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. Always remember to keep your transaction costs, i.e. your options trading commissions, as low as humanly possible without sacrificing trading technology.
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More Capital = Livable Returns
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, 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 for a living, it would be almost impossible. The keyword is “almost” because there is always the element of luck and unpredictability. Maybe the next 30 trading weeks of SPX will see 25 consecutive weekly gains and selling put credit spreads would be the way to go.
Or maybe the market won’t move at all and we could make enough money to live off of by selling iron condors. Who knows?
In reality, however, both of these two aforementioned situations are extremely unlikely.
In the world of finance, there are only two certainties:
markets will move up
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. 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 seling options an attractive choice.
Selling Options for a Living
So selling options on a $5,000 portfolio is not that realistic, because it necessitates specific market conditions to be profitable.
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 is something we really need to analyze.
When you have more buying power, 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 take 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’s insane! Is it possible? Sure….but the probability of that happening is next to none!
However, with the $100,000 portfolio, we would only have to make a mere 50% return to make a living. In terms of returns on Wall Street, this is still a huge ROI. For the individual trader, however, it’s not that unrealistic.
A 50% return on a $50,000,000,000 portfolio is mostly 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. 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 once you cross the seven figure mark, you’re kind of set. Only a 5% return is needed on a portfolio of $1,000,000 to reach that same $50,000 target.
This is the key to trading. More capital (up to a certain point before reaching the billions) equates to better odds of returns for the retail trader.
Simply put, most traders fail because they don’t have enough capital to start with. Trying to make a sum of $50,000 by trading a $5,000 or $10,000 account is be extremely difficult.
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 generate reasonable returns on a large account 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.