Everybody wants to be an entrepreneur or start a side hustle. This inclination can be attributed to various factors, including building new income streams, autonomy in one’s work life, and the opportunity to pursue personal passions.
If adding more work to your plate isnāt your thing, you might consider the FIRE movement.
The FIRE (Financial Independence, Retire Early) community in finance is a movement that focuses on extreme savings and investment to achieve financial independence and the ability to retire much earlier than traditional retirement age. The core philosophy behind FIRE is about living below your means, saving a significant portion of your income (often 50% or more), and investing those savings in a way that allows you to live off the returns without needing to work a traditional job.
The bottom line is – more and more people are trying to financially hack their life so that they can opt out of the traditional 9-5, retire at 65 lifestyle of previous generations.
The proliferation of digital information, platforms and resources has also facilitated this trend, providing individuals with the tools and knowledge necessary to embark on entrepreneurial ventures.
When trading options – specifically from the sell side – it can help to think of your trading activity as a business. In this article we will show that selling options operates under the same free market, supply demand dynamics of any other business.
Key Takeaways:
- Option Selling as a Business: Comparing option selling to traditional business models, emphasizing market dynamics, customer base, and operational aspects.
- From Experience: Gaining unique perspectives on entrepreneurship and option selling from diverse business backgrounds.
- Operational Demands: The day-to-day operational requirements of running a lemonade stand versus managing an options trading portfolio.
- Time for Money Trade-off: How both business models involve trading time for financial returns in different ways.
- Income Stability: The predictability of income from traditional businesses versus financial trading activities.
Quick story:
I personally have started 9 businesses and own/operate 5 today – so I know what its like to run a small business. Because I have been a part of so many businesses and projects I can bring a unique perspective to the relationship between selling options and entrepreneurship.
I am not just some internet finance guy – I have been in the shoe, marketing, hosting, software, construction, wine and music business. Not sure if that helps or hurts my credibility but it gives me context to explain how selling options and your next side hustle idea are comparable.
The Side Hustle:
The example side hustle could be anything – but for simplicity lets say the side hustle is a lemonade stand. Everyone should be able to understand the lemonade stand example – but the lesson applies to drop-shipping, the gig economy, or flipping houses. In the end, its a business – and it should be evaluated as such.
Every business has a product/service, customers, costs and metrics that can be compared against their peers – and other uses of capital.
Letās break down the lemonade stand verses treating option selling as a business.
Product/Service:
Lemonade Stand: The product here is lemonade, a beverage sought after for its refreshing qualities. The focus in this business is on producing a high-quality drink that appeals to the customer’s taste and refreshment needs. Success hinges on the ability to consistently create a lemonade that stands out in flavor, quality, and presentation, ensuring that each cup sold meets the customer’s expectations for refreshment and satisfaction. You likely have to make your product every day – and the difference between your cost to produce and your sales price is your margin.
Option Selling: The product in option selling is a financial contract that offers the buyer certain rights regarding the purchase or sale of an asset at a predetermined price within a specific timeframe. The emphasis is on crafting a contract that is attractive to the buyer in terms of the potential for profit, while allowing the seller to generate income through the premium charged for this right. The skill in this business lies in accurately assessing market conditions and risk to price these contracts in a way that they are both profitable for the seller and appealing to the buyer. You donāt produce anything, but you are paid for providing a financial service – options contracts – to the market place. Your margin is your ability to sell volatility for more than realized volatility.
Customers and Total Addressable Market
Lemonade Stand: The customer base for a lemonade stand primarily consists of pedestrians in high-foot-traffic areas, such as parks, neighborhoods, or events. The total addressable market can vary significantly based on location, weather, and accessibility. The appeal of lemonade stands often hinges on impulse purchases driven by thirst. Therefore, the potential market size is generally limited to the local population and the influx of visitors to the area, with peak periods likely coinciding with warmer weather and outdoor activities.
Option Selling: The customers in option selling are investors or traders looking for strategies to hedge their portfolios, speculate on future price movements, or gain income through premium collection. The total addressable market encompasses a broad range of individuals and institutions participating in financial markets worldwide. This includes retail investors, hedge funds, financial institutions, and anyone with access to options trading platforms. Given the global nature of financial markets and the increasing accessibility of trading platforms, the total addressable market is extensive and not limited by geographical boundaries, making it potentially vast compared to physically localized businesses.
Regulatory Environment
Lemonade Stand: The regulatory environment for a lemonade stand can vary greatly depending on the location. Generally, these small-scale operations may require a vendor’s permit, health department permits, and adherence to local business regulations. These requirements are in place to ensure public health and safety, regulating aspects such as food handling, sanitation, and sales operations. While some areas may have relaxed rules for children’s lemonade stands, intending to foster entrepreneurial spirit among the young, others enforce strict compliance with local business ordinances. This environment necessitates an understanding of and compliance with local laws to legally operate even such a small-scale business.
Option Selling: The regulatory environment for selling options is complex and highly regulated, involving multiple layers of oversight to ensure market integrity and protect investors. Options sellers must comply with regulations set by financial authorities, such as the Securities and Exchange Commission (SEC) in the United States and similar regulatory bodies worldwide. Additionally, they must follow rules established by the exchanges where the options are traded, such as the Chicago Board Options Exchange (CBOE). Compliance includes understanding and adhering to requirements regarding trading practices, reporting, and capital requirements. This environment aims to maintain fair and orderly markets, protect investors from fraud and abuse, and ensure the financial system’s stability.
Tax Treatment
Lemonade Stand: The tax treatment for income generated through a lemonade stand typically falls under self-employment or business income, depending on the scale of operation and local tax laws. This income must be reported to tax authorities, such as the IRS in the United States, and is subject to income tax at the applicable rates. Expenses incurred in the operation of the lemonade stand, such as cost of goods sold (ingredients) and any applicable business expenses (permits, equipment), can often be deducted to arrive at the net taxable income. For very small operations, especially those run by minors, there may be exceptions or thresholds below which income is not taxed, but the specifics can vary widely by jurisdiction.
Option Selling: The tax treatment for income generated from selling options is more complex and varies depending on the type of options traded, the duration of the positions held, and the traderās tax residency. In general, profits from selling options can be considered capital gains and taxed accordingly, with the rate depending on whether they are short-term or long-term gains based on holding periods. Additionally, losses can typically be used to offset other capital gains, and in some cases, a portion of ordinary income. Specific rules, such as the “mark-to-market” accounting method for traders who qualify as professional traders, can change the way income is reported and taxed. Traders must carefully document their transactions and may need to consult with a tax professional to ensure compliance with the complex rules governing options trading.
Scalability
Lemonade Stand: Scalability for a lemonade stand is primarily limited by physical and logistical constraints. Expansion possibilities include opening multiple stands in different locations, diversifying the product range to include various beverages and snacks, or even transitioning to a mobile operation to attend events. However, each step requires additional investment in supplies, equipment, and possibly labor. While there’s potential for growth, the scale is inherently limited by the need to manage physical inventory and maintain quality across multiple locations, alongside navigating local regulations and securing appropriate vending spaces.
Option Selling: The scalability of selling options as a business is significantly higher due to the nature of financial markets. Traders can increase their scale by managing larger amounts of capital, diversifying into different types of options and underlying assets, or leveraging sophisticated trading strategies that use software and algorithms. The primary constraints are access to capital, risk management capabilities, and the trader’s skill in analyzing market conditions. Since the business operates in a digital realm, it’s not bound by physical location or inventory, allowing for potentially rapid and extensive scalability subject to market risk and regulatory compliance.
Overhead
Lemonade Stand: The overhead costs for operating a lemonade stand include ingredients for the lemonade (lemons, sugar, and water), disposable cups, a stand or table, signage, and potentially a permit, depending on local regulations. These costs are relatively low, making it accessible for many to start. The variable costs, such as ingredients, directly correlate with the volume of lemonade sold. Fixed costs, like permits or stand setup, remain constant regardless of sales volume. This structure allows for straightforward financial planning and management, with the primary focus on optimizing ingredient costs and sales price to maximize profit.
Option Selling: Overhead costs in option selling are primarily related to brokerage fees, subscription costs for market analysis tools and data services, and potentially educational resources for ongoing learning. Unlike physical businesses, there are no costs for goods or a physical location, but capital requirements can be significant to cover potential losses from trades. Traders must also consider the impact of taxes on their trading profits, which can vary based on the trader’s location and the specific tax regulations applicable to trading activities. The cost structure in option selling is heavily dependent on the scale of operations and the sophistication of the trading strategy, with a significant emphasis on managing fees and capital efficiently to maximize net returns.
Start Up Capital
Lemonade Stand: Starting a lemonade stand requires minimal initial capital, making it an accessible venture for many. The essential startup costs include purchasing ingredients (lemons, sugar, and water), basic equipment (pitcher, stirrer, juicer), and serving supplies (cups, napkins). Additional expenses may involve a table, chair, and signage for advertising. If local regulations require it, there might also be a nominal fee for a vendor’s permit. Overall, the startup capital required for a lemonade stand can be very low, often under a hundred dollars, making it an attractive option for first-time entrepreneurs or young individuals looking to experience the basics of running a business.
Option Selling: Conversely, entering the world of option selling, specifically through a put credit spread, can require significantly less startup capital, often as low as $100. This lower threshold is made possible by many brokers who allow traders to engage in options spreads with minimal initial investments. The capital requirement is primarily to cover the margin or the potential risk exposure of the spread, rather than the full value of the underlying asset. This makes option selling, particularly strategies like put credit spreads, an accessible entry point into the financial markets for individuals with limited capital, contrasting sharply with the comparatively higher initial costs associated with starting a physical business like a lemonade stand.
Employees
Lemonade Stand: For a lemonade stand, the employment and HR requirements are minimal particularly if the business is operated by the individual or within a family. Formal HR processes, like contracts, payroll, and employee benefits, are generally not a concern for such small-scale operations. However, if the business grows or operates in a manner that requires hiring employees outside of the family, compliance with local labor laws and regulations regarding employment would become necessary.
Option Selling: For individual traders or small partnerships, there may be no need for hiring employees, as the business can be managed by the individuals involved. As an individual, you can grow your option selling business without hiring anyone. However, as the operation grows to include more complex strategies or a larger volume of trades, the need for additional support in areas such as analysis, compliance, and possibly customer service may arise. In such cases, formal HR processes would need to be established, including recruitment, contracts, payroll, and adherence to labor laws.
Barrier to Entry
Lemonade Stand: Barriers to entry for a lemonade stand are low. The primary requirements include a modest investment in supplies and equipment, such as lemons, sugar, water, a pitcher, cups, and a stand or table. Depending on the location, there may be a need for a vendor’s permit, which could introduce some regulatory barriers and associated costs. However, the simplicity of the product and the operation means that specialized skills or knowledge are not necessary, allowing almost anyone with a small amount of capital to enter the market.
Option Selling: The barriers to entry for selling options as a business could be considerably higher due to the specialized knowledge required and the financial risks involved. Potential traders must have a solid understanding of the stock market, options trading strategies, risk management, and regulatory compliance. Additionally, traders need access to a brokerage platform that supports options trading, which may have requirements such as a minimum account balance or trading experience. It sounds complicated, but anyone can become an option seller.
Exit or Liquidity Event
Lemonade Stand: Exit or liquidity events for a lemonade stand are generally straightforward due to its small scale and simplicity. The most common exit strategy might involve selling the stand’s physical assets, such as tables, signage, and equipment, to another aspiring entrepreneur or liquidating these assets individually. Given the limited scale and the nature of the investment, the return from such a sale is unlikely to be substantial. Additionally, because the business is closely tied to the individual or family running it, transferring ownership or scaling down operations can often be done with minimal formalities, making the exit process relatively simple and direct.
Option Selling: In the context of selling options as a business, exit or liquidity events can vary significantly based on the structure of the trading operation. For individual traders or small partnerships, exiting the business typically involves closing out all open positions to realize any remaining equity in the trading account. This process can be relatively quick, assuming the market for the underlying securities is liquid. For larger operations or trading firms, an exit might involve the sale of the business to another firm, which can be complex and require negotiations over the value of the trading strategies, client lists, and intellectual property developed. Alternatively, a gradual wind-down of trading activities may be preferred to manage risk and maximize the return on remaining positions.
Operational Complexity
Lemonade Stand: Operational requirements for a lemonade stand include sourcing ingredients, preparing the lemonade, setting up and breaking down the stand, handling cash transactions, and maintaining cleanliness throughout operations. Daily tasks involve purchasing fresh ingredients, ensuring a consistent recipe for quality control, and managing inventory to meet demand without excessive waste. Additionally, the operator must be prepared to engage with customers, provide quick service, and manage the financial aspects, such as making change and tracking sales. The simplicity of the operation allows for a focus on customer service and product quality to drive repeat business.
Option Selling: The operational requirements for selling options involve continuous market analysis, monitoring of open positions, risk management, and compliance with trading regulations. Traders must have access to financial news, market data, and analysis tools to make informed decisions on when to enter or exit trades. Regularly reviewing the performance of open positions is crucial for adjusting strategies in response to market movements. Risk management involves setting stop-loss orders and maintaining appropriate levels of diversification. Additionally, traders must ensure that their activities comply with the regulations of the financial markets in which they operate, including reporting requirements and maintaining adequate capital reserves.
Trading Time for Money
Lemonade Stand: In the case of a lemonade stand, the concept of “trading time for money” is evident through the direct involvement required in operating the stand. Each hour spent preparing lemonade, setting up the stand, serving customers, and managing sales directly correlates with the potential to earn money. The revenue generated is closely tied to the operator’s active participation and the number of hours dedicated to the business. There’s a linear relationship between time investment and financial return, with limited opportunities to generate income without active engagement in the business operations.
Option Selling: For option selling, “trading time for money” manifests in the time spent researching, monitoring the markets, managing existing positions, and strategizing for future trades. While the initial setup of a trade might not require constant attention, the ongoing analysis of market conditions, adjustment of positions to manage risk, and the decision-making process for opening or closing trades involve a significant time investment. The profitability of selling options is thus directly influenced by the time and effort dedicated to market analysis and trade management. However, the potential for passive income exists, as once positions are established, they can generate returns without continuous active management, though monitoring and adjustments are necessary to mitigate risks.
Income Predictability
Lemonade Stand: Income predictability for a lemonade stand tends to be low due to its dependence on various uncontrollable factors such as weather, location, and local competition. The business is typically seasonal, with higher income potential during warmer months and virtually no income during colder periods. Daily earnings can fluctuate significantly based on foot traffic, which may be influenced by events, holidays, or even the day of the week. This variability makes it challenging to predict income consistently, requiring operators to adapt quickly to changing circumstances to maximize sales opportunities.
Option Selling: Income predictability in option selling varies with market conditions, the chosen trading strategy, and the trader’s skill level. While the collection of premiums from selling options can provide a more regular income stream compared to some other trading activities, market volatility can significantly impact the profitability of open positions and the overall success of the strategy. Experienced traders may mitigate some unpredictability through diversified strategies and risk management techniques. However, the inherent uncertainties of financial markets mean that income from option selling can still be highly variable, with potential for both significant profits and losses.
Why Treating Options as a Business Can Help Improve Results:
Thinking about option selling as a business can significantly improve trading discipline, strategy, and overall performance for several reasons:
- Risk Management: By treating option selling as a business, traders prioritize risk management, understanding that preserving capital is just as important as making profits. This approach encourages the development of strategies to limit losses, such as setting stop-loss levels, diversifying option positions, and carefully selecting strike prices and expiration dates to balance potential returns against risk.
- Strategic Planning: Like any business, success in option selling requires a well-thought-out plan that includes clear objectives, an understanding of the market, and defined strategies for different market conditions. This level of planning helps traders stay focused on their goals and makes them less likely to make impulsive decisions based on short-term market movements.
- Record Keeping and Analysis: A business-minded approach to option selling emphasizes the importance of keeping detailed records of trades, including the rationale behind each trade, the outcomes, and any lessons learned. This discipline facilitates ongoing learning and strategy refinement, enabling traders to analyze what works and what doesn’t and adjust their approach accordingly.
- Professionalism and Continuous Improvement: Treating option selling as a business fosters a professional attitude towards trading, where continuous improvement, education, and staying updated with market developments are part of the routine. This mindset encourages traders to seek out new knowledge, strategies, and tools to enhance their trading performance.
- Financial Management: A business approach to trading instills a sense of financial discipline, where understanding the cost of trades, managing cash flow (through the careful allocation of capital to different positions), and planning for taxes are integral to the operation. This comprehensive view of the financial aspects helps in making more informed decisions and in planning for long-term sustainability and growth.
Overall, thinking of option selling as a business can lead to a more disciplined, strategic, and analytical approach to trading, which can significantly enhance a trader’s ability to achieve consistent profits and manage risks effectively.
In conclusion, what type of business would you want to operate?
Lemonade: dependent on your effort and time, inherently limited in potential, difficult to reach customers.
Options: independent of time and effort, unlimited in potential, unlimited access to unlimited customers.
How would your drop shipping, clothing line, marketing agency, AI start up, restaurant compare to option selling? What is the best use of your time and capital?
If you have questions on this content, leave them in the comments section below and I will make sure to respond. You can also learn live with us in Discord or on x.com.