we really, really devalue or de-risk ourselves because we get to choose the terms of the contract that those buyers are going to make against us. But those terms are still based on what you think will or won't happen.
00:17:45
Speaker
Correct. So it's still some level of, I mean, nobody nobody has a crystal ball. So based on this factor, or that factor, the other factor, or the combination of them, you make a best guess and then put yourself in a position t to win at this push-pull exchange.
00:18:00
Speaker
yeah and and and People will use that as a way to criticize options, but that's true for any investing. right When you buy 100 shares of Apple, you're not buying them with the hopes that it goes down or the knowledge that it's going to go up. right We buy with whatever, whether it's technical analysis, it's a hunch, our buddy at work told us so.
00:18:21
Speaker
right We're making all these investments for whatever reasons we are, and it's really just a different way to take on risk in the market. yeah Thanks. we We talked about put options, call options, strike price, and a couple other terminologies. In my very elementary research, I came across a few more words that I don't know necessarily what they mean, and Carson, if you can help me, I appreciate it. Covered calls and cash-secured puts. What are those?
00:18:49
Speaker
So those are exactly the two, probably most basic strategies that Brad just explained. So cover call is, so you sell a call option on a position you already have. okay And so you imagine you have a hundred shares of Apple. They are worth X dollars. And then you normally, what you do is you would sell a call option a little bit out of the money. And what the the reason why people like this is that, so imagine you're already retired, right? And you have a huge portfolio.
00:19:17
Speaker
And you say, you know, whether Apple goes up another 100 or 200%, I already won the game. i I'm already fabulously rich. I don't need to shoot for the moon again. I'm actually willing to sell a little bit of this upside potential, this Apple stock or whatever stock you have in your portfolio. And in exchange for that, I get a little bit of yield in my portfolio. so and So people would do this as basically supplemental income in retirement. It's almost squeeze a little bit of extra. It's not dividend income, right? it's But it's it's some additional income out of their portfolio. And now you would still participate if there is a market crash, right? It would go down, but then this additional yield from selling call options would cushion that a little bit.
00:20:04
Speaker
So that that would be i think a legitimate strategy for people who want to do risk their portfolio a little bit now you still participate on the downside you but you sell a little bit on the upside so that that that's the that would be the covered call strategy and then the cash secured but is as as brad explain right you have the cash in your account.
00:20:25
Speaker
twenty thousand dollars you want to buy a stock that's trading at say two twenty and you think i would be willing to buy it for two hundred so i'm selling a put option at two hundred if the stock were to fall to below that strike price then i would get the stock at that price and so i would then lock in the price of two hundred dollars even though the price today is is two hundred and twenty but of course you would not get it if the stock just keeps rallying from two twenty to two thirty and so on.
00:20:54
Speaker
But you would have generated a little bit of income right because you saw the put option and so again that twenty thousand dollars in your account maybe it's now making only four point seven five or four point six percent interest but with that put selling strategy you get a little bit of extra income and.
00:21:15
Speaker
depending on how you structure this and what stock you trade and whether it's the s and&p 500 index or or or a very volatile stock something like nvidia ah you could actually make more money from the option selling than what you get as your your interest on your money market funds that you might have in your account.
00:21:34
Speaker
So this is this is again a legitimate strategy for people say who have a lot of cash sitting around want to maybe dip their toes in the market and they say well if the market keeps rallying while i still made some extra money and if the market drops well then i buy but i wanted to buy the dip anyways and this is almost a way to.
00:21:56
Speaker
to lock myself into that. sort because There are a lot of people who say that, you know, I have a lot of money sitting around, I want to buy the dip. And then the dip happens, and then they get cold feet. And it's wow now it's way too risky. I don't want to invest in the stock market. And then there's this way a lot of people, you know, they never ah dare to get into the market. And this might be a way where they almost tie themselves and and lock themselves into getting into the market if there's a good buying opportunity. And of course, you hope that it's only a dip and then it recovers again. And it's not it's not the next great depression where the market goes down by 80%.
Low-risk Options Strategies
00:22:31
Speaker
So these are the two most basic option trading strategies, which is not what I'm doing, but i'll I'll get into some of the things that I'm doing.
00:22:39
Speaker
And but we we can do that and in a few minutes. But so so yeah, I mean, generally speaking, these are the two major basic option trading strategies. And if I could just follow up with that, like the way I see it too is the word covered just means that I have the the shares to cover my position and the cash secured just means I have the cash because if you have a margin account, you can sell those put options on margin, not something I would ever go near. And I'm only a cash secure put. Like when I sell a put option, I have the cash in my account to cover that option if I have to buy those shares. But there are the option of writing a good old put. And if it were to be assigned, pulling out margin to cover that put. So that's when we say a covered call, that just means we're just being a little less risky and we're avoiding margin generally.
00:23:34
Speaker
and Okay. All right. I think I'm following. Good. We're going to get you to, we're going to get you to, you know, sell you for his options contract, but you're lucky we're outside market hours or I'd have you on your computer right now getting ready. Well, that'd be, yeah, that'd be something. Like how fast can David lose some money in options? no Now, I've called the covered call strategy a win-win strategy. i really There's some ways if you if you set it up and you get your terms right, I don't see how you can lose if you do it right. And there's always a loss of like potential capital gains you could have made. But if you write your strike price above your cost basis and you get a sign, you still sold for more than you bought, you win.
00:24:14
Speaker
And if it expires worthless, you collected premium and didn't lose your shares. You also win. So it's only when you really get greedy, that's when you're really going to bring that risk onto the table. But anybody beginning, you always got to think like, we're going to probably sell some options first.
00:24:29
Speaker
And because, as you mentioned earlier on, the buyers, you know there's there's not a good chance for them. And as somebody that's been buying options for years, I can tell you with 100% certainty that I've made ah way more money with maybe the exception of GameStop and AMC, which was a Black Swan event. I've made way more money selling options than I probably ever will buying them.
00:24:51
Speaker
Carson, you talked about this might be a strategy for someone who has a large net worth, someone who has already retired, someone who's already achieved financial independence. And before this episode ends, I would like to talk about how you fit this into your overall portfolio and strategy. But for the listener who is who maybe has not listened to any other episode and is now listening to this one, I want to make it very clear. These two gentlemen, as well as myself, are very well versed in the much more conservative, simple path to wealth approach that I'm sure we all advocate, even though we're talking about options right now. We advocate taking a conservative approach, investing a high or like as much as you practical say practically can save into broad market index funds.
00:25:37
Speaker
and So, if this is your first inkling of our three faces and talking on a podcast, please understand that this is a we all understand this is a very niche strategy when we're talking about the financial independence audience as well as the overall investing audience. But having said that, we talked about the retiree who might be looking for ah some additional income. Who else is this suitable for?
00:26:01
Speaker
I frankly, if I can start, i I think it's suitable for anybody that wants to learn it. And I will completely second you not putting words in my mouth. I i agree with you 100%. 90% of my net worth is in VTI. If you listen to my individual episode with David,
00:26:16
Speaker
That is that. And this really started as as a hobby for me. I tend to be somebody that wants to know the most about the market, even for just my general basic investing. And as somebody that just has a mind for learning, that's options were intimidating. So I wanted to sit down and learn it. But as I've learned it over the last seven to 10 years, I've realized that there is just like investing in stocks. We can find a way to have a manageable amount of risk And depending on what our risk tolerance is, where we are in our investing journey, I don't really think there's anybody necessarily that this would be not for. Buying options, definitely. But selling options with a little bit of education and a little bit of mentorship, I think this really, it could be a strategy for anybody. i am
00:27:07
Speaker
somebody that's not extremely wealthy, financially independent, but I've been selling options since I was working my way towards financial independence with that 10% that we always advocate. you know If you want to take a little risk with 10% of your net worth, whether it's Bitcoin a couple of years, for me, I used it to dabble in options and sell options and learn about them.
00:27:29
Speaker
and Now, ah the the general conversations that I have with people that I'm mentoring is that, wow, why didn't I find out about this sooner? Or, wow, options were so... ah All I heard was the bed. And like I mentioned the sports analogy earlier, like to say options are bad is to say that you don't like soccer because you don't like ping pong. They're two completely different sports. So we can find a place for everybody inside the options trading community, I think.
00:27:57
Speaker
Karsten, Brad says he limits his to about 10% of his overall net worth. And that works for him. how do Where does options fit into your overall financial strategy? Right. So let me just explain my evolution. So I've been trading options since 2011.
00:28:16
Speaker
almost exclusively selling options. The only way I would buy an option is I would basically buy back a further out of the money option to hedge the risk from the option that I sold. So basically just a spread trade. Otherwise I would not buy options. So I started with this in 2011, also with a relatively small account. And I think it's good that you start with a small account because you want to find your way around.
00:28:43
Speaker
Because it's it's actually quite dangerous to do this with a basically full size account with your entire net worth. And because something goes wrong and something will go wrong. So my, my personal experience is that you could expect about every two years, something nasty happens. So 2018 February, we had a very nasty volatility blow up 2020. We had the, we had the.
00:29:07
Speaker
the pandemic. In 2022, we had the bear market. In 2024, we had August 5th, which was a big blow up in volatility on that Monday morning and some crazy out of left field decision by the Japanese Central Bank. So and so every two years, you something goes wrong. and Actually, before that, I can go back. In 2016, we had the Brexit. In 2011, actually, right out of the gate when I started, we had the downgrade in US Treasury bonds.
00:29:37
Speaker
And so sometimes something bad happens and if you if you've been doing this with a small account and you have the account that's small enough that if you have losses that it's not going to wipe you out and you can basically refill and and learn you an easier way of it.
00:29:54
Speaker
easier way of into this. I think that's that's definitely recommended. Even though, I mean i must say, you know when I did this with a small account, you know the the amount of time that you spend doing this was not really worth it. right and so if If I had been at an hourly job where I got paid i didn't get paid overtime, right i mean imagine you are somebody who gets paid overtime you could probably make more money but just working another shift overtime but obviously now so now i'm retired and i would say that my option trading strategy is one of the basis of my retirement plan actually i.
00:30:29
Speaker
Because we're talking a lot about sequence of return results just to give you an example i have not felt it necessary to liquidate any of my assets so i could just purely leave off of my option trading income some dividends from my index fund portfolio i never had to touch any of mine.
00:30:46
Speaker
tax-deferred accounts. so I don't have to do any roth ladder or there's any kind of early withdrawals from my 401k plan. So right now, I'm trading options in my taxable account and that revenue is enough to pay for almost my entire retirement budget. And then I have a little bit of real estate investment income and make a little bit of money from my blog that covers maybe another 10% of my living expenses. But yeah, I mean, I can, I make enough money just from the option trading. And that means that since 2018, when I retired, I didn't have to withdraw a single dollar from my equity portfolio. And while my equity portfolio is up by more than a hundred percent since 2018, right? So by not touching that, I was able to yeah have a very relaxed retirement
00:31:33
Speaker
experience because i this is this is the issue of sequence of returners. You're liquidating equity positions when the market is down. And the market has been down a few times, rather pretty dramatically in 2020, obviously. And I didn't have to touch any of that. And as I was actually trading options in March of 2020, it was by far my most profitable month, in fact. And so I i view this as very nice a supplemental income opportunity with very minimal time commitment. And i I would not want to miss that. And I'm glad I had this training experience early in 2011 till 2018, but I wasn't really doing this with a very big account, but it was it was serious money and i would have I would have missed it if I had lost it. I may have missed it, but were you doing this in your personal accounts or were you doing this for your job at the time?
00:32:25
Speaker
Uh, I was doing it in my personal accounts and I proposed it to do that at my job at that time. And I was told, uh, well, we probably don't want to touch that. ah We, we know what you're doing, but it would be too risky for us. So this is what they, what they told me at the, uh, at my job back then. Okay. Brad, I saw you taking notes. Always taking notes. I'm always taking notes. I'm trying to figure out like, Oh man, I might be able to retire off of this.
00:32:49
Speaker
No, but I will say this.
Options Trading for Retirement Income
00:32:50
Speaker
So I mentioned like 90% of my net worth is in VTI, which is, you know, very, very close to what we mentioned in the spy and also with VTI I can sell covered calls against my VTI shares.
00:33:05
Speaker
And when you you put something like this into my Roth IRA, you know, where I am not paying taxes on any of the capital gains that I'm making off of selling options against them. And it really, it's like the best of both worlds for me. and the The hard part is trying to really convince people that you can. I tell people on my YouTube channel and in my Discord and the people that have been around me for years, like it is not absurd to say that you can probably add 2% a month on the high end and 1% on the low end. So you're adding 12%.
00:33:42
Speaker
you know to your portfolio returns really for a very, very minimal time commitment. and And the more you learn, especially when you're just trading one thing, like one stock. if i had ah like If I had a dividend portfolio and I had all these stocks, I'd have to manage all these things. But when I'm just selling options with VTI, I have one instrument. I i know it. It has monthly expirations, so I really don't have to manage it very well. I take very conservative strike prices, things like that.
00:34:12
Speaker
And i mean I plan on using it in the same exact way when I get to a point where, I mean, I have a nine to five now, but when I'm not, I'm definitely going to supplement a lot of my income. And I've seen people switch from dividend investing over to this because it's a little less stress in their opinion.
00:34:31
Speaker
And it can be win-win if you manage your time properly. And yeah, even though I have a very, very conservative investing strategy with things like VTI and VOO, I'm able to add now in in a younger phase of my life, I can take on a little bit more risk by selling these options right on with with the two years because yeah, a couple of years back, you know I was selling puts and I was also selling puts on stocks that would maybe get me some views on YouTube and things like that. and things tul I'll give you an example. of Peloton, I sold pretty much at 50% of the share price. I was selling put options on Peloton thinking, there's no way this share price is going to cut in half in six months. Well, six months later, they were essentially demarcated. They're not even on the market anymore. so
00:35:22
Speaker
there There is, you are going to lose from time to time, but with consistency and and proper risk management, it definitely, it's, I freaking love it. And I wish more people knew and I very rarely do I get people that take the time to understand it. And then they're like, I wish I never learned that.
00:35:39
Speaker
where I can give you a laundry list of people, including people in the f Fi community who don't really want to come out and say they trade options that are doing this. And it wasn't until I really saw some of the ultra wealthy that were selling put options you know as a way to manage large sums of money that wasn't invested in the market because they thought the market was overvalued.
00:36:01
Speaker
And I'm like, if they're doing it, there's probably something to learn here. And i I could probably try and figure out, you know, what what are the really smart money doing? That's kind of where I want to be. When I think of someone on their fi journey or financial freedom journey, or just working and investing, building their net worth, growing their net worth, when I hear ah about a strategy like this, I can't help but think there has to be some kind of rule of thumb or a guideline, not necessarily on the educating education of learning how to do options, but how much of your portfolio do you need in order to dabble deeper into options so that it doesn't risk your portfolio.
Who Should Trade Options?
00:36:41
Speaker
Is there?
00:36:42
Speaker
like a net worth that guideline. Like if you have a net worth of 200,000 and it's in VTI ETF, that's a good way to start. Or what how could you construct a portfolio to as you're building it with the expectation that if you hit 200,000 and then you decide you may want to get into options, what does that look like? Or am I just thinking about this? so I'll start with that. Yeah.
00:37:08
Speaker
I think anybody that has 100 shares of a stock should seriously consider learning how to sell call options. Simple as that. If you have 100 shares of a of a stock, I'm not saying you should sell call, but you should learn why you're not. And as far as selling put options, if you have a large amount of cash and you are a little bit timid to invest in Apple because you think it's overvalued and it's trading for 221 and you think it's worth 150,
00:37:34
Speaker
and If I could wave a magic wand and make the share price of Apple $150 tomorrow, you'd say, Brad, I got 15 grand. Give me 100 shares. You should probably be selling put options. and it it's it's really and i mean that's It's a hard question to answer what you just said. and I always go back to real estate because that is the bread and butter of the Fi community and it's like their little safety blanket. and There's so much risk that comes around with real estate that so many people in the FI community are willing to sweep under the rug. But when it gets to the risk of options trading, it's just all bad. You're going to lose all your money. You're going to tumble and crumble and everyone's going to point and say, I told you so.
00:38:13
Speaker
where from my experience of doing both, I see this as less risky and you wouldn't sell sell somebody in real estate like you need to have a certain amount of money before you invest in real estate. No, you would say, hey, you need to have this in line. You need to have a certain knowledge. You need to know what your risks are, what your cost is going to be, what your plan is. And then regardless, if you think the numbers work, you're going to buy a piece of real estate.
00:38:38
Speaker
And for me, I think if you are in a position where you already own 100 shares and youre you have a pretty good grasp of what that 100 shares is and what that company is doing, and you have a little bit of education with money and and a pretty good no hindsight to what's going on, I think as long as the numbers work, just like in real estate, I think anybody could do it at any time.
00:38:59
Speaker
I think um the if people trade options and they blow up their portfolio, or or at least the option portfolio, not their entire net worth, I wouldn't necessarily even blame the options. I would blame that they started doubling in stock picking. And that is the that is the danger that people think they can they know the market better. right I mean, obviously people say, yeah yeah, but I only pick the good stocks. or I only pick the stocks that I like. And ah so the danger with that is obviously the market doesn't care what you like or what you think is good or bad. The market has already priced in all the information that's available at that time. ah You will not have any more information. Even if you look into some kind of company reports, these company reports, they have already been screened through a millisecond after they were released with some AI and machine learning
00:39:53
Speaker
machine learning program so everything that's in there has already been sucked out and priced into the market so you will not really beat the market by being a stock picker if you. Then put together a portfolio with options or without options the danger is that it's very concentrated in technology very concentrated in consumer cyclical something like starbucks oh i like starbucks well i also should own starbucks stock then.
00:40:19
Speaker
So I think that that is the real danger. I don't think it's the option trading part. That's the danger because obviously, as we have said earlier, you can do this also with the index ETFs, right? So you can do this option trading with, with index ETFs or with the index itself. There's a CBOE index, the s SPX, and you have options on that. And this is what I do. So, and so in that sense, I am doing, and I just give you my example, I am doing the,
00:40:47
Speaker
the options trading with my entire taxable account. I have one interactive broker's account where I've moved everything I have in my taxable account. so that's and there's no There's no cash and there is no individual stocks and there's not even ETFs.
Daily Routine of an Options Trader
00:41:02
Speaker
It's actually mostly fidelity index funds. so I moved them from fidelity to to interactive brokers. You can do that in a way in in kind so you don't sell your assets. They move in so there's no taxable event.
00:41:14
Speaker
So and then pretty much everything I own is in there and I have some i have some fixed income, some some bonds, some preferred shares, individual preferred shares, not even the ETFs because the ETFs really have quite high expense ratios. So this is my entire portfolio. And instead of selling covered calls on something I own, because nothing I own in that portfolio is really optionable. There are no options on and my fidelity index funds.
00:41:43
Speaker
And there's also no options on any of the individuals, say Wells Fargo or Goldman Sachs preferred shares. So I'm kind of stuck. And then also on top of that, I don't want to sell any of my stuff to create cash and then do cash secured puts. So my only option that I have, ah option and ah pardon the pun.
00:42:01
Speaker
So, the only way i can I can sell options is to sell basically naked options. So, I can sell, put options on the S and&P 500 index and I sell call options on the S and&P 500 index. And I do that also as Brad described. I think the juiciest Premium is usually for very short premium for very short duration options. So I do only overnight. So today is Monday and I sold the Tuesday options and they will expire in 24 hours at the next expiration. And then on top of that, I also trade some additional options usually in the morning right around the open of the market. I sell
00:42:39
Speaker
put some calls right at the open expiring that afternoon. And so it's really only six and a half hours market exposure. And so these are the puts and calls that I sell and I do that every day. And it's really only taking me a few minutes at the open. So usually so I'm at the west coast. So for me, the market opens at 6.30 on a weekday.
00:43:00
Speaker
Which is okay, I have to get up. My daughter has to get ready for the school bus. And so I'll be up at 6.30 and I'll do my trades at 6.32. I'll be done at 6.40. I wake up my daughter and my wife my wife is up too. So she makes breakfast for the two of us. And that's that's our morning routine. And then the same thing at about 1pm.
00:43:20
Speaker
I do a few trades potentially a little bit before the close. And then there's one other thing that that comes to this is kind of options, not 101, but 501. You can't sell as many options as you want, right? There's certain constraints on how much margin and how much exposure the exchange and your broker will give you.
00:43:39
Speaker
So you have to wait until that margin comes back. You have to wait until your old options expire until you can sell new ones for the next day. So that usually, usually at one minute after 1pm, my margin comes back. I do a few more trades. And usually I'm done at 1 or 5pm my time in the West Coast. And so that that that would be my type of option trading. So I will do the option trading on top of the assets that I already have in that taxable account and I will do that exclusively on the S and&P 500 index. There will be no individual stocks. I don't want to touch individual stocks. I don't think I'm ah i'm a good stock picker. I think i'm ah I'm an okay market timer in some way in in terms of timing volatility. So I definitely noticed that in the past, if the market gets too calm, I'm getting a little bit nervous. If the market gets really nervous, then I get... So it's kind of that
00:44:32
Speaker
Warren Buffett quote right if the market gets greedy you want to be fearful if the market is fearful you want to be greedy so i use that a little bit so i might change my exposure a little bit over time that that has worked out so far relatively well so i'm a little bit of a market time in that sense but i i don't consider myself a good enough stock picker to to do this on individual stocks that i Can I add to that? Because you said a lot of good things and I wanted to just give my two cents because I've never really thought about it like that, where it's the stock picking, it's not the option. But I mean, I just gave an example of Peloton a couple of seconds ago, how I got burnt. yeah And that's exactly what you are are talking about. And we trade very different styles as well. but
00:45:18
Speaker
i I think back now in hindsight, I've been thinking about all the times that options did me dirty in the last seven to 10 years. And it really was always trying to get ahead of a stock like Tattooed Chef and all of these things that YouTubers and my whole like YouTube scenario. yeah But for the last three to five years, I am also a terrible stock picker and i hey treat I hate buying stocks outside. I'm an index fund investor, but I knew that I wanted to trade options. And also it's part of my side gig on YouTube is talking about options. So I said, you know what? If I am an S and&P 500 person, then that's the stocks that I'm going to own.
00:46:01
Speaker
And I literally went down the list of the S and&P 500. And I bought Apple 100 shares. And then I sold options on those 100 shares. And I took all the premium to work into Microsoft. Then I got 100 shares in Microsoft. And I just worked my way down. And now the 10 stocks that I sell options with are literally the top 10 stocks inside the S and&P 500.
00:46:26
Speaker
And they give me like a nice beautiful, we get the we get the volatility of Tesla, which is freaking crazy. We had the run of Nvidia this year, but then I still have those Apple and Microsoft, which I don't feel like I'm a stock picker. I feel like what I did is I took an options portfolio that was the S and&P 500 index, but I just used individual stocks. And I really, I'll never go outside of that, but trading like trading every day for me would be hard. I trade monthly options. I see. Makes sense. so Yeah, so my expirations, which are very different, I write an option that's a little bit further out of the money, but it's going to have about a month till expiration. yeah So when I write an option, I really don't need to think about it day to day.
00:47:12
Speaker
I kind of check in on it here and there. I'm definitely, I love day trading the markets. So like I always know what's going on with the S and&P 500 and the NASDAQ and that's future is not options. But so I always kind of have an idea. My time that I use to trade my options, it's got to be less than an hour per month to trade 10 stocks. So that's 10 contracts open and closed.
00:47:36
Speaker
And I've never gone above the 100 shares. I just use all the premiums. I'm just working my way all the way down the S and&P 500. And that's been what works for me with my 9-5. If I didn't have my 9-5 and I could go on my computer and look at the charts twice a day, that might be something I want to do. But I used to trade weekly yeah options, expirations, meaning they would expire on Friday. And even that was just like too much. i I would rather spend my time in the woods running around or serving at the beach. So I said, I'm going to make my explorations for a month. And it's just been fantastic. But I really, i I wanted to say thank you for pointing out the fact it's not the options fault. It is the stock. And I'm here and i'm here to you know tell you every time it's done me dirty, it's always been the stock and it's never been the option.
00:48:22
Speaker
and And I should say, so ah just the the reason why I'm doing the the opening and the close is I think the zero DTE, so zero days to expiration, so same day and then one day to expiration. So I find that the that the premium, that's the purest vol premium that I can get. So I don't have to worry too much about stock because ah especially with the S and&P 500, a lot can happen in one month.
00:48:46
Speaker
When I first started in 2011, I also did monthly. And so you sell a put option on the S and&P 500 and you say, oh, there's no way it's going to go down like that. But then something like August, 2011 happens. So this is why I kept decreasing the time to expiration. And there's even a mathematical reason for it. right I want to take as many small independent bets as possible, because then when you average over it,
00:49:11
Speaker
it becomes better behaved from a statistical point of view. right This ah is called the central limit theorem and in math and statistics. So I think of that as if you're the casino, you want to you want to you want the player to play as as long as possible because they're losing money and it it increases the probability of them losing money. And I am ah usually is also what I noticed is that if there is some kind of a volatility event, it builds, but it doesn't come from, even if it comes out ah out of left field, like the pandemic, it still builds up, right? There were some crazy trading days in March of 2020 where the market moved by plus minus 12% in one day. At that time, I was already selling put options that were 20 or 25% out of the money, right? So 12% didn't hurt me.
00:49:56
Speaker
and I made all my premium ah in march twenty twenty whereas if i had sold something. Towards the end of february when nobody could see how bad this is gonna get this would have made me nervous and sweating throughout march.
00:50:09
Speaker
So this is this is why I like the very short expiration, so you you average over more stuff. and And then I should also say that, again, on weekdays, it doesn't mind it doesn't matter to me if I have to do this at 6.30 in the morning. Sometimes when I go on a hike, and if it's it is a short enough hike, I'll be back for my my clothes.
00:50:29
Speaker
Sometimes I can trade while I'm hiking. Sometimes I can trade while I'm skiing. The big ski resorts around Mount Hood, they are also very well covered with ah with LTE e and 5G. So I can do it on my phone while I'm sitting on my lift, on the lift ride.
00:50:45
Speaker
And then if everything else fails, right, if I'm on a cruise ship close to the Nordkapp in Norway, and maybe I don't have very good reception, then I can outsource it to a friend of mine. So he has access to my account and he can trade my options and I will do it for him if he's traveling. and So I, I have never felt the constraint that the daily trading is, is messing with my, my early retirement. I actually, it's almost like a.
00:51:10
Speaker
doing this every morning and afternoon is almost like, you know, watching sports, you know, they're watching and and you are rooting for the S and P. Come on, you can do it. And so it gives you a little bit of excitement and intellectual stimulus. So I don't mind it. If I get a little bit older, maybe in 10 years, I don't want to do it anymore. But maybe then I'll outsource it to somebody else. But I mean, so far, I can and still do it. I don't consider it day trading where you sit in front of the screen for the entire six and a half hours and you're looking for
Options Trading as a Sport
00:51:40
Speaker
patterns. So so but I do my stuff really very stoically and very very much the same the same thing every morning. But of course, every morning is slightly different, right? So you have to look at, well, where where do I think is is the juiciest strike? And I haven't quite automated it. Maybe I'm going to write some kind of an API because Interactive Brokers is very good at
00:52:02
Speaker
supporting that and i'll just write some python code and let that run automatically i i don't quite trust the computer yet completely outsourced that but maybe maybe in five to ten years i will i'll be at that point can i selfishly ask how are you choosing strike are you using percent change using delta or how you choose new strikes Yeah, Delta, i sometimes it's just the premium. If I think the premium is far enough out of the money, hey i'll I'll do a debt premium. Sometimes I will check what is the what was the worst one-day move over the last X days, and then I will go to that and maybe a little bit of a cushion. But yeah, I mean, I have i have a little bit of ah my proprietary little
00:52:45
Speaker
code where I look at where, where, where are the, where does it look? The, the most rewarding, but I mean, it's, it's obviously it's part art and part science. Right. So there's still some discretion for me. And some of the best trading days are actually, I don't know if you have ever noticed this, but when there are actually six explorations in the week, right? Which is the third Friday of the month when the S and P 500 options have an AM expiration and a PM expiration on Friday. And for some reason, between Thursday PM and Friday AM, m ah that people are willing to pay for put option protection for just overnight. i mean there' And there's usually nothing going on overnight on that Friday. it's not It's no payroll employment release. There's no CPI release. And people are
00:53:34
Speaker
paying higher insurance than than the last week from friday from Thursday PM to Friday PM. And now they're paying you the same rate or more for a put option for just overnight from from Thursday PM to Friday AM. m And so i kind of I go a little bit crazy for the Thursday to Friday morning expiration. So I do a lot more leverage that day than I would normally do. but yeah so that's and so So for special situations like that, obviously, and then there's some other special situation, either it would be FOMC meetings or around the FOMC meeting, there's ah there's some extra volatility, very rich premiums. It doesn't mean that you should always take it so don't get too greedy around that time. Maybe Right. Just take your 20 cents premium, 25 cents premium, and then 25 cents times 100, obviously. So it's a $25 premium and and it's all good overnight. And so don't don't get too greedy because who knows, maybe maybe they surprise a form C date.
00:54:33
Speaker
ah Yeah, so they there's a it's it's not that easy to completely formalize that and automate it into a robot. So which is so I'm not quite yet so so out of fashion that somebody could just replace me with a robot. So there's still something... so I'm still useful for something. Big urn. What would you name this robot if you had the right to... Small urn. Small urn.
00:55:01
Speaker
Gentlemen, you're both very smart. You're both credible. I know you both personally, so I can vouch for your integrity. So this is the question I want to ask and many people are probably wondering, looking back, is this a net positive for you? Many times we've even so-called experts get on and and tout a particular strategy, but won't share their numbers or won't admit that they actually maybe even ultimately lost as compared to other opportunities. How has options generally been for you and your experience trading them?
00:55:30
Speaker
So since 2018, when I retired, my strategy made me, I think the last time my check is about $650,000. So in six years. So that that's pretty decent. And this is out of selling about a million dollars worth of premium.
00:55:48
Speaker
So I made $650,000. So it was out of every dollar of premium I sold, I actually got to keep 65 cents, which by the way, also means that in between there were basically I had $350,000 worth of losses. So it's obviously luckily sprinkled in into small enough chunks that i I slept pretty well during retirement.
00:56:13
Speaker
But yeah, I mean, so this is this is really worthwhile in the sense that this option trading strategy made me enough money that I didn't really have to withdraw any of my principle. And so this is, and in my view, this is almost the solution to a sequence of return risk, right? So you you get extra premium. And by the way, there there are some other people who say, well, why don't you just buy higher dividend stocks?
00:56:39
Speaker
Well, that's not working, right? Higher dividend stocks, the the dividends are not for free, right? Everything else equal, higher dividends will basically keep the total return the same as it would otherwise be. And it would decrease your your price return if you're if your dividends are higher.
00:56:55
Speaker
But this is and this is what i said in the beginning this is purely on top of the portfolio that i already have right i mean i could just shut down the option trading i would still have my portfolio it has equity index funds as preferred shares and bonds so this is purely on top.
00:57:11
Speaker
of that S and&P 500 index portfolio. And it made me enough money that I didn't really have to withdraw a lot of the other stuff. And by the way, if it ever stops working, I mean, I also have enough income from that preferred shares and equity index fund that that also throws off quite a bit of dividend income. So I wouldn't need to withdraw much from any of the other accounts. so Yeah. So from a sequence of return risk point of view, it It gave me out a lot of peace of mind and it made sure that I didn't have to withdraw anything from my equity portfolio. As I said in the beginning, equity market since I retired in 2018 is up over a hundred percent. So I didn't miss, I didn't have that opportunity cost.
00:57:54
Speaker
So to wrap that all up, but since 2018, you've made $650,000 using your strategies.
Success Stories in Options Trading
00:58:01
Speaker
It's option trading strategy, yes. How would you characterize and quantify your options trading performance?
00:58:09
Speaker
i I don't know exactly how much. I probably could have looked. I have no idea. But because my full disclosure or my my caveat is I do a lot of the things that I do with money because I have a YouTube channel and I like to talk about it. And I don't really need to know the numbers because ah pretty much an open book there. So anybody could always go find what they need to know. But I have no problem telling people that if I didn't have a YouTube channel, I would never be buying options. The only time I'd be buying options is to close
00:58:44
Speaker
ones that I had already sold because to close an option early before expiration, if I'm the seller to close it, I just buy it back and you make the money on the difference. Hopefully you sold it for more than you buy it back, right? So I mean, do I still sell options for YouTube content and to help people in my discord communities and things like that, or to show examples of the good, the bad and the ugly? Yes.
00:59:09
Speaker
But I'm doing that with almost like business type funds. I consider them expenses to the business or or fees that I pay to keep that side business going. I have lost a lot of money. I've not made any money buying options, like I said earlier, with the exception of that Black Swan event with AMC and GameStop where I just got lucky. that was That was me hitting a number on the roulette table and I was lucky enough to walk away. But I can say even numbers aside, that if I did not have a YouTube channel,
00:59:39
Speaker
and i did not teach people and i didn't have a discord community thing i close all the computers tomorrow i'm still gonna be selling options on a regular basis for the foreseeable future i have found a spot and that's kinda what we talked about over and over again today i found a spot where i know the risks.
00:59:59
Speaker
I know how to mitigate those risks. And as long as I avoid the greed that comes along with trying to get rich quick, I think this is very, very sustainable for me. And I just, as a general rule of thumb, I tell people that I like to shoot for about 1% of my portfolio every single month. Sometimes it's three, sometimes it's minus two.
01:00:19
Speaker
But if I can, at the end of the year, say that I increased my portfolio by just 12% on the low end and maybe up to 24% on the high end, that's been a pretty sustainable calculation for me over the last seven years or so. So just just just as a follow up, in Brad's defense, right it's it's harder for him to do a complete and proper profit assignment to the options, right? Because imagine you have an Apple stock,
01:00:47
Speaker
trades at $200, you sell an option at 220, and then the stock goes up to 240, and you basically lose out on that additional gain of 20. Well, how much have you made from the option? Well, in some way, the option costs you money.
01:01:03
Speaker
because you didn't make the profit all the way to 240 because if you're just hold held on to the Apple stock, you you have that opportunity cost. On the other hand, well, in some way you always make money with but the call because, well, you get the premium for it, but of course you could cause a loss if something is assigned.
01:01:22
Speaker
how to get that out, you almost have to be a forensic accountant to do that. So in in that sense, my strategy is a little bit easier in that, ah even though it's more complicated in some other ways, I can just, right I can get, I can basically get an account statement from interactive brokers, I download that as a CSV file. And then I look at ah everything that's related to s SPX. And so I can separate out the my base portfolio, which has my index funds and the other shares and everything options related. So it's a little bit easier for me to do a proper profit assignment and and allocation. And be be ah one thing one word of warning because of that is, I mean,
01:02:08
Speaker
Be careful if YouTubers promise you some outlandish return targets, because exactly because of this this difficulty. how How much is really from your uptrend trading? How much is from your stock picking? How much is from market timing? How much is from the underlying stocks themselves? Well, the S and&P 500 also went up by 20% most years, except for the the one year when we had the bear
Tax Benefits and Educational Resources
01:02:35
Speaker
market recently. So So how much is really due to the option trading is sometimes it's a hard to to disentangle there. Yeah, you're absolutely 100% correct. like if i If I go on my portfolio that I used to trade options and click year to date, it might say 40%. Well, I can promise you that 40% wasn't all from trading options because
01:02:55
Speaker
but I am holding 10 stocks in the S and&P 500. And the superstars potentially. Exactly. like What NVIDIA has done to my portfolio this year, just holding 100 shares of NVIDIA, my the options that I've sold against NVIDIA, like I can't hold a candle to it. And yeah, then those potential losses upon assignment. um i know how to do this now for years so i know how to kind of avoid assignment i haven't gone to expiration in a very long time i usually roll options that are going against me like can roll that expiration out but that's ah another skill set but yeah no when when you are holding shares and just doing calls it just gets very I would have to
01:03:33
Speaker
pull and trust me, the YouTube community has wanted me to pull every single trade out and take the net of the sell and the buy to close. And i I did it for years, but now it's just like, hey man, you can either trust me. I have it. You go back and look or you can not, like there's nothing. I had it this year. and This year I have, I think ah close to 9,000 contracts that I traded. I have every, I have the start, the finish, what what date, what time I traded it, what the S and&P was at that time. It's actually,
01:04:02
Speaker
So the the record keeping takes me more time than the actual trade. yeah i'm done I'm done trading at 6.32. At 6.35, I'm done with the with the Excel sheet. So yeah so it's for you but it's easier it's easier for me because naked naked puts and calls are easier in that sense. yeah Okay. I have some logistical questions regarding options. Your hair hasn't set on fire yet, David. What kinds of accounts can you or can you not trade options in? Can you do it in a raw? You already mentioned, Brad, that you could do yours in your raw. You have a normal brokerage with the interactive brokerage. I think I understood that to be correct, Karsten. Can you do this in a 401k? Can you do it in a self-directed? What are you limited to options as far as the accounts?
01:04:46
Speaker
the broker, there's different brokers are going to require you to have certain levels of options and education. And for example, like you want to Robin hood, they'll let anybody, they'll let my dog trade options. If you want, you know, where, if you go up to more reputable brokers, they're really, they're going to do a little bit more due diligence on you to make sure you know what you're doing.
01:05:06
Speaker
I can only speak for the accounts that I've traded in. I've traded in personal brokerages, solo 401ks, my Roth IRA, my traditional IRA. And it's it's written pretty much from what I've seen, anything that has options available. Like we mentioned earlier that there's some funds that just don't have options available. The market makers don't make them. So you can't trade. It's more what assets can you trade options with, not necessarily the limitations from the broker.
01:05:34
Speaker
Yeah, so my specific strategy, naked puts naked calls only in a taxable account, so it cannot be done in a retirement. But in a retirement account, obviously, you can do ah covered calls so that you you have to apply, quote unquote, apply and answer some questions about your option trading experience. And I always wondered what if you answer, I have zero experience, I want to learn it, will all they give it to you?
01:05:58
Speaker
There's a chance this kind of a circular. argument I'll let you know. You need experience to actually trade about how do you gain your experience in the beginning. I always claimed, well, I mean, obviously I did it through my job. I had experience in and options trading. So ah but but anyway, so my my specific strategy, I do that at interactive brokers in a regular taxable trading account and it requires portfolio margin, which is the highest level of margin account that you can have. I think recti is not enough. It would be very cumbersome. You couldn't do it with the type of
01:06:34
Speaker
a leverage that I require sometimes in a recti account has to be portfolio margin. So I think the minimum account size for that is either 110,000 or 120,000. And then as we also mentioned, there's different types of options strategies, for example, spreads. So your broker might require you to have a little bit more experience where you might have level one option clearance where you can sell covered calls and cash secure puts, but you can't sell a spread, which is a horse of a completely different color and things like that. So it really depends. It's broker to broker and you got to do your research. and But you talk to rules of thumb. I think general rules of thumb are know how to exit the position, so how to get out. If you're selling options, you're going to have to know how to buy to close that option or roll that option. And also just do it with a stock that you happen to have to hold it on the put side. Share price goes really far down. You don't mind bag holding it.
01:07:25
Speaker
or, you know, take Carson's advice and and don't stock pick. But I like to take low volatile stocks. When I began, I think the first stock I ever traded with was Wells Fargo. That didn't end up very well either. I begged out that for a long time, but people love the dividend stock because they kind of trade kind of flat out of tunnel volatility. Don't need to worry about getting assigned. You can kind of go far out of the money. And I've seen people have success with it that way, but with dividend stocks, like I said, there's just an,
01:07:51
Speaker
another area of risk and that you have to take on. But in the the next route or the S and&P 500 stocks, you know I think it's much better to wait a couple of years and save up 20 grand and get 100 shares of Apple than to say, I need to start trading options tomorrow and I'm going to do with a crappy stock like Peloton and then you lose your money.
01:08:11
Speaker
Or do it with the index. So SPY index. it's a star carson Carson, it seems like you're probably a favorite with your accountants since you have these nice Excel spreadsheets all ready to go within seconds of a trade. And maybe ah not so much you, Brad, but how are profits from options trades taxed?
01:08:32
Speaker
Oh, I'm not a CPA, but I will say this. As far as I know, they are taxed as short-term capital gains. And a common misconception or at least a micromanaging that I see people do is they worry about the taxes on one particular trade. You have an entire year of trades, you are going to sell and collect premium and you're going to buy to close and you're going to give some premium back to do so.
01:08:55
Speaker
And you are going to pay short-term capital gains on the net of selling to open and collecting premium and the buy to close giving away premium. Yeah. So ah my tax time is very easy because I can compress 9,000 lines of trading in my Excel spreadsheet because these are special ah contracts. They're called section 1256 contracts.
01:09:18
Speaker
I'm going to get only one number reported on a tax form at Interactive Brokers and I put that into IRS form 6781. And then all my net profits are considered 60% long-term and 40% short-term profits. So that's one nice thing about anything that's that falls under IRS section 1256.
01:09:39
Speaker
These would be the s SPX options on the CBOE, would be options on futures contracts, also futures themselves. right If it's index futures, ah you make any profits there. That's also considered 60-40. And then any kind of option on a broad index or any kind of option on commodities, whether it's oil, gas, um pig halves, or wheat or corn, all of those options are also considered Section 1256. So, tax time is actually relatively easy for me, even though, I mean, obviously today now we have all sorts of ways, you know, you download as a CSV sheets, all of your tax statement, and then it reads it into a tax act or TurboTax.
01:10:23
Speaker
it's not It's not the end of the world if you have to itemize all of these trades, but nice thing is for all these naked puts and calls that I sell, the tax time is relatively simple because all the IRS cares about is the net at the end of the year and that's reported already at at IB. All right, gentlemen. Now, Brad, you have a Discord and i you have a YouTube that talks about options.
01:10:47
Speaker
I do. You did not ask me to do this, but would you recommend someone like me who might be interested in just a learning and maybe dabble as a little hobby trade, join your discord or are there other places like your discord where a person could get a responsible education for options trading?
01:11:07
Speaker
Yeah, I always tell people the the value of my Discord is not me. The value of my Discord is the community inside my Discord. Everything that happens inside my Discord is on my YouTube channel for free. So there's no like secret sauce handshake type education going on in my Discord. Generally, people will join my Discord because they've watched a couple of videos and they just want access to me to ask me direct questions in real time.
01:11:34
Speaker
but also be able to talk to other people that are like-minded and trying to do the same thing at all different levels. You can come into my Discord and have somebody that is literally can ask a question that they could never Google the right type of... They wouldn't even know what to Google, but they can they can post a screenshot and they can ask a valuable question and get immediate feedback from people in real time doing the exact same thing as them.
01:12:00
Speaker
That's really the value of the Discord. It's not the education piece per se. It's the access to people and resources. As far as like learning, you can go and type in on YouTube, Brad Finn Covered Call, and you're going to get 25 videos.
01:12:15
Speaker
I mean, I got to be ranked pretty high in search for covered calls and cash secured puts and every other options trading thing out there. So you can get that education and leave a comment and I'll generally get back to you because I'm that type of guy. But I don't think that anybody needs to take a course. I don't think that anybody needs to be in a discord. I think that you can get, just like I did, a lot of this information just by going onto YouTube or reading a couple of books.
01:12:40
Speaker
but being able to ask questions and i think that's really was that's what the youtube does it just allows you to quote google the guy that you learn from and get access to them directly because even emails are slightly antiquated i get emails i very rarely respond to them but If somebody is going to pay me five dollars a month to have access to me, I'm going to give them that respect and and and they're going to get an they're going to get an answer from me immediately. And sometimes I can't answer it. Like I'm not on interactive brokers, but inside my discord community, I have a chat that's dedicated to all different brokers. So somebody can be hey.
01:13:13
Speaker
i'm trying to trade ah I'm trying to close a cash secure put on interactive brokers. Can somebody help me out? And within minutes, somebody's on there like, yeah, go to the top right of the screen, click that cog, the third thing down, click that. that's And that's really what the value of the Discord is, not so much the education.
01:13:29
Speaker
Karsten, you learned you to to do options trading at your job, I believe, yeah a decade ago, more than a decade ago. Did you do any additional training or is just all real life experiences? it's That's life experience. I mean, the funny thing is i i didn't I wasn't on the trading floor, right but I knew about option trading through the the research side. So we we would develop signals that will then said will be sent to the trading floor.
01:13:58
Speaker
So I knew what options are and and and so so in that sense, I had that exposure and and experience. and that's how you that So when somebody asks you, you want to open an account, what's your option trading experience? Well, that's so yeah I have this many years of option trading experience. ah So that that's how that came about. No, but I mean, the option trading that I'm doing today, that is pretty much all self-taught.
01:14:26
Speaker
Well, it's very, very impressive. Carson and Brad, thank you both so much for sharing your expertise and breaking down the world of options trading. You've helped paint a much clearer picture for me. And I think I will probably at least research it some more. And Brad, I'll probably get into your discord at some point to check it out. And now we all can decide if options trading fits into our own financial independence journey. I appreciate your time ah and guidance and look forward to our next chat.
01:14:53
Speaker
Right on, man. Pleasures have been in mind. Thank you so much, man. It's been a good time, good chat, and I learned something too, so thank you so much, Carson. Yeah, same here. Thanks for the invite. And thank you all for watching and listening.