What Size Does Your Options Trading Account Need to Be to Earn $10,000 per Month?
Let’s dig into the math behind figuring out how large of a trading account needs to be to make $10,000 per month trading short options.
Selling options offers many benefits that you may have never considered, the most important one is the freedom of choice. The amount of directions and strategies that can be employed with trading options can be daunting when you’re just starting out. From choosing between calls and puts, to determining whether to buy or sell options, all the information is at your fingertips, which can make it seem overwhelming.
Get 20% off by entering CHRISTIANPARK20 when checking out.
The good news is, once you’ve got a foundational knowledge of trading options, it can quickly turn your knowledge into a cash printing machine!
To determine what account size is necessary to earn $10,000 per month, I’ve used my own personal results from the past 12 months employing the wheel trade, averaging about a 2% return on capital per month. Using these results, I would theoretically need a $500,000 account to earn $10,000 per month!
While past results are not indicative of future gains, I feel confident that I can maintain this pace given the challenging market we’ve faced over the past 12 months.
Wheel Trade Explanation
The Wheel Trade involves selling puts until being assigned shares and then selling calls until those shares are taken away. Some refer to it as a beginner’s strategy, but many seasoned traders also utilize this strategy.
The first step of the wheel trade is to sell a cash-secured put. Preferably, I like an ETF or stock that I believe in and would not mind owning in the long run.
A great example of this is that I prefer to sell index-based ETFs like SPY, QQQ, IWM, & TLT. SPY is an ETF that is based on the S&P500 and is my 2nd favorite trading product. QQQ is the Nasdaq-100, IWM is based on the Russell 2000, and TLT is based on the long-term treasury bond market.
For those of you who are curious, my new #1 favorite trading product is SPX but it is a cash-settled product, meaning you cannot own shares, so it does not apply to the Wheel Trade.
Once you’ve picked out your product, you select a price (strike) that you wouldn’t mind owning the product. Lastly, you pick a timeline that best suits your goals and preference and sell a put at that price and timeline.
The second step is the fun part. If the product’s price stays above the strike price at the time of expiration that you sold your put, you simply repeat the first step to keep on collecting premium. For example, say SPY is currently trading for $405 per share. I sell the 7 days to expiration Put at the $400 strike price and collect $100 in premium. 7 days go by and SPY is above $400 at the time of expiration of that contract, I simply keep the $100 of premium because that Put option that I sold for $100 of premium is now worthless at expiration. On the other hand, if SPY dipped to $399, I would then own 100 shares of SPY at a cost basis of $400 per share.
The last step only applies if the product’s price is below the strike price chosen at the time of expiration, then you would be assigned the shares. Once assigned the shares, you would sell a covered call at or above the strike you choose for your Put. Going back to our example of owning SPY at $400 per share, I could write a covered call at $400, $405, or even higher depending on how much premium I would like to collect. The further the Call strike price is from the current market price, the less premium you will collect when selling a Covered Call.
The greatest strength of this strategy is its simplicity. It is impossible to time the market, yet this strategy provides the opportunity to buy shares lower than the current market price and sell shares at a higher price.
Pros
· Easier strategy to understand and employ
· Consistent returns
· Ability to capture dividends
· Able to purchase shares below the current market price
· Able to sell shares above the current market price
Cons
· Not as capital efficient in terms of margin requirement or buying power reduction compared to trading strangles or selling puts & calls without taking assignment of shares
· The underlying could lose a drastic amount of value, forcing the trader to lower the cost basis by purchasing more shares or waiting for the price to rebound.
Let’s Tie This All Together with one last Example
Bob is a believer in XYZ stock (I made up the ticker symbol), and he does not mind owning 100 shares. XYZ is trading at $11.00 per share, so Bob sells the $10.00 strike price for an expiration that is 30 days away and collects $100 of premium.
Next month, XYZ is trading at $10.50, and the put Bob sold put expires worthless because the price is above the $10.00 strike. Thus, Bob keeps the $100 premium and moves on.
Bob simply places the same trade going out an additional 30 days for another $100 of premium. 30 days go by and XYZ is trading at $9.00 at the time of expiration. Bob keeps the premium but is assigned 100 shares of XYZ.
Now that Bob owns 100 shares, he sells a covered call at $10.00, 30 days out, for another $100 or premium. If the price of XYZ stays below $10.00 per share, then Bob would continue to sell covered calls until the price recovers. If the price is above $10.00 per share at expiration, then Bob would lose his 100 shares at $10.00 per share, the same price that he purchased them for, and of course, keeps all the option premium.
At the end of the three months, Bob has collected $300 in premiums and has not realized any losses. Thus, the wheel trades continue to roll on.
Essential Things to Note:
1. Each contact represents 100 shares of stock.
2. There is no need to wait until expiration. Many would argue that you can be more profitable if winners are managed at or around 50% depending on how far out expiration is.
3. Trader Beware, if the product’s price continues to crash down after being assigned the shares, losses could be realized for the principal invested. Especially if the price never recovers, it is essential to only use this strategy on a ready-to-own product.
Final Thoughts
For many, earning $10,000 per month in passive income is enough to live comfortably, to include myself. I plan on growing my options account to this point in the next 5–10 years in hopes of quitting the 9–5 and only doing the things that I want to do with my time. I hope you found this information helpful & God bless!
Happy Trading!
Disclaimer: I am not a licensed financial advisor. All content is my opinion and is for entertainment purposes only. Please do your research to make the best financial decisions. This article contains affiliate links that may result in me gaining a profit from purchases.
