In this video, I want to talk about the logistics of running an options trading business by answering some of the most common questions people have. Of course, there’s no one right answer to this and you should consult your attorney and CPA before ultimately structuring your business - what I offer here is what has worked for me and my family since 2007.
The text is the output of AI-based and/or outsourced transcribing from the audio and/or video recording. Although the transcription is largely accurate, in some cases, it is incomplete or inaccurate due to inaudible passages or transcription errors and should not be treated as an authoritative record. This transcript is provided for educational purposes only. Nothing that you read here constitutes investment advice or should be construed as a recommendation to make any specific investment decision. Any views expressed are solely those of the speaker and should not be relied upon to make decisions.
Hey, everyone. This is Kirk, here again at optionalpha.com. In this video, we’re going to talk about running a professional options trading business. First, before we get into that, I want to congratulate you on completing all the education tracks here at Option Alpha.
It is a huge accomplishment, and my hope is that we’ve been able to completely transform your thinking around options trading both for income and wealth. Great job going through all those tracks! I know it’s not easy to do all the education and training, but trust me.
You'll be thanking me later on in the future now that you start applying all of the stuff in your trading. In this video, I want to talk about the logistics of running an options trading business and doing this from home for income by answering some of the most common questions that people have around this topic.
Now, of course, there’s no right answer to this, and you should always consult your attorney and CPA before ultimately structuring your business. What I offer here is what had worked for my family and me since 2007 when I started doing this for a full-time income.
The first question that most people have is “Should I open an LLC or basically, should I trade in an LLC?” According to the IRS, trading is not a business activity. You have to gain trader status to be able to take advantage of this corporate structure which means that you have to be doing this already on a full-time basis if you want to gain trader status.
As a passive trader which most of you might be if you’re still working a regular job, collecting a W2 income or a 1099 income, as a passive trader, the income derived from trading though is not subject to additional self-employment tax which is a good thing.
As soon as you transition over to an LLC, if you decide to do that, then you’d be subject to self-employment tax, you’d have a lot more filing requirements, a lot more reporting requirements.
Ultimately, I think for most people, the idea of opening up an LLC is not something that you need to do and in fact, it will be hard to even get an LLC with most brokers, especially mostly like US brokers.
Another big question is “With trading, can I deduct the expenses?” Once you qualify for trading or a trader status like we talked about before, if you qualify under that, you can deduct equipment, home office, education, platform fees etcetera as part of your business operations on a Schedule C for your tax returns.
This is where you have to talk with your CPA and decide if this tradeoff is going to be worth it to go full on with an LLC or start doing a Schedule C for your personal tax returns if you want to do that and then you'll be able to deduct this. You don’t need an LLC to deduct the expenses.
If you do qualify for a trader status even as an individual, you could deduct expenses like education, training, software, platform fees, etcetera. You can deduct that from business income on a Schedule C.
Another question that people have is “Should I take income?” I highly suggest that you calculate and determine a salary from which you’ll draw monthly installments out of your trading account. This is something that people mess up all the time. They unrealistically assume how much money they can take from their account.
As a general target, if you want to do this for the long-term, I would say target 3% to 5% annually which is widely considered to be very a conservative range for distributions. That means you’re going to be taking annually, $400 per $10,000.
I know that might come as some of a shock to some of you that “Wow! I need a lot of money in my account to generate a pretty significant return on my portfolio and generate income.” The reality is yes, that’s true. Now, could you target maybe a higher distribution if you annualize, get around 15% to 20% which I think is a realistic range of where you could be? Sure.
But I think that you want to try to overshoot how much money you need if you want to do this because you don't know how long you’re going to go through a drawdown, you don't know what the sequence of returns that you’re going to face.
So you don’t know if your average 15% return in over the course of 10 years might be the first five years of a couple of drawdowns here and there that hurt your portfolio and keep you stagnant.
I would say overshoot this. I would say 3% to 5% annually is something to target. That doesn’t mean you can’t work up to that. It just means that you have something to shoot for in the future.
“Should I keep cost low?” Yes, of course! Part of this whole conversation here is to remember that ultimately, your wealth is directly correlated to your ability to keep your personal finances in check and save the vast majority of your income. Look.
I’m not going to make any [Unintelligible] about this. Your ability to generate income and trade for a living has a direct correlation on how low you can keep your cost. What’s often been said, I think… I don’t know who this quote is. I’m not stealing this quote from somebody. I just couldn’t find it.
“You got to live like no one else, so later you can live like no one else.” That’s really what it is. My wife and I, we moved from Virginia to Pennsylvania because that was part of our transition as we had kids to lower our living expenses.
If you are going to start trading for a living and going to start even transitioning to trading for a living even part time while you phase out of your current job, then you have to look at your overall income and expenses for your personal household and get all of your non-preferred debt pay down.
That means all your car loans, your student loans, etcetera. I have never had in my entire life a car loan. I’ve never had student loans. I’ve never carried credit card debt. It’s just how we've done things since day one because we wanted to build wealth and we knew that that was important early on.
If that means that you have to spend a little bit of extra time and maybe work a little bit more to pay down debt first before you do that, it's totally worth doing because you’ve got to keep your overall personal expenses low.
“Other people ask about other investments?” Absolutely! Do I do other investing? The vast majority of it obviously is in options trading. There are no doubts about that. But what I do is I refund multiple different investment streams.
My wife and I refunded a bunch of real estate properties. We refunded lending notes which I’ve talked about inside of the podcast. We refund mortgages and other investments that we have with small initial deposits from top line trading revenue.
What would happen is that if any given year we did well, and that was more than the income we needed, we would take some of that money off of the top line, and we would take like let’s say $20,000 to $25,000 and make an investment. From there, we would try to let these sources of income grow on their own.
Just to give you an example, our real estate that we invested in, we initially invested about $80,000 in real estate for buying one or two properties. Those properties and the income that derived from those properties have self-funded the purchase of seven other properties to the point of which we have a $350,000 equity position in about 10 to 15 properties depending on how you count the doors, and some are duplexes and triplexes, etcetera.
We have a lot of money in there that we just have self-funded from that initial seed money. I would highly suggest doing that. That’s another reason why you keep your expenses low so that you can refund all of these different income sources.
For me, this is even better because I have invested very little in there and I let them grow, but they’re also a way to balance out my income in case we do have a month of slowly implied volatility, or we just don’t get a lot of trades on or whatever the case is.
A lot of people ask about IRA or margin accounts. I think that you should have both. Obviously, you want to max out all your IRA and 401K accounts each year if possible and continue to fund these since they’re tax favorable.
Now, of course, that means you have to trade slightly different strategies in there, but that's okay. You want to max these things out because you’re saving a ton of money on taxes. That said, eventually, most of your funds will be in a margin account or a portfolio margin account which we’ll use for drawing income on.
For us, we use IRA accounts just like you guys would use them for long-term and we never take draws out of them. We still trade options in them. We just never take draws. We only take the draws out of our margin account which is our trading account, and that's what we use to draw our income on.
For tracking and reporting, most of this is done end of the year with your brokerage statement. TOS does this is well with a service that they purchased a long time ago called “Gains Keeper.” It's a very quick report that they can run.
As far as like tracking trades and creating a statement for your CPA, it's very easy to do. They do it automatically for you, and it were all correct and verified for IRS approval. If you want to do weekly, however, I suggest you do download trades and keep them in a simple excel spreadsheet.
I don’t think you could go crazy with this. We built software to do this on our end, so that’s where our portfolio analysis software comes from. But a simple spreadsheet and just tracking the open, the entry, the close price, the profit, the type of trade that you traded, the percentage of your account, you could probably get complex and crazy with this.
But if you want just to keep it simple, I think the real idea here is just tracking how big your loss is, how big your gains, what type of win rate are you running, are you keeping your portfolio size in check as far as allocation. That’s the key there.
Daily routine. Everyone always asks about the daily routine. I think that you should keep it limited on analysis and try to be systematic as possible. I spend early mornings and late afternoons doing trades. It's probably one hour at most combined.
I do a lot of my stuff early in the morning when the market opens because prices are changing. Then I come back in the afternoon and do a lot more in the afternoon because then, it’s the end of the day, we see where the market might finish, positions may have changed between then and the morning, we might find new positions or take positions off.
The rest of the time though is spent with my family doing real estate projects, working on this website. That's the reason why I have time to do this, and honestly, because I’m a little bit OCD in the sense that if I didn't have this website or other things to focus on, I would get analysis paralysis and I would overtrade, I would overanalyze the markets.
If I don’t fill this time that I spent with it, I now do this analysis paralysis. I think it’s keeping your routine limited. This even really speaks to people who are trading and still working a job. You don't need to quit your job to do this.
In fact, you could carve our an hour a day to do this at the most once you get really into a good rhythm here and it's all very systematic. You should not be digging through reports and research all the time.
It should be very quick in the morning, very quick in the evening and you want to get in, make your trades, set them up to close automatically and then get out and let the markets work for you. This is a long-term probability and statistics play, and you've got to let this thing work out over time.
What’s next from here? Now you’ve completed track three, you've gone through all the tracks, here's my recommendation for you. Don’t stop learning. Keep learning. We have a ton of resources here inside of Option Alpha.
If you want to continue with us, I highly suggest going through all of the live trading section videos. You can also check out some of the software that we have on our watchlist, our earnings calendar, back-testing, etcetera and some of the research that we have on technicals and options trading. Also, we have a huge section of case studies on adjustments in particular strategies.
These are old videos that we have previously sent out to our pro and elite members, but now they’re really good for you just to give you an idea of how we’re actually making trades and a lot of examples because I think at this point, now that you’ve gone through a lot of the training, you need to start digging into more real-life examples.
Again, those new sections that we have here at Option Alpha are going to be a huge, huge help to you. Well, listen. I appreciate you guys taking this course. Thank you, thank you so much. I would appreciate getting your comments and your feedback, what you liked, what you didn’t like, what we can improve on, what we can do more in the future.
This is all tailor based on what we hear from you guys and how we can help you. More importantly, if you loved this course and Option Alpha, if you think that this has been helpful, please, please consider sharing us online with your friends and family on social media.
Send people emails or text messages, whatever you can do to help spread the word about what we’re trying to do here at Option Alpha. Until next time, happy trading!