Rising Star Teaches Me How to Make a Passive Income with Options | Rolling Trades Series
Apr 27, 2021
I saw a link on Twitter once that read something like, “how to earn mailbox money.” And I was like, why do you need to save up money to buy a mailbox? Damn, that must be one fancy-ass mailbox. But then, when I clicked on the link it explained that “mailbox money” is getting checks in the mail on a regular basis, or in today’s age, earning passive income as easily as if your last name was Khardashian. What if there was a way to become systematic in your trading, so that you were regularly placing trades that generated income on a consistent basis? These are the themes that were explored in this episode of Rolling Trades.
Um, I’m getting a text message from my lawyer. Let me be clear, I am in no way saying these are guarantees of income, we’re just exploring strategies and um trading is risky as hell, yo.
Our special guest this week is Michael S. from Las Vegas. This guy was a hit on our Rising Star episodes and you can follow all of his trades on the tastyworks follow page (just like Tony from Mexico and Fauzia). He’s a retired USAF Captain who used to fly KC-130s and when he’s not hanging out with models, DJs and other celebrities in Vegas, he spends all of his time trading. Yeah, he’s cooler than any of us will ever hope to be. He’s basically if Maverick from Top Gun and Jim Cramer had a baby, and that baby was raised in a strip club.
That said, Michael really knows his stuff when it comes to options trading. Here are his top three tips to boost trade profitability and increase the likelihood of generating passive income from trading.
The lesson this week is initiating regular trades (defined or undefined based on your account size and risk tolerance) in SPY or SPX. SPY is smaller and more liquid than SPX, and 10 SPY contracts are equal to 1 SPX contract so be careful with your size. But, as Michael points out, there are tax benefits to using SPX.
He likes to initiate the trades for 45 days out, it doesn’t matter if the expiration is in the regular cycle or in the weekly. And it’s optimal to place the trades when the market is down a bit but the VIX is up. Then, it’s just a matter of selling premium.
Michael likes to go out to the 20 delta put, especially if you’re doing a spread because we want to collect more premium. A $5 dollar wide spread in SPY would be a $50 dollar wide in SPX. But beware! The pandemic tested even the most protective of positions that were 600, 800, and even 1200 points out of the money. So bad things can happen to good traders, but your protection comes on trade entry. Michael says, “If the risk of another pandemic crash bothers you, don't have long positions.”
Adjust portfolio allocation based on risk tolerance and current market conditions. If you normally would have 35% of your portfolio allocated in “normal” times, maybe now go down to 20% or less.
Don’t get cocky when it comes to trade management! If the VIX goes up at any time near your 21 day window, that’s a good time to roll. Even though your spread may be out of the money by 35 (350 points in SPX) you still have Gamma risk. Rolling position out in time to another 45 day window helps you take advantage of volatility expansion.
Here’s where the mailbox money comes in: Always be selling! Sell a new 45 day trade every week into perpetuity. By doing this, you will always have a position that is near that 21 day mark that you can take advantage of when you have a down move. So every week, new trades get put on, and other trades get rolled out. A lot of up days where the market goes up but the VIX also goes up. So take advantage of that phenomenon. Roll strikes to the same delta and collect a bump in your theta.
This strategy may not be right for everyone, but I find the concept of consistent trades fascinating and, hey it’s probably better than going to Vegas and trying your hand at the slots.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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