Ditching the Salary
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”
I’ve been under serving the proportion of my subscribers that wish to learn how to make an income from the market due to me doing very little income trading myself recently (I see more upside riding positions for capital gains and often selecting companies that emphasise buybacks over dividends for the reasons I outlined in Moats and Cannibals).
Often, the first response I get to quoting Taleb that a “monthly salary is a harmful addiction” is, “I love my job and find it interesting/fulfilling.” Congrats, getting to spend your time on this planet doing something you find mentally stimulating and rewarding is winning the jackpot!
This post is for those of us who missed out on the jackpot or are still hunting for it.
Income trading is special to me as it gave me my independence, and while I’ve switched to an almost entirely capital gains-based portfolio, income trading remains important to me as I know I have the means to create a steady income again should I need to.
It’s a safety net, so I never need to relapse to a salary or LinkedIn profile.
The below meme hit a nerve for me as the picture is identical to the office where I put in 60-70-hour weeks for a big chunk of my twenties.
KISS (Keep it simple stupid)
With writing options, as with all my investments, I keep it as simple as possible; I know I could have made more with aggressive strategies, but the tiny chance it could blow up and send me back to the above “fast-paced environment” is unacceptable.
Writing options for income is notorious for “low risk” strategies which are just hiding risk for a future date.
This is the core of my strategy, I want situations where the risk is fully baked as possible. Identifying this involves judging sentiment, bombed out chart patterns, cyclicality and questioning narratives of assets/industries being in terminal decline or “stranded.”
Figuring out how "baked in" or knowable the risk is to allow an accurate risk/reward assessment.
Or to use the bush fire analogy I want the area just burned, not the area that has a spotless track record of no fires being extrapolated (take Nvidia as the prime example of this).
It kind of looks like they are catching up China and by default developing markets…
What does this have to do with generating income?
Quite a lot since for covered calls to work you need a flat or bull market (the strategy doesn’t work in a bear market). So with covered calls making up the majority of my income strategy it’s vital to get into sector thats found a bottom and has a fat margin of safety (coal, tankers, oil & gas companies, precious metals, uranium). This is pretty much everything I’m long in my portfolio, just optimised for income generation (liquid options and low stock price).
If you’re unfamiliar with options, I wrote this to help the beginner: Getting Up to Speed on Options (no paywall).
Active/Semi-active or Passive Income
I’m going to split this into three sections:
One is active as the purpose of the account is purely to generate income (the opportunity cost of capital gains is to be banished from your mind).
Two is semi-active, focusing on slightly out-of-the-money monthly covered calls with a preference, where possible, for dividend payers.
Three is a passive income via dividends, ideally without sacrificing capital gains.