Investment Income from Options

In another article, I made (another) impassioned case for the power of owning high quality, world class businesses.

I acknowledged that the idea of ownership has taken a lot of hits over the last 10-15 years as we've seen more than our fair share of meltdowns, crashes, and implosions.

So much so that a lot of people have this skewed notion that ownership is more of a potential liability than the primary pathway to financial security that it's supposed to be and always has been.

Of course, it's not just owning that's important. It's owning quality, and it's acquiring that ownership for as little as possible.

(And the reason I love option trading so much is that I've discovered and developed "structurally advantaged" strategies that pretty much allow me to name my own price on any stock I want.)

What If Stock Ownership Isn't Feasible?

But then the question comes up - what if you don't have the luxury of owning great businesses and trying to live off the dividends they produce?

What if you feel your portfolio is too small? Or that you didn't start investing early enough?

Sure, the dividend growth model works really well - if you've got several decades for the dividend growth to compound.

So in this article, I'm going to show you two ways that value investing with options can seriously boost your current investment income.

Both methods rely on the same premise - that by following this 7 step value investing with options plan, your portfolio can spin off a pretty decent amount of cash.

Method #1 - The Accelerated Dividend Growth Plan

Don't get me wrong - I love dividend growth investing. If you invest in a great, world class business that grows its earnings and increases its dividends every year, both your income and your effective dividend yield (current dividends divided by your original purchase price) are going to grow over time.

But if you're able to reinvest the additional income your portfolio generates from these customized value-oriented option trades into more and more shares of high quality dividend growth companies, you're going to dramatically accelerate the process.

All of a sudden, the dividend growth model doesn't seem so back-loaded.

After all, this is pretty much the model that Warren Buffett used to grow Berkshire-Hathaway into what it is today.

Granted, Buffett probably started off with a larger stake than you or I thanks to the success and structure of the early investing partnerships he ran where he collected 20% of the profits.

But the underlying growth principle is the same - invest in high cash flow businesses (insurance companies early on in Buffett's case, customized put writing in my case) and then continually reinvest the proceeds into more and more shares of other high cash flow businesses which then spin off even more cash for us to reinvest.

Method #2 - The Retained Earnings or Special Dividend Method

This approach is even simpler because it's basically the same as Method #1 but you just stop after the first step - which is booking your option income.

Instead of taking the cash proceeds from your option trades and redeploying them into attractively priced shares of your favorite businesses, you retain those "personal" earnings to issue yourself "special dividends" when you need them.

Instead of reinvesting your option income, you use it for your current income needs.

Method #2 appeals to a lot of individuals - those at or nearing retirement, and those - despite my best efforts - who aren't yet convinced that owning great businesses is the precursor to building substantial wealth and prefer to stay in cash as much as possible.

BUT . . .

Using Option Trades for Current Income

Even though Method #2 is has fewer steps than Method #1 (OK - it pretty much only has one step), that's not to say you can't screw it up.

The biggest mistake I see income-oriented traders make is expecting or needing returns to be too consistent on a monthly basis.

The way I practice value investing with options, I can generate a lot more income from the options than I can from dividends.

But that doesn't mean I won't have below average months. Or where I may need to sacrifice current premium to adjust or repair a trade (the ability to adjust or repair these trades is one of the things that make them so structurally advantaged in the first place).

Bottom Line About Current Investment Income from Options

Here's what it comes down to - if you're too income focused, you're going to make mistakes.

You're going to be tempted to lower your quality standards at the expense of hitting your monthly income target.

And you're going to be focused more on your needs than the health of the trade once you set it up.

If you do go this route, ideally you'll only use a portion of your booked option income for your current income needs.

Not only will that give you an important buffer, but it also enables you to continue to expand your trading capital as well.

And with more trading capital, comes more returns.

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