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This Grad Student’s Side Hustle Is Trading Options

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In this episode, Emily interviews Min Sub Lee, a 4th year PhD candidate in Molecular and Medical Pharmacology at UCLA. Over the past year, Min Sub has developed a side hustle in options trading, which is selling or buying the option or right to sell or buy stock. Min Sub teaches us what covered calls, put options, and put-credit spread options are. He shares how he learned this technique and why he thinks it’s a good fit for a graduate student’s budget and schedule. Min Sub keeps this strategy low-risk by limiting it to only a small fraction of his investment portfolio and making small, consistent bets. This content is not advice for financial, legal, or tax purposes, and if you are interested in options trading, please do extensive research before you begin!

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Teaser

00:00 Min Sub: You know, as long as you’re consistent, as long as you are committed to your goals, I really think that in the long picture, right, the money will compound on its own. And you know, I am a very strong believer that anyone can, you know, achieve great wealth, no matter what kind of income you’re making. I personally think that as long as you have the right mindset, as long as you have the right strategy for it, then anyone can do this. That includes grad students.

Introduction

00:31 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts. This is Season 11, Episode 4, and today my guest is Min Sub Lee, a 4th year PhD candidate in Molecular and Medical Pharmacology at UCLA. Over the past year, Min Sub has developed a side hustle in options trading, which is selling or buying the option or right to sell or buy stock. Min Sub teaches us what covered calls, put options, and put-credit spread options are. He shares how he learned this technique and why he thinks it’s a good fit for a graduate student’s budget and schedule. Min Sub keeps this strategy low-risk by limiting it to only a small fraction of his investment portfolio and making small, consistent bets. This content is not advice for financial, legal, or tax purposes, and if you are interested in options trading, please do extensive research before you begin! I have a new little project that I’d love for you to participate in! I’m crowdsourcing information on what tax forms are being issued for various fellowship and training grant funding sources. I’ve published an article with the data I’ve collected so far at PFforPhDs.com/taxform/. So if your stipend or salary was from a fellowship or training grant issued from the NIH, NSF, Ford Foundation, DoD, DoE, Hertz Foundation, Paul and Daisy Soros Fellowship Program, Life Sciences Research Foundation, American Association of University Women, etc., or an internal fellowship source, please fill out the survey linked from PFforPhDs.com/taxform/ to help out other people with the same type of funding who are confused about the tax form they received or lack of tax form. Thank you! Without further ado, here’s my interview with Min Sub Lee.

Will You Please Introduce Yourself Further?

02:32 Emily: I am delighted to have joining me on the podcast today Min Sub Lee. He is a current graduate student at UCLA, and we are going to discuss options trading, which is a form of investing that I know nothing about. So it’s very exciting for me to get to learn alongside probably many of you listeners. So Min Sub, would you please introduce yourself a little bit further for the listeners?

02:51 Min Sub: Yeah. Hi, Emily. Very nice to meet you. It’s very good to be here. My name is Min Sub. I’m currently a fourth year PhD candidate. I’m currently studying molecular and medical pharmacology at the University of California, Los Angeles. And I am very passionate about financial education, financial literacy, and hopefully I can provide some good value to my audience who may not be familiar with how options work and you know, all that good stuff.

What are Trading Options?

03:17 Emily: Yeah, sounds great. I am definitely in that audience. So, as longtime listeners know, I am a dyed in the wool passive investor. I set up my investments a decade ago and have not touched them since, because I’m very happy with how things are going. So, actively investing is not something that I do and it’s not something that I teach, but of course I want to learn about it, and I’m happy to share the information with the listeners as well. So, Min Sub, let’s start with what are options, and how does this differ from what we might otherwise think of as like stock trading?

03:50 Min Sub: Yeah, absolutely. So basically most of us are probably familiar with the concept of buying shares of a company. So essentially when we purchase, let’s say 100 shares of, you know, your favorite company, you know, let’s say McDonald’s or something, or, you know, Walmart or Target. Well, that basically means that you are essentially part owner of a company’s equity. Now, options are something that I honestly never considered doing until this year. Because you know, you might hear in the media saying that, well, you know, people have like based lots of their money on options, right? People basically, you know, put their entire life savings into options. They basically lost it all. So options really have a very negative sort of like vibe on overall market trading. But I actually wanted to, you know, change that sort of like sentiment today because options training can actually be very profitable and very, very safe if you do it correctly.

04:46 Min Sub: Right. So, essentially what options are is that options are basically a right or some kind of a contract to buy or sell typically 100 shares of a company. So here’s an example that I usually tell my friends whenever they ask me, you know, about options. So, let’s say that you are a home buyer, and I am a home seller, right? So, I currently own a house that is currently selling for about $500,000 right now. And you are interested in buying my house. However, you currently do not have the full $500,000 in cash, but you are willing to essentially have the right to buy my house. So, let’s say that you pay me $100,000 of quote unquote premium, and what the premium states is that you basically ask me if you can buy a $500,000 house for $200,000 with a $100,000 premium.

05:49 Min Sub: And essentially how that works is, you know, typically when we have those contracts, we set some kind of a contract date and some kind of a strike price. So essentially let’s say in three years, even if my house let’s say appreciates to 1 million dollars, because you have a contract with me stating that you have the right to buy my house for $200,000, essentially you could buy my house at a total of $300,000 if you add up your initial premium plus the amount that you want to pay for. So that is, in a nutshell, how options work. And, you know, obviously things can go wrong both ways because you know, my house can easily collapse to, you know, $0, right? So in that case, you know, then your premium might be deemed worthless. But at the same time, you know, like if my house appreciates to, you know, 10 million, right, then you can technically, you know, buy my house for the premium price that we’ve sort of contracted for.

06:44 Min Sub: Now, the truth is, for the most part, people who buy these call option contracts, many of these premiums expire worthless. And what that means is, typically what happens is, you know, like either the price did not appreciate in value as they wanted, so basically their contracts become worthless, right? Or, you know, the other concept is that sometimes over time there’s a concept called data decay, which means even if you hold an options contract for, let’s say three years, if you do not exercise that contract for some time, the data decay essentially can actually wear off part of your option contract on a daily basis. So, essentially people’s contract just becomes worthless, one because the actual security price doesn’t appreciate, or because of the fact that data decay has essentially just devalued the entire contract on its own, and your premium is just deemed worthless at that point. So, there are different ways how people can exercise options. But typically, you know, I say about 90% of the time, you know, people who own call options typically are on a losing streak, but you know, in the end they’re not losing a lot of money because they’re only paying a small premium to essentially have the contract, if that makes sense.

07:55 Emily: I see. Yeah. So, it does actually, and I’m not sure how familiar the listeners are with this, but I don’t know the stats on this exactly, but it turns out that like over the many, many decades, you know, 90 plus percent of the value that’s been created in the U.S. economy is coming from like the tail end of stocks that have done like incredibly well. Whereas the vast majority of companies either like break even, or lose money like over the long-term. And so it sounds similar to that. So like a lot of the bets that you’re going to make if you enter into this are going to not turn out in your favor, but because you’re making small bets, you only have to win big a certain percentage of the time to overall come out ahead.

08:35 Min Sub: Exactly. Yes. Which is why, you know, when people typically buy options, they only, you know, play with a very small percentage of their portfolio because it is money that people can live without,k right? But, you know, if the country goes well, then people can make lots of money in that sense. Right.

Safer Ways to Approach Options Trading

08:50 Emily: Okay. So I think we have the basic idea of what options are. So then how do you approach options trading in such a way that you think you’re going to come out ahead mostly?

09:03 Min Sub: Right. So, I mean, there are different ways to win in options trading. So how about this, let me start with actually some of the safer ways to start options? Because I think, you know, most people still think of options as a fundamentally evil thing, and they just sort of, you know, fear losing a lot of money. And that is, you know, not wrong. You know, if you play options really incorrectly, if you really think that you could sort of win big with options, right? You’re not thinking in the right mindset, right? Because in the end, options should be only about 20% max of your total portfolio. For me, you know, I only play with maybe 10% of my total you know, security asset portfolio, mainly because I know that if I lose that 10%, you know, I’m not going to lose my sleep on that, right?

09:46 Emily: If I heard you correctly, what you’re saying is that about 90% of all the money you have available to be invested is not invested under this strategy. You’re doing maybe a long-term diversified index situation, probably?

10:00 Min Sub: Correct.

10:01 Emily: Okay. Good to know. Okay. So we’re talking about this fraction of your portfolio, and the strategy that you’re using in that. Please continue.

Strategy #1: Covered Call Option

10:07 Min Sub: Correct. Yes. Yeah. So there are actually three sort of strategies that I adopted on options. And I really think that these strategies are very, very useful for anyone to get started. Mainly because, first of all, they’re risk-free, right? Technically, there are still some risks to options. So, I mean, don’t think that this is actually something that’s guaranteed to make money, because if you do it incorrectly, you will lose part of something. So, the first strategy I’m going to talk about is actually a strategy called a covered call option. So, how this works is, the one requirement that you have to have for this strategy is that you must own 100 shares of some security, some stock class. And basically, here is what’s happening. So let’s say that you have these 100 shares of a company or of some stock, and this stock has not been moving for the past year, or this stock basically has been trending sideways.

11:02 Min Sub: You know, maybe it’s been swinging up and down, but maybe like plus or minus two to 5%, you know, on a flat basis, right? And you know, like you’re looking at your other, you know, stocks like Tesla, you know, and like other big stocks and, you know, you’re jealous because you kind of want to, you know, like start liquidating some of this and start to, you know, maybe consider putting your money into asset classes that actually do appreciate more value. So instead of doing that, right, which I don’t recommend, you should never just jump and just liquidate your cash just to jump on a hot stock just because it’s moving up like 20%, you know, on a weekly basis. But essentially how cover calls work is you can basically kind of say that I think that the current stock that I’m owning is not going to go above 10% of value in the next certain time. Right?

11:55 Min Sub: So let’s say that, you know, by next month, by December 3rd or something, right? You know, my hundred shares, I do not expect these shares to go above a certain price. So what we can do is we can actually sell a covered call and receive a premium. So, basically I am kind of betting that because I sort of know on a high trends basis that I don’t think that these shares will go above a certain strike price, I am willing to sell a covered call option on my current shares. And with that, you can actually earn roughly between about two to 3% of your current assets. So let’s say that you own about 100 shares worth of, you know, your favorite stock. Pinterest, let’s say, right? And, you know, you currently have about, let’s say $5,000 worth of Pinterest.

12:46 Min Sub: And, you know, you can sell a covered call option and receive about, you know, two to 3% of your current holdings. And if your bet is correct, right? If you’re correct in a sense that Pinterest did not go above 10% in value, then you’re basically going to keep that premium, right? You’re basically going to keep your current shares, and you’re also going to keep the premium, and we can actually do this on a weekly basis because we can actually sell a weekly cover call options on your securities. So essentially, you know, for stocks that you believe that you don’t really expect them to move on a really volatile basis, then this is a very good strategy to actually sort of earn passive income. It’s kind of like earning dividends, you know, on your stocks, right? To an extent. Now, the downside, you know, of course, is Pinterest might all of a sudden skyrocket, right?

13:38 Min Sub: You know, there might be really good news, you know, something, let’s say there’s an acquisition purpose. And, you know, like Pinterest might literally go up 30%. Well, in that case, you’re kind of screwed because you promised to sell 100 shares of your security at a specific strike price. And if the price of Pinterest has gone up way over your strike price, then there’s a high likely chance that you’ll be called out, which means, you know, you will still get your premium, but you’re forced to sell your 100 shares of a company at a target price. So typically selling a cover call is a very good viable option for stocks that typically don’t move too much. You know, stocks like Apple, like Microsoft, you know, these stocks that tend to have a very low volatility and, you know, stocks that typically have very low, you know, like ups and downs are very good ways to actually utilize cover call options as a strategy. I’ve been using this option for quite a while, and I’ve made pretty decent income. And so far, I have never got called out yet. So hopefully I can, you know, stay that way for next, you know, whatever years I continue to do options.

14:50 Emily: With that example, is the price that you agree to sell that stock for what you’re calling the strike price? So like, in your example, it was that like 10% above wherever the price was when you made this bet?

15:02 Min Sub: Correct.

15:02 Emily: So I guess what I’m thinking is, for you as the person who is, you know, currently owning these hundred shares, basically you get money if your stock doesn’t move that much, or if it goes up quite a lot, you still get more than you had in the first place, because you’re selling at that slightly higher price. It’s just not as high as it could have gone had you never put that, you said it’s a covered call, right?

15:26 Min Sub: Exactly. Perfect. Exactly.

15:28 Emily: Yeah, so I see the attraction here.

15:31 Min Sub: Yeah. So like I said, right, it’s very good for stocks that don’t really have a high volatility because you know, if your stock goes, let’s say down, right? That, you know, it still sucks because your stock went down, right? But you’re not going to be called out. But you know, if your stock let’s say suddenly goes up to like 20%, then you know, it’s an opportunity cost that you sort of gave up because of a premium in that sense. So that is one down side, but overall, like, you know, if you feel like there is a security that you just want to hold for a long time, but want a little bit more passive income, then this is one really good strategy to do so.

Feasibility for Grad Students

16:04 Emily: I guess a further follow up question about this, this a little bit relates to like, how feasible is it for a graduate student to do this. To own a hundred shares of a stock, the stock has to be fairly low in price, right? For that to be manageable for a grad student kind of income. So like for instance, when you have done this strategy, what is the stock price or some examples of stock prices that you’ve done this for?

16:26 Min Sub: Yeah. So, you know, I mean, I’ve been trading for some time, about two and a half years now. And honestly, like when I first started this strategy, I didn’t start with covered call options. I actually started with another option trading that I slowly, you know, started to accumulate a little bit of cash on the side. And I’ll actually get to that strategy, which is actually much more feasible and practical for grad students. But right now I currently only, if I were to be transparent with my portfolio, I currently own 100 shares of Lemonade right now. So, Lemonade is actually an insurance company that I really believe that there’s a good future growth to this, but Lemonade also has been trending sideways for a long time. Right now, Lemonade is trending for about $62 if I’m looking at it correctly, and it’s been like this for about the past three months. So, like I simply just used the strategy to, you know, essentially like gain a little bit of passive income on a weekly basis to at least, you know, get something out of it.

17:23 Emily: Hmm. Okay. So the way that you’re using this strategy is you have what you want to be a long-term holding, but you don’t expect it to take off anytime soon or do much movements anytime soon. So you’re making, as you said, some income from it in the meantime.

17:38 Min Sub: Right. Right. Exactly.

Strategy #2: Selling a Cash Secured Put Option

17:39 Emily: Very interesting. Okay. Well, I think you said there were three sort of approaches that you wanted to cover for options trading. So what’s the second one.

17:45 Min Sub: Yeah. So the second one is actually a little bit similar to the covered call option. So the second one is called selling a cash secured put option. So how this works is basically you are obligated to, this time instead of sell, you’re obligated to actually buy one hundred shares of a company that you like. Okay. So, I currently do not have many sold puts going on right now. But let’s say that you have a company, okay? I don’t know, let’s say that you really want to buy Costco or something, right? But you know, you currently don’t like the price right now because Costco is trending for about, you know, $350. I don’t know, I haven’t checked, but let’s say it is. But you know, you really want to own Costco at a lower price. So what you could do is you could actually sell a put option.

18:42 Min Sub: And how that works is for a put option, you actually need a collateral this time. So in the case of a cover call, your collateral was your 100 shares of a security, but for a put option, your collateral is actually cash. That’s why it’s actually called a cash secured put option. And because an option contract typically, you know, moves 100 shares at a time, you know, and maybe Costco is not a good example in this case, but basically we need to have, you know, so if you’re willing to buy Costco at $320, then you need to have a cash security collateral of about $32,000 in your account, which might seem impractical for grad students. But that’s kind of like how put options work. And basically what happens is you also get a premium on that. So you can basically put your collateral up, and then you also receive a premium based on that collateral.

19:34 Min Sub: So if Costco let’s say never goes down to $320, let’s say, right? Let’s say Costco just moons and let’s say it just stays at $350. Well, then the good news is that your premium is still yours. You get to keep that premium, and you actually get to keep your collateral, right? Because you know, basically in a put option, you’re obligated to buy the shares. But if your strike price has not reached below your expectation, then you know, after a week, right? Essentially your put options will expire worthless and you get to keep your money and you get to keep your premium, potentially. Now, I really like puts because here’s, and, you know, put options, I think is really never a losing strategy. Let’s say that Costco actually does go down to $320. Let’s say. Well, remember the reason why you’ve done it in the first place is because you are actually willing to pay that much money for Costco, right?

20:28 Min Sub: So, in a sense, it’s not a losing game because that was your original bet, right? You have an entry strategy and you wanted to basically buy a hundred shares. So even if Costco, you know, falls after earnings or something, you know, let’s say it falls down to $319. Well then yeah, you’ll be called out, right? You will lose your collateral. And actually you’re forced to basically buy 100 shares. But the good thing about that is, let’s say that, you know, you just don’t like Costco anymore all of a sudden. You can always, you know, sell those hundred shares back in the market, right? And essentially, you know, if that happens, then technically you get your collateral back, and you also get to keep the premium that you originally settled for. So I really think that put options is a very attractive strategy.

Risks of Selling Puts

21:10 Min Sub: The only downside course is that, you know, you need to have a lot of collateral depending on what kind of security you’re trying to buy. But other than that, I really think that selling puts is very lucrative. Especially if you have some cash that you really have no idea how to spend it, but you know, you’re going to at least keep your cash as collateral, then you can sort of receive some passive income premiums, in that sense. I sold puts quite often, you know, during this spring, when the market was very red and you know, I made pretty good income from that. So I’m very happy about that choice. Right now the market is doing really well. So put options are not very attractive right now, but you know, the next time we enter a barren market, I’m hoping to, you know, like consider selling more puts, if I have some more cash on the sideline.

21:54 Emily: So one follow-up question, again, I’ll use your example, and thank you for giving one. So in your example, you agree to buy Costco at $320, but you mentioned, let’s say it fell to $319. What if it falls to $200? So are you still agreeing to buy at $320?

22:10 Min Sub: Exactly. Yes. So that is a risk of selling puts, right? So essentially you know, again, which is why you should not do a put option contract on stock with a very high volatility. You know, Costco has a fairly low volatility. It’s deemed a very safe stock. You know, its P multiple is very low. So, you know, I personally don’t think that Costco will drop that much money unless there is some kind of a really bad earnings report, a really bad guidance or something. But, you know, usually with either your cover calls or selling puts, you should not do these strategies on really volatile stocks because, like I said, we know for fact that if it goes in both ways, we are kind of screwed. So that’s a very good follow up point. And thank you for mentioning that.

22:57 Emily: Okay, thank you.

Commercial

23:00 Emily: Emily here for a brief interlude! Taxes are weirdly, unexpectedly difficult for funded grad students and fellowship recipients at any level of PhD training. Your university might send you strange tax forms or no tax forms at all. They might not withhold income tax from your paychecks, even though you owe it. It’s a mess. I’ve created a ton of free resources to assist you with understanding and preparing your 2021 tax return, which are available at PFforPhDs.com/tax/. I hope you will check them out to ease much of the stress of tax season. If you want to go deeper with the material or have a question for me, please join one of my tax workshops, which are linked from PFforPhDs.com/tax/. I offer one workshop on preparing your annual tax return for graduate students and one workshop on calculating your quarterly estimated tax for fellowship and training grant recipients. It would be my pleasure to help you save you time and potentially money this tax season, so don’t hesitate to reach out. Now back to our interview.

Strategy #3: Put Credit Spread Option

24:15 Emily: And what’s a third strategy?

24:18 Min Sub: Great. Yes. So this is a strategy that I really, really like, because I think this is a great strategy for all grad because, unlike covered calls or, you know, cash secured puts, you don’t actually need a whole lot of security or, you know, a whole lot of, you know, collateral. Basically this is called a put credit spread option strategy, and how this works is essentially, you have a put option that is going both ways at the same time. So essentially, you are selling a put, but you’re also simultaneously buying a put at the same time, right? So here’s an example that I thought of yesterday, right? So, let’s say that you are selling a put option for Apple, right? So Apple is, you know, let’s say trending around $147 as of now. And remember what that means is if you’re only selling a cash secured put, you are basically putting $14,700 as a collateral because you’re willing to buy apple at that strike price, right?

25:23 Min Sub: But what if you don’t have that much money? What if you actually don’t have that cash? Well, then you could actually, you know, take that advantage and actually do the opposite. You could actually buy a put option for the same company, but at a lower strike price. So essentially let’s say you sold a put for $147, but you’re actually now going to buy a put option for the same security, but at a lower price, let’s say $146, right? And then remember, when you’re selling a put, you are receiving a premium, and when you’re buying a put, you’re actually paying a premium for that security. So essentially you’re actually receiving the difference on the premium between your sold put and your bought put. So if your sold put was, let’s say $37 of credit, but your bought put is $23 in credit.

26:14 Min Sub: That means your net credit on this put credit spread strategy would be $14, right? Because you’re basically receiving a difference between your sold put and your bought put, right? And you know, of course, you still need to have some collateral, and how the collateral works is basically, it’s the difference between your strike price of your sold put and the strike price of your bought put. So if you sold your put for $147 and you bought your put for $146, the difference is $1, right? But remember, because options operate for 100 shares, your total collateral that you’ll be paying for is $100, right? But you’re actually receiving a premium of $14. So if you put it that way, so if your collateral was $100 and your net premium was $14, that’s about a 14% profit from your collateral.

27:12 Min Sub: And, you know, if you’re correct that Apple basically did not go below your put price, then you know, you can actually keep your premium and your collateral. And the beautiful thing about this put spread strategy is that, unlike the cover puts, unlike the cover calls, you don’t need to have 100 shares, you don’t need to have, you know, basically a lot of cash as a collateral. So I really think this is a really good strategy, and I’ve actually been doing this for quite a while sometime in January of this year. And you know, I’ve been doing this on a weekly basis. And also the one good thing about this strategy is that there are actually ETFs that you could do this. So ETFs, like SPY and QQQ, those two are the two, you know great ETFs for this strategy.

28:00 Min Sub: Mainly because these ETFs actually have three different strike dates per week, right? So basically Monday, Wednesday, and Friday, they have a different strike expiration date. So essentially if you do this correctly, you can actually do this three times a week. And if you, you know, let’s say you sold about, you know, three contracts per, you know, like every two days. And if you make about, let’s say to be conservative, let’s say about $8 per contract. Well, that’s still about $24, you know, on that expiration date. But if you multiply that by three days, that’s still about, you know, $74 of just profit that you’re making from just the strategy. And, you know, like, I think I kind of can figure out your next question. Is this actually a very, you know, like good time commitment for grad students? Because, you know, it might sound like this is very long, very time lucrative and, you know, very, very time sensitive.

28:58 Min Sub: And the truth is, when you first learn how to do this, it does require a little bit of, you know, time to sort of like learn this. But honestly, like once you get more comfortable with these strategies, all you really have to do is simply just wake up in the morning and then, you know, just open your brokerage account, and like on your phone, or it could be on your computer, and just trade these options for, you know, maybe like the first, like 15 minutes of the market open. And that’s it. As long as your security is sold, then you can just, you know, put down your computer, go on a hike, you know, get your breakfast, go to lab. And, you know, like not worry about it until the next expiration date, which is, you know, typically in two days. So I really think that this is a very good tangible strategy that anyone can actually utilize, whether it’s grad students or whether you’re just trying to get started with options.

Recommended Resources for Executing Options Trades

29:47 Emily: If someone is listening and is really interested in pursuing this strategy, but they have no idea where to start, where would you recommend they go to learn more about how to execute these options trades, but also, you know, the research into like, you know, which particular stocks should you be doing which particular, you know, option trade for? So like, what are some really great sources that you’ve learned from in the past few months and years?

30:09 Min Sub: Right. So here’s the thing. So when I first learned about stocks in general or options in general, I actually started with paper money. Because I personally don’t like losing money, and you know, like learning something new like this, even if it’s like a hundred bucks, I mean, even if, you know, that might be a small percent of my portfolio, I don’t like losing money. I mean, so like I would rather be somewhat of an intermediate expert on this field before I actually use real currency. So, you know, there are actually, you know, like online, you know, sources, you know that you could use. I think that the one that I used was actually called the Stockwatch, I think, but basically there are a lot of paper trading platforms where you can sort of like play with fake money and see if this strategy works for you.

30:56 Min Sub: And once you are comfortable with trading fake money, and once you have profited, maybe even become a millionaire with the paper money, I think by then, you know, maybe to me, you know, it took about maybe a good three weeks to be more comfortable with this. So it was a very good learning period for me. And, you know, I’m very glad that I took that time to actually learn about this because now, you know, again, like I said, the time investment, you know, initially might be a little painful, it’s just sort of a big climb, but once you are comfortable with the level of, you know, risk-free training, then honestly this becomes a very routine task for me. So, I started using, you know, a paper training currency, but, you know, there are a lot of YouTube videos out there nowadays, right?

31:43 Min Sub: If you just, you know, look up, you know, how to sell covered call options, how to sell put options, right? How to do a put credit spread. There are many, many sources that people actually use. And there are actually, you know, plenty of day traders online who actually record their, you know, online, you know, videos on live. And they actually show how to execute different trades and they actually do tutorials of this. So there are actually endless amounts of resources that anyone can get started with this strategy. So if anyone is really interested in actually starting, you know, to learn a little bit about options, you know, how to actually trade options in a risk-free way, then I really think that those two ways are a very good start. And you really must make sure that you have enough collateral cash that, again, you are comfortable losing potentially. Because, you know, like I said, I’m only doing this for about 15% of my portfolio, right? Because you know, like I will not lose my sleep if, I mean, it would still stuck, but I will not lose my sleep, you know, if I potentially, you know, lose everything the next day.

Fairly Low Time Commitment

32:46 Emily: Yeah. So I want you to make some comments now about how compatible you think this strategy is with like a grad student lifestyle. And we’re talking both income, like available money to be invested, and of course, again, we’re only talking about a percentage of that total portfolio. And also the time. So like you mentioned earlier, I think there was a little bit of time invested to learn the strategy and you were, you know, playing around with a simulation. And then you actually start doing it. But once you are familiar and comfortable, it sounds like it’s a fairly low time commitment on like the daily or weekly basis, right? To actually execute the trades.

33:25 Min Sub: Yeah. It really is. I mean, you know, honestly, like the actual, like trading itself takes, you know, maybe less than three seconds. You know, like as long as you set your own strike price that you’re comfortable with, and as long as you are, you know, like consistent with what you want to sell it for or buy it for, then it really just, you know, like usually, you know, like I do multiple options on Monday because, you know, technically Monday is when the new market opens, unless it’s a holiday, and then the option contracts expire usually on Fridays. So usually selling a weekly put or cover call on the same week, I think is a very good, consistent income. Now sometimes, you know, like I do a little bit of longer calls. I make longer contracts if I feel like, you know, I can get more premium because you know, the longer your contracts are, the more premium you will get.

34:13 Min Sub: So sometimes if I feel like a stock, you know, might not potentially move for maybe another like two weeks or so, right? Then, you know, I could consider doing that for a longer time, which means the next week I’ll just take a week off or something because I don’t actually have to worry about you know, like losing maybe a premium in that sense. Yeah. So like, honestly, like once you sort of reach that phase of, you know, I learned how to do options, I kind of know what I’m doing, right? Once you sort of like, I think pass that barrier, I think from there, it becomes a very, very passive thing. And that’s the reason why I chose to participate in this podcast because, you know, when we talk about, you know, like passive income, you know, and side hustles. Most side hustles that we are familiar with, you know, usually requires some kind of a time commitment.

35:01 Min Sub: You know, we spend about, you know, an hour or two tutoring, we spend an hour or two, you know, maybe, being a tour guide or something. Or, you know, like you could be some kind of a, you know, participant in some, you know, case study, right? But I think with options, you know, it’s very great because it doesn’t require you to actually exchange your active time for money. Because once you sort of like, you know, have a system, right? It’s kind of like, you know, you are generating your own, you know, machine that gives you your own passive income. Now, you know, don’t get me wrong. Like, again, there are risks to options trading. So, you know, don’t think that everyone’s an expert, because I definitely lost some money during this. You know, but for me, like, you know, because I was very consistent over time and I was very keen to what I believe, and I was very committed to my purchases and other stuff. I was able to make a slowly but substantial income that I still have today. And I’m still looking forward to, you know, keep on doing this, you know, hopefully until I graduate. And by then, who knows what’s going to happen.

Choosing the “Right” Stocks

36:00 Emily: So kind of one more follow-up question on that. Like, I understand that, you kind of said once you set up this like system or like machine, you know, consistently. Yes, there are risks, but you have generated a fairly consistent passive income from this. But I guess I’m more wondering about how you’re figuring out, like you’ve mentioned several individual stocks as examples so far in our conversation, like there’s whatever thousands of stocks to choose from. Like how do you actually figure out which ones you’re going to be making these bets on? Like what resources do you use?

36:30 Min Sub: Yeah, that’s a very good question. So when you talk about like stocks that are deemed considered safe, so there are actually many measurements you can actually learn about this. So, basically when I first got really into investing, I actually read the book called The Intelligent Investor. I actually have it here. Let me pull it out right now. So it’s called The Intelligent Investor by Benjamin Graham. If you see this right here. And basically this is a really good book because it actually really shows you a lot about how to, you know, pick the stocks that are right for you. Essentially, you know, there are two like great measurements of a stock that you consider, right? Because remember, when we do a covered call, you want to choose a stock that has a fairly low volatility that does not tend to move up and down in price too much, right?

37:15 Min Sub: So, you know, a good example would be Google, right? Google or Apple, right? Those two, you know, are very big, you know, big blue chip stocks that have already performed very, very well. Right? So, these are called, you know, large market cap stocks because these companies have already grown, and you know, the amount of growth that they are projecting forward is a lot less compared to, let’s say new SPE companies that have just, you know, IPO’d and you know, these companies have a lot more, you know, potential to grow, right? So I mean, you know, if you’re looking for, let’s say this growth stock investing, then you should not do options on them, personally, because you know, these, like I said, these growth stocks can either go both ways and, you know, because of the high volatility. You might receive more premium, but you have a much higher risk of losing all your money.

37:59 Min Sub: So I would personally stay away from any of those companies that have a very small market cap, right. And, you know, market cap simply means it’s the total asset of a company. So you can basically multiply the share price times the number of shares, that’s how you get market cap. The other measurement is actually a measurement called beta. So I don’t know if you’re familiar with beta, but beta is basically a comparison to the S&P 500 index. And for those who are not familiar with the S&P 500, the S&P 500 basically is a way to think about the U.S. economy as a whole, right? So if your S&P 500 sort of grows on this path, then we can kind of expect that the U.S. economy also follows that trajectory, essentially. So if your beta for a stock is one, that means that stock essentially aligns parallel to the S&P 500.

38:48 Min Sub: So an example of a stock that would have beta one is actually Google, right? Basically, if you actually look at the past chart of Google versus the S&P right, we can actually see that they actually largely overlap together. You know, mainly because, you know, those two companies, they sort of flow in the same trajectory, right? So if I were to, you know, recommend a stock to do options on, I would choose a stock with a very low beta, or with a beta that’s as close to one as possible, mainly because we know those stocks are a lot less volatile compared to other stocks, right? You know, please don’t do, you know, options on, you know, like stuff like Tesla right? Because we know Tesla goes like up and down, in like so many ways.

39:30 Min Sub: So, it’s really, really risky to you know, do those kind of options, you know, unless you have a lot of money to lose, right? And the third measurement that I also look at is something called the PE ratio. So that’s called the price to earnings ratio. And typically I mean, some people say that PE ratio is a measurement of companies’, you know, future performances. But usually I like to basically use a metric where the PE ratio for a company typically should be around 20 or lower. And basically with that measurement, that usually means that the company has already grown, you know, has a lot of built-in growth. And there is a lot less growth potential possible in the future. So, it’s kind of like Google.

40:13 Min Sub: So Google also has a fairly low PE ratio because, you know, they also have grown so much these past, you know, couple decades that you know, we don’t expect Google to, you know, become like a master large cap stock in the future. So, you know, like you could actually search up these stocks on Yahoo finance, and actually look at their charts. And, you know, these charts will actually display all the parameters that I talked about. Beta, PE ratio, market cap, all that stuff. And, you know, if you are interested in learning more about this stuff, there are plenty of resources out there online. The one source that I really like is a source called Investopedia, actually. So Investopedia is basically like an encyclopedia with all the investment terms.

40:54 Min Sub: So, you know, like if you want to know more about, you know, what is a large cap company versus a low cap company? What is a PE ratio? What is a beta? You know, what are call options? You know, you will be able to find individual articles on all of these. So, again, it takes a little bit of time and practice to be familiar with these, but I personally think that as long as you are comfortable and as long as you are interested in making money, then I think these are very good strategies that we could potentially incorporate in our daily lifestyle. Especially if you like investing.

Portfolio Growth in 2021

41:26 Emily: Sounds really attractive. So for your personal portfolio, do you mind sharing how long you’ve been doing this for, how much money you’ve made or how much your portfolio’s grown, and how much time you think you’ve put into the research and the execution?

41:44 Min Sub: So this year alone. So if I were to, you know, just add up all of my total put credit spreads that I made from January 2nd to now. I have about $7,322. And that is because I was able to do this on a weekly basis. You know, I was selling SPY put credit spreads on three times a day, and eventually, you know, those money has been accumulating and compounding. And quite frankly, that’s the reason why I was actually able to accumulate a little bit more capital to start, you know, selling puts. Remember to sell put options, we need cash collateral. So because now I had a little bit of cash, now I’m able to, you know, use these put option strategies to actually sell puts on companies that I’m willing to buy. So basically, like, you know, I think you can see what I’m getting at here, you know, as long as you’re consistent, as long as you are committed to your goals, I really think that in the long picture, right, the money will compound on its own. And, you know, I am a very strong believer that anyone can achieve great wealth, no matter what kind of income that you’re making. So, I personally think that as long as you have the right mindset, as long as you have the right strategy for it, then anyone can do this. That includes grad students.

43:01 Emily: I love the way you put that. I don’t have anything to add to that, except to just say that $7,000 in, let’s see we’re in November now. So almost a year of what is essentially like a side hustle. You know, not that active, you’re not spending a lot, a lot of time on it. It’s a very decent rate of return, especially for a graduate student. So yeah, this is very exciting.

Best Financial Advice for Another Early-Career PhD

43:21 Emily: It’s been really a pleasure for me to learn more about this. So thank you so much for volunteering to be on the podcast. I want to conclude with the question that I ask of all my guests, which is what is your best financial advice for another early-career PhD? And it can be something related to what we’ve talked about today or something completely else.

43:40 Min Sub: Yeah. So this is actually not financial advice, but this is actually, I think, a very good personal habit that everybody should employ, and that is to wake up early. So the reason why I started waking up early was actually frankly, because the stock market in California opens at 6:30. And, you know, like, you know, if I’m trying to get the best bet out of this, right? You know, usually I like to do most of my trades in the morning. But honestly, you know, quite frankly, like after I started to have very prosperous morning habits, I realized that I feel like I have a lot more time in my day, right? Because, you know, when we wake up at let’s say 9:00 AM or 10:00 AM, right? You know, like we tend to feel I think more lazy because the sun’s already out and, you know, we already hear people outside. So, I really feel like fostering this kind of like early morning routine is a very good habit, I think for really anyone, right? Because not only do you feel like you have more time, but I think that, you know, in the morning when people are, you know, mostly asleep typically usually like I get less distracted and I tend to get more work done in the morning, personally.

44:50 Emily: I have to say that I concur, and it’s even a surprise to me. Well, it was so good to meet you Min Sub! Thank you so much for coming on and sharing about this topic. New to me, new to probably many of the listeners, but really exciting to learn about. So thank you! It was great to have you on!

45:05 Min Sub: My pleasure! Thank you so much for having me!

Outtro

45:12 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? I have collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. If you’ve been enjoying the podcast, here are 3 ways you can help it grow: 1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use. 2. Share an episode you found particularly valuable on social media, with an email list-serv, or as a link from your website. 3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and increasing cash flow. I also license pre-recorded workshops on taxes. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.