When traders are first starting out, one of the most common questions they want to know is if selling options for a living is possible.
The short answer is yes, but it completely depends on your portfolio size and cost of trading. The latter is something we cannot stress enough. As a trader, it’s paramount to keep your transaction costs, i.e. your options trading commissions, as low as possible when trying to make a living trading. Commissions for active traders are like buying an expensive cup of coffee everyday; you may not notice the cost in the short-term, but when you look at how much money you’ve spent on coffee on your year-end credit card statement, it’s shocking.
If you trade just two times per week with a broker that is on the high end of commission pricing, with an average order size of 10 contracts, you’ll spend about $1502.80 at the end of the year. If you’re trading a $10,000 account, you cannot afford to have your commissions amount to 15% of your entire account size at yearend. This is why you need to minimize your cost of transacting in the options markets, because fees can make or break you as a trader.
Tastyworks is one of the most popular online brokerages for options sellers because they have deeply discounted commissions for active traders and offer access to enhanced trading technology and options analysis tools.
Put simply, if you’re not trading options with Tastyworks, you’re probably missing out on a professional options trading experience. The Tastyworks options trading platform is unparalleled.
More Capital = Livable Returns
In general, this is the biggest concept to understand when trying to trade for a living, especially if you want to sell options. Selling call options and put options are inherently risky strategies, because the max profit is always defined and the max loss is usually undefined and substantial.
As a trader, if you have more capital to begin with, it will enable you to take on less overall risk and generate better returns.
For example, if we had a $5,000 portfolio, and wanted to sell options and “make a living,” it would be almost impossible. Of course, the keyword is “almost” because there is always the element of luck and unpredictability. Maybe in the next 30 trading weeks the S&P 500 will see 25 consecutive weekly gains and selling put credit spreads would yield highly outsized returns on a small account.
Or maybe the market won’t move at all and we could make enough money to live off of purely by selling iron condors. Who knows?
In reality, however, both of these two aforementioned market situations are unlikely, though still very possible. The majority of 2013 and the beginning of 2018 saw insane periods of daily and weekly consecutive gains
In the world of finance, there are only two certainties: markets will move up and markets will move down.
That is it. It’s tough to make blanket statements like “timing the market is impossible,” because there unequivocally are traders who have proven that their timing is impeccable and dramatically better than other market participants.
The anonymous Japanese daytrader, CIS, is one such example. He has made hundreds of millions of dollars from very humble beginnings, so regardless of what anybody says, trading for a living is very much possible, it just may not be that plausible. Anyway, for the rest of us, who don’t overindulge on carrots and sit in front of a computer 24/7, what can we do? Knowing that there are two certainties in the market, it makes selling options a very attractive strategy.
Selling Options for a Living
So selling options on a $5,000 portfolio for a living is not very realistic, because a 100% yearly return would only be $5,000, which is not enough to live on.
But let’s say we had a $100,000 portfolio. Now, all of a sudden, selling options for a living just became a whole lot more realistic. If we only wanted to use 5% of our entire capital as the initial margin on one trade, which is still a lot, that would be the entire value of the $5,000 portfolio in the aforementioned example.
This concept of buying power is something we really need to analyze.
When you have more capital, you can generate better returns and take less risk.
Say to “make a living” we need to make $50,000 every year. Of course, everyone’s standards of living are different, but we’re assuming most people out there would be satisfied with a free $50k solely from selling options, so we’ll use that number as an example.
With the $5,000 portfolio, we would have to make a 1,000% return in one year in order to achieve our target. That would be extremely difficult! Is it possible? Sure….but the probability of that happening is demonstrably low.
However, with the $100,000 portfolio, we would only have to make a mere 50% return to make that same $50,000. In terms of returns on Wall Street, 50% is still a huge ROI. For the individual trader, however, it’s really not that unrealistic.
A 50% return on a $50,000,000,000 portfolio is unrealistic because it’s not possible to deploy that much capital in the markets without creating waves and running into liquidity issues.
The power that retail traders have is a smaller scale and liquidity than huge Wall Street hedge funds. You’re not going to make any waves in the market by using your $100,000 to sell a few SPX put options, and this is a good thing.
Why Most Traders Fail
We can clearly see the difference with the $5,000 portfolio and the $100,000 portfolio, but what if you have a portfolio of $5,000,000?
With a $5,000,000 portfolio, you can sell options and take on such little risk that generating just a 1% return will result in the $50,000 target. Let that sink in. This is why it’s commonly said that, as a trader or investor, once you cross the seven figure mark, it only gets easier. Only a 5% return is needed on a portfolio of $1,000,000 to reach that same $50,000 target.
You might be thinking, can I take out a massive personal loan and trade it? Surprisingly, this is allowed, but most personal loan lenders only lend up to $100,000. This is incredibly, incredibly, incredibly, INCREDIBLY risky. If you lose money that isn’t yours, and you don’t have a way to pay it back. Your financial life will be ruined.
This is the key to trading. More capital (up to a certain point before reaching the billions) equates not only to to better odds of returns for the retail trader but it also makes a low % ROI livable.
A 5% return on a $1,000,000 is enough to live off of, and it is easier to make 5% on a $1,000,000 account than 500% on a $10,000 account. Simply put, when selling options, most traders fail because they don’t have enough capital to start with. Trying to make a sum of $50,000 by trading a $2,000 or $5,000 account is extremely difficult. It’s not impossible, but the odds are not in your favor.
With that said, however, even with a $5,000 account, it’s possible to sell options and collect options premium that can easily be a few hundred or even a few thousand dollars a month. Who wouldn’t want that?
Selling Options for a Living is 100% Possible
It’s possible, folks. It really is. Don’t fall for any “guru” promising to alert you about profitable trading setups or other garbage like that. Keep it simple. Have a decent amount of working capital and 2-3 years worth of living expenses in the bank, and I promise you that it’s possible to bag a few winning trades that net some reasonable returns by selling options.
Know all of the options trading strategies, keep your risk under control, and diversify your underlying positions.
The other important thing to note is that you need to keep your fees as low as possible. Do not overpay for commissions, because every dollar you spend to place a trade is a dollar taken out of your account. Always remember that.
There is a reason why serious options traders choose Tastyworks to trade options. Simply put, Tastyworks is an online options brokerage for the professional options seller. After all, the firm was started by options traders.