1. Never invest what you’re not willing to lose
I can’t say this enough. Never, ever, EVER invest money you are not completely OK with losing. If that means you need to start small, even just $1000, so be it! If you lose that $1000, you need to be totally fine. You cannot be emotionally tied to ANY money you are investing. If you are, you’ll be less likely to make rational decisions when things aren’t going well.
2. Schedule automatic deposits
Around four years ago, I read an article about how a millionaire rose to riches from nothing. His best piece of advice? Invest every day with an amount of money you are completely OK losing. For him, that was $5. That’s right! This guy started depositing $5 into his account every day so that he could then invest it. Now I’m sure he did some super smarty-pants stuff with that money to help it grow to millions, but the point is simple: if you invest even tiny amounts very frequently, your wealth has a better chance of growing (and growing faster).
After reading that article, I figured if this millionaire was depositing $5 per day, I could too. I set up weekly automatic deposits of $50 into my account (about $7 per day). That’s a couple of Starbucks coffees! No big deal if I lose that. Now I don’t even think about those deposits (it’s $75 per week now). They just go in every week, no matter what, as new firepower for me to use.
3. Don’t mess with margin
This is more of a personal preference, but I choose to stay away from margin accounts. For those unaware, a margin account essentially allows you to trade stocks/options using borrowed money. You usually have to either pay a monthly fee and/or interest on that borrowed money. So why would anyone do this? Well, your returns are amplified because you’re really only risking a fraction of your own money when you invest on margin.
However, when things go bad, your losses are also amplified. And if things go bad enough, your brokerage can execute a margin call on you, forcing you to deposit more money into your account. The problem is that the brokerage really has you hostage when this happens. They can ask for any amount they deem necessary to mitigate their risk. And if you can’t deposit that money by their deadline, they can (and will) SELL your other stock positions to cover the losses.
This, to me, is just too dangerous for my taste, and I wouldn’t recommend it for you either. If you are trading on margin and intend to keep doing so, just be mindful of the possible risks.
4. No FOMO, no shame
This is pretty simple. Don’t beat yourself up. We are not wizards. We are not magicians. We are not psychics. We CANNOT predict the future. Ever. All we are doing is playing the odds. Sometimes (hopefully most of the time), we’ll be right. But we’ll be wrong a lot of the time too. That’s ok! And that’s to be expected when selling options using my system. Do NOT beat yourself up when a stock that you own goes really bad. Do not beat yourself up when you sell right before a stock rockets up. Both of these are going to happen and there really isn’t much you can do to avoid it. All you can do is manage the situations as they occur.
5. Don’t fear assignment
Assignment is what happens when you “lose” selling an option. When selling puts, assignment means the stock dropped below your strike, and you’re forced to buy shares. When selling calls, assignment means the stock went above your strike, and you’re forced to sell your shares. As I’ve explained elsewhere, you should expect to “win” about 75% of the time. That means you’re going to “lose” 25% of the time. So 1 out of every 4 weeks you will be assigned shares. It’s going to happen. Expect it, welcome it!
6. Be robotic…but use your brain
This may sound weird, but it’s really key: you need to be unemotional, logical, rational, almost robotic with your weekly trades…but you also need to be human and use your brain and your own judgment. This means that when you’re looking at the weekly list, you shouldn’t just blindly place the top trades recommended by the algorithm. Take at least 30 seconds to look up the stocks and the companies you’re considering. Are you going to be OK with possibly owning 100+ shares of a particular stock for potentially multiple weeks/months or even longer? If so, great! If not, maybe consider a different stock/option. There are usually thousands to choose from!
7. Keep meticulous records
Keep a record of your trades. At a minimum, you should keep track of: total premium you’ve been paid for each stock, average buy price for each stock, and current price of each stock. With those three numbers, you can calculate your overall profit as: stock_last_price – average_buy_price + total_premium/total_shares_owned. Without a record of your progress, how can you really judge your success?
8. Don’t be afraid of taxes
They say there’s only two sure things in life: death and taxes. Do not fear taxes. If you make money selling options, your overall net profit will be taxed at the end of the year. So yea, you’ll have to give Uncle Sam some of your winnings. And most likely your gains will be taxed at the short-term capital gains rate (essentially as if your employer had paid you that money).
But guess what? You made money! And even after you pay your taxes, you still made money! That’s a good thing!
9. Let it grow
If possible, let your account grow. It will be tempting for you to withdraw money from your account as you start to see extra “paychecks” coming in every week. If you really want to build wealth (and do it fast), I recommend not touching your account/your weekly premium earnings. Let those earnings accumulate, then use them to sell more puts and calls. This is the essence of compound interest/exponential growth. If you withdraw your earnings, then your account will never actually grow. If you instead reinvest your earnings, your account will grow much, much faster.
10. Have FUN
And finally…take a minute to realize that you are taking control of your finances. You are doing something new and exciting. You are (hopefully) getting paid every week. This should be FUN! Yes there will be bumps along the way. There will be losses. But overall, you should come out ahead. Enjoy the ride–it should be a long, rewarding one!