A day in the life of a FIRE wizard
Another day on the path to FIRE (Financial Independence/Retire Early). It’s nice, but it’s a grind. You wake up, make your own coffee, pack a lunch, go to work (hopefully by bike), and operate alongside everyone else at a job you may have mentally categorized as temporary.
Like many of your colleagues, you are investing in a group of index funds. Unlike many of your colleagues, you plan to hit the escape hatch1 whenever the value of your investments reaches 25 times your annual spending. It’s not necessarily a bad thing, and in fact, eventually it’s going to turn out to be the best thing… but could you make the stretch of days until you retire better?
The Proposed Improvement
Better could mean a lot of things, but for argument’s sake let’s say better means “generating income with your index fund shares on the path to FIRE, without ever having to sell them for less than the price you purchased them at.2” What you do with that income itself is up to you. Since we all know by now that money itself doesn’t make you happy, you might want to use the income to speed up the path to FIRE by purchasing more shares of VTI (Vanguard’s Total US stock market index fund) or your chosen index fund, or wisely spend some on experiences that make the years of saving seem much less austere, potentially a bit luxurious. You might even use some of the income to fund a side hustle that really speeds up the clock on hitting your FIRE number.
In all seriousness, generating income off your FIRE fund without selling shares could allow you to
- weather an unexpected expense
- endure a sudden job loss
- help a friend in need
- donate to your favorite charity
- or anything else money can do
Really pause and ponder: creating income without selling shares can reduce the sense of scarcity that exists pre-financial independence, and make you feel more empowered. Even better, the type of trading this book describes works best in flat or slowly rising markets, so you can still generate cash even if the market is floundering. For these reasons, I think everyone should at least know how to sell covered calls in the case of an emergency, even if they don’t do it regularly.
My Index Investments Can Make Me Income?
So, am I telling you that there is there a way to make the journey better without destroying the precious FIRE nest egg?
Yep.
Yes.
You bet.
Absolutely.
You can sell covered calls against your VTI shares, aka ”portfolio overwriting”.
It’s one of the simplest forms of options trading (that is, simple in theory, though complex in practice), and it can get you an extra “dividend” every month from your held VTI shares.
And no, not all options are risky– only specific types of options trades. In the case of covered calls, the risk/reward is limited and explicitly known from the outset, and you never stand to lose more on the downside than the value of the shares you hold (which, as an index investor, is the risk you are taking anyway).
Depending on how you choose to execute the trade, an extra 0.5% (usually it’s between 0.25–1.2%, depending on market conditions) of the stock price is a normal portfolio overwriting monthly premium for a total market ETF like VTI, or large index like S&P 500.
To be clear, portfolio overwriting isn’t a magic bullet that gets you an extra 12% per year3. It can, however, give you intermittent, incremental returns in the form of extra cash, without requiring you to sell your shares for anything less than you bought them for.4
For Example
When I wrote this VTI was $168.32 a share, and I could have sold someone the right to buy 100 shares from me, at the price of $1705, for a premium of $1.66 per share. That would have been $166 in my account, and I would only have had to sell my shares if they had risen to more than $170 when the option contract expired.((You also choose this date as the option seller- one month in the future in this example.)) Of note, $170 is more than they are worth when I purchased them for $168.34, so I’d be selling my shares for an additional $176 gain on top of the $166 I received in my account when I sold the contract.
For the frugal FIRE investor, $166 extra can make for quite a luxurious month, or buy yet another share of VTI.
Just picture yourself waking up, making some income off your shares by selling a call, and then biking to work and checking off another day towards FIRE, all the while knowing you have the “magical” options trading skills of a FIRE wizard.
What Are You Selling Me?
The website is free, and currently ad-free.
Each post is a chapter from my book “Earn Income with Your Index Investments: A Complete Guide to Portfolio Overwriting for Passive and FIRE Investing” available on Amazon.
I’ll be releasing them in accordance with how close to FIRE I am (i.e. when I am halfway to 25x, the website will have half the chapters of the book posted to it). If you like what you’re reading, you can buy the book or wait until I retire and get it all here for free.6
And just in case you still aren’t convinced, the next page will lay out what I think are the best reasons for learning to sell covered calls.
Next- Article 2: Why You Should Care
- Stop working, at least at your regular job. [↩]
- If you even have to sell them at all [↩]
- it could, depending on the strikes you choose and how the market moves, and how lucky you are on any given day, but that’s extremely rare and not really the point [↩]
- In fact, you pick the price that you are obligated to sell shares at when you sell a covered call- it can be as high above the current index price as you want. [↩]
- as mentioned, you choose this price as an option seller [↩]
- If you are having seriously financial difficulty and/or just starting out on the path to FIRE, write me a personalized email so I know you are human and I’ll be happy to send you any author copies I have lying around (I order them periodically as a business expense and usually have some available) for free, as long as you live in the continental US. [↩]