Options Trading For Passive Income: Truth Or Myth?

Many people dream of having a passive income or a sideline income that can sustain their lifestyle so they can retire early. Options trading may come to mind as the plan to provide that steady stream of income every month. However, how true is that? And how feasible is it to sustain an income that we need for retirement through options trading?

In this article, I will use my experience in options trading since early 2021 (2.5 years) to answer the above questions on whether it is possible or sustainable. My options trading journey started in late Feb 2021 and I will take the whole of 2021 as the first year.

Options Trading Year 1 (2021)

The below table shows my accumulative total earnings, my earnings per month, and the total capital that I used in my first year of options trading.

In the first year of options trading, my monthly returns range from S$945 to S$131k. The average monthly return for the Year 2021 is S$20.2k. That is a really good monthly income to have. However, it would be naive to expect that kind of return as 2021 was a really bullish year.

Options Trading Year 2 (2022)

The below table shows my accumulative total earnings, my earnings per month, and the total capital that I used in my second year of options trading.

The first half of the year was still alright until the disaster happened in the 2nd half of the year when I had to cut massive losses on my long-term CALL contracts, aka LEAPS. Back at the end of 2021, I was aggressively buying the dip using the profits that I had gained in that year as well as other capital that I had raised from selling my stocks, which later turned out to be the biggest mistake of my options trading journey.

In the months of July, August, and December 2022, I realized massive losses as my LEAPS CALL options contracts either expired worthless or I chose to cut losses on them. Barring those months, I had positive returns for the remaining months of the year. My average monthly return for those months was S$18.4k.

Even in those months when I realized the losses, I had positive cash flow through some successful trades. The capital for the losses for those months was invested months ago through buying long-term options contracts. All these positive cash flows helped to make the S$415k options contract losses less painful.

Options Trading Year 3 (2023)

The below table shows my accumulative total earnings, my earnings per month, and the total capital that I used in my third (& current) year of options trading.

2023 was a very tough year in my options trading journey. Firstly, I followed a guru into believing that the greatest crash was coming and he even specified that it would happen in March 2023. I had more than S$40k of bearish vertical spread position. I also sold Covered CALL on my existing stock positions just before they bottomed, and at a very low strike price to earn more premium.

When the stock market rallied, I was caught off guard and all of my positions in spreads and Covered CALL went underwater. Also, as I was traveling during the first half of 2023, I could not allocate enough time and attention to my portfolio and made many mistakes which contributed to a disastrous start to 2023.

As you can see from the above table, I was losing 5.3k and 4.8k respectively in the months of Feb and March and it was negative cash flows for those months. I even made crazy mistakes and placed a very risky bet which made me lose S$3.4k in a single-day trade. I was pretty desperate back then to recoup my loss and ended up losing more. I learned my lesson not to take so much risk and to have patience in recovering my losses.

Things start to get better from April onwards as I start to have positive returns and cash flows. I had a new strategy that has been working well for me since April 2023. There were realized losses in June and July due to my bearish spread positions expiring worthless. Overall, I have had positive cash flows ranging from $389 to $8.1k since April 2023.

Concluding Thoughts

Options trading may be a risky derivative for many. However, when it is used in a controlled manner where risk is managed, it is possible to earn a steady stream of income out of it.

For the past 31 months (from Feb 21 to Aug 23), barring the two crazy months of Feb and March 2023, I have managed to generate positive cash returns every month. So, I believe that as long as we stick to some low-risk options trading strategies, we are able to create a sustainable monthly sideline income.

I am setting a target of earning S$3k per month to supplement my main stream of income. Once the target is reached, regardless of the time of the month, I will cut down on my trades and minimise my risk as the stock market has been very unpredictable this year.

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Options Trading For Passive Income: Truth Or Myth?