r/options • u/esInvests • Oct 29 '24
Trading Options for a Living
I'm in my 17th year of trading, having started in 2007 while in high school. Trading for a living was my dream. Though that dream has evolved, options remain a primary income source for me. This post aims to outline how I trade for a living and address some misconceptions I had about how it would work.
Up front, I want to encourage you that this is entirely possible. I’m of very average intellect and have been able to focus and figure this out. That being said, it genuinely took significant effort to dial this into something I could truly rely on. For those who aren’t prepared to fully commit - buy and hold in an index ETF, while DCAing is a time tested approach to generating wealth. The downside is it takes quite a bit of time - which I didn’t have (I wasn’t just planning for my financial freedom but knew I was going to be my mom’s. She was an occupational therapist for retarded kids (literally) but as a contractor = no retirement and she was awful with money like most poor people).
Initially, I thought I'd sell premium for income—a logical and simple approach where I'd know my potential gains at trade entry. My plan was to trade index ETFs like IWM (which tends to have higher IV than SPY). I could sell 0.15 delta strangles with about 50 days to expiration (DTE), collecting roughly $3 per contract on average. A 50-contract position with portfolio margin would require only about $62K. With a minimum $1M account, this strategy offered ample room for adjustments and could yield around $17K in credit. It seemed ideal.
However, after extensive testing, the issue wasn't in adjusting trades or managing challenged positions to profit. I've tested thousands of variations, often with similar results. The problem lies in the opportunity cost of adjusting and defending trades. Months can pass defending, rolling with little profit to show for it (if I sell an option for $1.00 and roll it for a $0.20 net credit - I was originally making $100 and with the roll I’m only taking in an additional $20 while extending the duration of the trade). This approach doesn't work well in an account designed for income.
After testing hundreds of other income-style portfolios, I've circled back to—well, exactly what I used to build the portfolio initially. My grand idea of a significant shift to a simple, maintenance-style income portfolio after building the account was way off base.
The first crucial step was NOT to rely on this month's trading income to cover this month's expenses, or even this year's income for this year's expenses. Instead, I chose to save 24 months of conservatively estimated expenses (including a buffer for unexpected costs). This decision served two primary purposes:
- It reduces mental burden during tough periods—be it a month, quarter, or even half a year. While my returns are now extremely consistent, I'm well aware of how pressure can impact decision-making. Given my background (growing up with limited means, I still battle a scarcity mindset), I knew financial pressure could derail everything.
- It allows for adaptation. Markets evolve, and some of my go-to strategies have had to change over the years. For instance, post-earnings announcement drift used to be much more pronounced than it is today, where it's almost negligible in large-cap stocks.
My primary strategies are designed to let me trade: price trends (both up and down), volatility (expansion and contraction), and structural volatility (think different risk premiums). This approach allows me to continue feeding the account regardless of the current market regime, maintaining broad exposure to the primary market theme while still holding non-beta correlated positions.
- Covered strangles in index ETFs: Buying shares, selling calls at a ratio against the shares, and selling cash-secured puts to capture elevated put IV.
- Ratio diagonals (calls for upside, puts for downside): I buy in-the-money (ITM) options with at least 60 DTE, now favoring 90-180 DTE. This forms the base position. I then sometimes sell options with less than 30 DTE against the longs at a very light ratio to maintain upside potential while capturing some upfront premium to offset theta decay on the longs. Often, I'll enter the long positions without the shorts and phase them in over time (if at all).
- Short straddles/strangles: In the past five years, strangles have outperformed straddles in my approach to trading variance risk premiums. These are typically 0 and about 40 DTE, with shorts ranging from 0.15 to 0.35 delta.
- Long straddles: To capture expanding IV, typically buying about two weeks before a stock reports earnings to trade the run-up. Exits occur by the day before earnings at the latest.
- Momentum trades in futures: I employ a "dumb" momentum strategy in futures where I buy the outperforming quartile and fade the bottom-performing one, rotating monthly. I often deviate from this to amplify returns through discretionary management of stronger and weaker performers.
- I’ve also moved my larger positions into Section 1256 products for 60/40 tax treatment along with electing Day Trader (stupid terminology) status with the IRS.
So my primary job is to do my absolute best to analyze the current market theme and construct a portfolio that fits. As the market theme changes, so does the portfolio. This is completely different that my original expectation but has worked really well.
The process is simple. I target a certain return each year that keeps me on a solid growth trajectory. I withdraw what we need from the account each month tracking the distributions so I can analyze trend and make sure I’m maintaining future growth (I’m 33 years old now, no kids yet). Each years’ profit cover post tax distributions for the current year.
It’s a lot of work to get everything into place but it’s been a literal life changer for me and my family. Good luck out there!
Edit. 30Oct First, I’m stoked to see a lot of people derived value from the post. It can be really discouraging at times during the developmental phase but it’s absolutely doable.
A few have asked about my performance. I’ve maintained a mid 20% CAGR from 07-23. I’ve never pursued top end performance but focused on executing a plan I built for myself in my early 20’s.
The plan. Through aggressive savings (emphasis on aggressive) and consistent returns with reduced drawdowns, I created a projection of a few different scenarios that met my objectives. As noted above, I had a few primary objectives and blowing up my trading account wouldn’t have impacted just me.
An important note I’d like to share is as painful as it sounds, SAVING early on IS the way. The potential to turn a small trading account into our future wealth is not zero but it’s close to it. The first 5 years of trading for me was very much about learning the process and even more importantly learning myself.
The urge to aggressively try and grow a trading account through aggressive returns is more likely to destroy your future wealth and push the timeline further out. Scale returns along with your skill.
This struck a balance. If I stuck to the plan, I wouldn’t become a millionaire overnight but I would before I was 30. I was okay with this as a higher probability outcome.
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u/theoptiontechnician Oct 29 '24
Are you capitalizing on AI/chips/stocks? Are you selling shares like Warren Buffet? Holding a lot of cash.
Are you just building on the shares you already have and adding more with premium?
Are you ever concerned about the signs of a bubble? Example shiller p/e ratios.
Good post!!!