Like most here, I started trading to make money more quickly, so I could enjoy a better lifestyle earlier in life. Looking back, I made a pretty big error and wish I had integrated paper-traded my prospective future income strategies sooner.
I’ve been fortunate across my investments that I’ve hit some of my milestones earlier than expected, I’m obviously not complaining here but it identified a gap in my approach that I hadn’t spent adequate time refining. I mention this to those interested in trading options long-term, specifically those who expect to use it as or to supplement their income in the future, so they don’t do what I did - essentially wait until the paradigm began to shift and had not prepared adequately at all.
I’ve been trading for a while now, however there are some significant differences when trading for income vs maximizing growth.
For example, a staple strategy of mine has been the covered strangle. When trading for growth, maximizing upside potential (when assigned), allowing leverage, and when defending positions prioritizing exiting quickly were more important to me. For income, adjusting the strategy to favor consistent monthly income and protecting principal are more important.
What are some of the changes to the strategy?
-I do not allow the income portion of my account to become levered. This means I can experience grossly inefficient capital use periods. For example, most of this year I’ve been extremely lightly invested - this leads to drag on the overall account via opportunity cost and inflation.
-When assigned on the puts, I focused more on what adjustment achieves my monthly income goal over what’s most capital efficient or what favors upside potential. This includes selling short calls closer to a 1:1 ratio to shares vice leaving more shares uncapped for upside potential.
-When scaling in via disparate strike tranches, I need to more carefully allocate capital, not scaling in as quickly or at size to ensure I don’t burn through the income allocation too quickly. Again sacrificing efficiency.
-I rarely trade individual stocks, favoring index ETFs like IWM or SPY. This decreases unsystematic risk and return variance but comes at additional costs - lower premiums and lessened capital efficiency. It also sacrifices upside potential.
I also missed out on tons of potential data points that I collect in my trade logs because I wasn’t tinkering with income based strategy variations. E.g. When does it make the most sense to take assignment and sell calls vice rolling IF premiums collected would be similar (based on my strategy)? I’d like to experiment more with underlying relationship to MAs and volatility to optimize.
Overall, my main thought is to not just focused on what’s right in front of you right now but try and think a little further out so you can explore without being compressed by time.