It is time to review our trading strategy and update it if it no longer fits all our rules and comfort zone of our trading.

Although this strategy will still be based on the basic frame posted earlier on this blog, it is time to tweak it a bit and – update it. Another reason for update is that I no longer trade what I have said that I do…

First, when I started investing / trading in 2006 I obviously had no plan and strategy. I had some, but it was mostly erratic and vague with vague rules which I usually heard elsewhere and which I always broke.

But I had a dream. It was to trade to create income which could be invested in dividend stocks. My journey from a sucker to a trader began. Today, I feel comfortable with my trading, I have a set of rules, and enough knowledge to “trade in the zone”. Although I have rules, time to time these rules need to be adjusted and tweaked. Not that I do not know what I am doing or keep searching for a trader’s holy grail because the previous rules didn’t work. They did work. But still, I realized that time to time I still was making mistakes which needed to be addressed.

But going back to my dream. And that is to use 50% of all my options trading profits to buy dividend stocks, dividend aristocrats.

Here is an updated strategy:

  1. Trade cash secured (in cash accounts) or naked (in margin accounts) puts to generate income.

  3. Trade against dividend stocks only. Trade against dividend aristocrats. The list of dividend aristocrats (Champions) is here.

  5. Update watch list every month. All stocks which are removed from the dividend aristocrats list will be removed from our watch list, all open options trades closed or expired, and all open long stock positions closed. Money will be reused for options trading.

  7. When a trade goes against us, roll puts as much as possible.

  9. If rolling is not possible for any reason (e.g. too deep in the money, no strikes available, a roll would result in a debit trade) accept stock assignment.

  11. When assigned, keep the stock, collect dividends, and start selling covered calls.

  13. Sell covered calls only when the stock is not too deep in the money. If so, and rolling covered calls (CCs) would not be possible, do not sell CCs and wait. Collect dividends only. It is OK selling CCs only if resulting assignment would sell the stock above the break even point.

  15. When selling covered calls above the break even point and the stock starts rising, roll covered calls as much as possible. If rolling not possible, accept assignment or attempt converting calls into puts.

  17. Create a watch list of 30 dividend aristocrats (exceptions allowed) and build a portfolio of 30 stocks (DGS).

  19. When a monthly income reaches $1,000 dollars, use 50% to purchase DGS stocks and leave the rest to be reinvested into options trading.

  21. If the monthly income is below $1,000 dollars, accumulate monthly incomes for 6 months and use 50% of combined 6 months income to purchase the DGS stock. For example, if monthly income is only $200 per month, use 6 months combined income of $1,200 (6 x $200) to purchase DGS stocks. However, the combined income must be more than $1,000. If less, all monthly income will be reinvested in options trading.

  23. Limit open trades to max 45% of available buying power (BP). For example, if a BP is $90,000 only $40,500 can be used to trade options. The rest is reserves for rolling and trade repairs. If trade repairs consume more BP than allowed, no new trades can be opened until the available cash for trading is raised back to the limit.

  25. Open new trades only when the old ones are closed so not to exceed the cash limit.

  27. Trade only 1 contract of each stock at a time. The reason is if the trade goes against us and we have to accept assignment, we will purchase only 100 shares of a stock in lieu of multiple stock lots.

  29. Sell contracts with expiration from as little as 3 days up to 45 days based on:
    • available premium (if more credit is available at shorter DTE use shorter DTE)
    • binary event (for example earnings – use shorter DTE for the trade to finish before earnings, or avoid the trade)
    • volatility (the more volatile the stock is the shorter DTE shall be used).

  31. Sell new put contracts at 1 SD (first standard deviation, or delta 16 or less). This is only for naked (cash covered) puts or calls.

  33. When selling covered calls go as close to the money (at the money trade; ATM) or in the money (ITM) as long as the strike is above the purchase or break even of the stock purchase price.

  35. Avoid opening new trades with earnings event. The trades can be opened so the trade ends before earnings; avoid riding a trade through the earnings.

  37. Open a trade with minimum of $15 net credit per trade (including 0.05 debit for closing the trade; thus the gross limit is 0.20 credit).

  39. Close the trades as follows:
    • < 7 DTE = let a trade expire worthless
    • > 7 DTE and < 30 DTE = buy the contract back for 0.05 debit.
    • > 30 DTE and 45 DTE = buy the contract back for 50% of received credit.

  41. When selling puts or calls, identify trend, supports and resistances on the chart and trade puts or calls when the stock is near the resistances or supports or in a sideways pattern. If the stock is falling wait for the stock to reverse at a major support before selling put.

  43. Purchase only stocks from DGS watch list which are in a “correction” mode and “undervalued” at the same time. The correction mode is determined by how much the DGS stock is off of its 52 week high. The valuation is based on a fair value calculation. We will be publishing the list of all stocks from our watch list meeting the above criteria for purchase.

  45. If a stock is purchased via put assignment, that stock can be sold via covered call assignment. A stock purchased via 50% reinvestment, that holding becomes a core of a portfolio and shouldn’t be sold (mainly in retirement accounts). If sold, sell a new in the money put to buy it back.

  47. If a monthly dividend income reaches $500 a month then that income shall be used for selective reinvestment in lieu of DRIP.


 · An example of constructing a trade



The goal is to trade options and use proceeds from options to purchase high quality dividend stocks for passive income. This was my dream from day one when I started trading and later on our business. The reason was that my income wasn’t large enough to pay the bills and save enough money to invest. So I wanted to create a sufficient income from trading to invest. I am almost there as many of our accounts are now self-sustainable and can support this strategy of reinvesting options income into dividend stocks.


 · Example of our strategy decision process


In order to trade successfully and stay in your comfort zone, I believe you need to know exactly what to do in any situation of your trade outcome.

No analysis, no oscillator, no market prediction will tell you what the market would do next. It is impossible and if anyone tries to sell you a miraculous winning strategy secret, he is lying. If any such secret exists, the one selling it to you would use it for himself and get awfully rich.

Trading is 90% about psychology and the rest is skills and knowing what to do. In order to trade successfully and have consistent returns, you must do the following:

1) Have a trading plan and strategy. Always know what to do in any situation.

2) Have enough money in your account so you can manage your trades when they need adjustment. The worst case what can happen to you is to be forced closing your trade at a loss due to a margin call.

3) Never predict the market. Always trade what you see is happening and not what you think will happen because it may not happen at all.

4) Trade only a handful of trades you have time to handle and manage. If you still work a full time job, opening 1000 different trades will knock you out in a sharp sell off. You will not be able to manage them when needed.

I am a visual person. It helps to have the process visible. Here is what my strategy decision process looks like:

Strategy flow chart
(note, I took the IT classes about 10 years ago and no longer remember exactly how to create the flow charts properly. So some ways above may not be correct and I apologize for it.)

When trading options, you must be perfectly OK with anything what’s depicted above. If you are OK with any of the point shown above you will not be surprised, angry or anxious about it and you will trade comfortable. And when comfortable you will also become consistent.


 · 2018 Dividend stocks watch list


Here are the stocks I plan on trading options with, holding them when assigned, and accumulating them. As mentioned above, the list may change over time if any stock gets removed from the aristocrats list or I decide to modify it.

2018 Dividend Watch list

In my watch list, there are a few exceptions of stocks I consider worth owning and a few dividend contenders.

How a stock makes it into my dividend watch list?

I look at two major things to put a stock into a list:

1) The stock must be a dividend stock (as stated above) although I allow for a few exceptions.
2) The stock or company must have a story (the story makes the exceptions).
3) The stock must offer good strikes and premiums to be tradeable (as I stated above). So if a stock offers no or little available strikes and expiration dates, or small to no premiums (for example I would have to sell an at the money strike and still barely get 0.10 credit, then that would be a stock I skip).

Then I go to a dividend aristocrats list and browse the stocks and simulate my trades with them to see how they trade (creating new trades but do not placing those trades with the broker). If I see that the stock offers a lot of good strikes and premium at least $15 or more I place a trade.

Here are a few older posts which describe my stock and their optionability selection process:

How I trade Strangles
Why selling puts against dividend paying stocks is a win-win strategy
TRADING RULES – RULE #1 – Stay small
TRADING RULES – RULE #2 – Trade often
Are you a trader or loser? Check for yourself!


Here you can download some papers I wrote some time ago (and true they need an update) but they indicate my selection process too:

Put selling strategy rules
Rolling ITM or DITM puts

The story of a stock or company is mostly fundamental. For example, recently, I watched a documentary movie about Warren Buffett and his story and success made me think that buying Berkshire Hathaway and get a share of his success (and money cow) is not a bad idea. So this stock story superseded all other rules (stock is not a dividend stock, but it is an optionable stock and I may start trading options using this underlying).

Or another story is – water. Over the years we saw a shift in interest of what people eat and drink. Selling a bottled water for example reach all times high and exceeded sugary drinks. And this trend will continue. Not so long ago I read a story of Nestle which literally bottles water directly from a stream with almost no cost added (no drilling, no refinery, no purifying, etc…). Nestle sold bottled water for billion of dollars last year with little to no overhead. I believe, this trend will continue. Given also a shortage of potable water stocks involved in water treatment will also outperform in the long run. To provide an evidence, see performance of a few stocks such as FIZZ and AWK or AWR. All were going straight up and more than doubled over a short period of time (a few years in fact).

So, if those stocks meet my selection process – dividends, story, options, I include them in the list.


 · Why dividend stocks?


The reason is simple. Dividend stock (high quality stocks) are less volatile. Yes, they offer smaller premium but they also offer less risk. And as one saying says – “Small drops will make an Ocean”.

High quality dividend stocks usually raise their dividend every year and it is a well known fact that these stocks tend to grow by the rate of their dividend increase. If a stock increases a dividend by 3% annually, you may well expect the stock to go up by 3% too.

Another reason is that one day I will not be able to trade. You know, Alzheimer… or senility… or laziness, who knows what will hit me when I will be 70 or 90 years old. In that case I want a secure income and not only from the retirement accounts.

Next reason is psychological. When trading options using dividend stocks the fear of assignment is eliminated. At least this works with me. I am no longer afraid to get assigned because it is now a part of our strategy. Before, when I was trading stocks such as WYNN, X, TECK, LULU, MNK, or index STX, these were actually stock I didn’t want. Yes I traded them for greed and fat premiums but I didn’t want to be assigned. And when the stock moved against me, I was in panic trying to defend the assignment at all cost. And I still have those stocks (trades) in our trading account and still fight those trades (and I wish so much to end those trades for good, but I can’t as I would suffer losses).

The high quality dividend stocks do not react violently to every day market fluctuations. I call them “lazy stocks”. They are like dinosaurs. It takes them time to move. And should they move against you, you will be able to respond to it fast.

They are also unlikely to disappear or go bankrupt. You may say that there were many high quality companies out there who later on ended in ashes such as recently GE. Well, yes, but should this happen, the dividend stocks will be the first they give you a warning. How? They cut the dividend. When I mentioned trading options against dividend aristocrats, one trader said that GE was once one too. Yes, it was, but before GE got into troubles, it was first removed from the dividend aristocrats list.

However, if a company, still on the list, gets into a trouble and you end up buying shares because your puts get assigned, you will be buying a high quality company. A few years ago, Johnson & Johnson (JNJ) got into trouble due to some product recalls. People were predicting the end of JNJ. While they were selling, I was buying. I bought JNJ at $58 a share. Today, at $140 a share, I still own it, receive dividends, and intend to not sell anymore. If your puts get assigned, you own a quality company, you get paid to own it, and you can sell covered calls. A triple income!

You may look at it from yet another perspective: high quality dividend aristocrats paid dividends for more than 50 years (many in fact for 100 years, just check it for yourself) and increased the dividends every year, for 50 or more consecutive years. How likely a company with such history will suddenly go belly up without you noticing?


 · Stock assignments


When do we let the put or call options assign?

We will roll our option contracts as much as possible to avoid assignment and preserve capital for trading. The goal is to trade and generate income.

However, at some point, rolling will not be possible, for example, the stock will slide and the option will be deep in the money. Then rolling will not be possible. Or the owner of the put decides to assign the stock to us (so we will not be able to do anything about it anyway) in an anticipation of some event or catalyst unknown to us. Then we will take a stock.


 · Any exceptions to the strategy?


Yes, I allow myself an exception to the rules spelled above. But such exception must not derail me from the comfort zone! Trading is about being comfortable in the first place in order to be successful.

There are plenty of people out there boasting about their trading and how great they are, but when you talk to them you find out that they have been exposed to the market for a year or less. They are still enjoying the “beginners luck”. I was there myself too. I actually started this blog in 2008 when I felt like the greatest trader in the world. I wish that oblivious ignorance was still with me and I could trade more easily than today.

So, I allow for exceptions and trade stocks such as Amazon (AMZN) or index (SPX) but I only do it on a very small scale and only when I feel comfortable with those trades. As soon as I no longer feel OK, I stop trading those stocks or index and stop trading whatsoever. If you do not feel comfortable do not trade.

I also allow for trades using different strategy than above if I see a good trade opportunity (for example trading Iron Butterflies on earnings) but again, this must be done with enough cash in the account being traded and when feeling in a comfort zone.

The main goal is to preserve capital and not lose it with reckless trading.


 · What about strangles? Will we still trade them?


Yes, we will trade strangles but not as often as before. We cannot trade them in our retirement accounts (and other strategies such as call spreads or Jade lizards do not have enough premiums to make it worth trading and our business trading account is currently deadlocked in bad trades with we need to eliminate first. So majority of our trading is now in a personal retirement accounts. However, as soon as our trading account is relieved, we will resume strangles.


 · Accounts


On this blog we will be reporting the following accounts:

IRA (personal retirement account – cash account)
ROTH (personal retirement account – cash account)
TD (our business trading account – margin account)
TW60 (personal trading account – margin account)


 · Trades reporting


We will be still providing monthly reports to show our trading progress but we are also working on reporting individual trades for our followers and novice traders to follow.

We believe that it can be helpful mainly to novice traders to see the trades, follow them, and mirror them. The best way to learn trading options is by doing it.

Before you start mirroring our trades, please make sure you read and understand our strategy and how we trade options. It is important that you know the strategy before you commit your money in a trade and that you understand that trade.

To trade options successfully you must understand the initial trade and its setup, all possible outcomes of that trade, and your “repair” strategies to all those outcomes. It is not always easy to repair a trade. But you must know what to do when that happens and a trade needs a repair.

Before you commit real money, we recommend that you place those trades in you paper money account and practice trading first to understand. And of course, you can ask us any questions about the trade.

In the past, we experimented with several way on how to post the trades and keep track of them for our readers and followers to best mirror the trades. We did this manually and with the amount of trades, it became impossible to maintain our trades public. But we will keep looking for the best way to publish our trades and show its status so you can follow it the best.

As of today, it seems that the best way to publish our trades (and it still may change over time) is to use Facebook page. So we set up a page ZZ Capital 14 where you can follow the trades.

You can still visit our Trades and Income page to review our trades and accounts progress but if you want to follow our trades, visit the Facebook page.


 · 2018 Lending Club Strategy


UPDATE 09/07/2017

In my post “A bitter return to Lending Club” I wrote that I would be returning to investing with Lending Club but this time I would be very conservative in selecting notes to invest in.

Originally, I wanted to invest only a very small amount of money ($25 dollars a month) but later on, I changed my mind a bit and decided to invest more ($100 dollars a month). In this strategy update I would like to write down my strategy for investing in Lending Club:

Here are my Lending Club screening & investing criteria:

1) deposit $100 per month I am still disappointed with Lending Club notes and cannot invest in this type of investment, so no more deposits. But I decided to keep in what I have already deposited ($500 as of now) and I will keep reinvesting. Let’s see if LC investing can change my mind. (Updated: 03/10/2018)

2) invest only $25 per note

3) invest only in “A” and “B” notes

4) invest only in 36 months notes

5) invest in notes with loan payment to income less than 10%

6) invest in notes with employment more than 2 years

7) invest in notes with debt-to-income less than 25%

8) invest in notes with no public records

9) invest in notes with credit score more than 700

10) invest in notes asking less than $10,000 dollars

11) if available cash is sitting in the account screen loans daily as long as all free cash is invested.

12) if no loans meeting criteria show on the list, skip that screen and screen next day.

13) reinvest all interest to new loans.

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4 responses to “Strategy”

  1. David Haley says:

    What are your thoughts on selling puts on a 3x fund such as TNA?

    • Martin says:

      I guess it would by like trading any index. I would have to watch it for some time to see how its options react to the market moves. The only thing I do not like is that it is not marginable so trading June contract 60 strike you make 53 premiums and you will need 5,346 margin to trade it. Too much money for not much music.

  2. Steve says:


    I’ve just found your website and read several posts. You’ve done a wonderful job of sharing and imparting your knowledge in a clear and concise read. Kudos for your commitment to assisting others in their efforts to trade options profitably.

    One question I had though in your SPX trading strategy relates to the 40 dollar wide strikes you use. Your discussion of the logic in using the wider strikes seems to neglect one important metric in designing trades and that is margin impact.

    If I choose to trade a Nov1 15 iron condor in SPX with short strikes of 1700/2200, using your 40 dollar wide strikes I get a trade that looks like this – 1660/1700/2220/2260. Using TOS, I right click on the trade, hit “confirm and send” and a dialogue box pops up which shows me I will get a $202.01 credit after commissions with a resulting buying power effect of ($3,797.99) which equates to a 5.31% return on risk.

    If I then use the same short strikes but make the strikes 5 dollars wide, I get a trade that looks like this – 1695/1700/2220/2225. Now I adjust the number of contracts so it comes as close to the buying power effect above of ($3,797.99) and I get 8 contracts. Again, opening the dialogue box which summarizes the trade, it shows a credit of $246.01 after commissions with a resulting buying power effect of ($3,753.99) which equates to a 6.55% return on risk.

    Isn’t that getting me more bang for my buck? Please consider the above scenario and see if I’ve missed something.

    Keep up the good work.


    • Martin says:

      Hi Steve, thank you for you kind words.

      To you question, it is a matter of priorities. Yes with 8 contracts you get about $44 more or 1% more, but your risk losing entire credit is a lot higher than mine. As I tried to describe in the post, 5 dollar spread has a higher likeliness of the price smashing thru both strikes than 40 dollars spread. It is the same with 50% credit capturing strategy. When I receive $180 credit, why liquidating it at $90 and not keeping the entire credit and letting the trade expire worthless? Well, the numbers are against you and you will be better off with a wider spread and closing it at 50% credit although it looks better otherwise at first look. And actually it is not. Trading 5 dollars spread is OK if you do not have that margin available (I do not have it, so I only trade 10 dollars spread and working towards 40 dollar spread goal). So the entire spread width meaning lays in probability of success and not the immediate gain. I personally would prefer lesser gain but lower risk and higher probability of success than 1% more gain and a chance that if the trade goes against me I have higher chance of losing the entire risked spread.

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