Strategy
2020 – 2023 Strategy
A lot has changed since I last updated my strategy. The biggest change is that I decided to stop trading all sorts of long or short SPX trades as listed on subsequent pages of this section. Yes, I realized that this type of trading is not for me. But you must give me a credit for trying hard. I refused to accept the nature of this trading and agree that this was not the way to make money long-term. It is fine to make a trade or two when the opportunity arrives and grab a nice profit here and there, but, I was not able to make it a sustainable profitable trade. I had a few successful months and quickly made $20 or $30 thousand dollars just to get it wiped out by one bad trade. And I decided to stop it and go back to what I was always writing about on this blog (but rarely followed myself – sad).
· Dividend Investing – asset accumulation
This is the primary goal and strategy this year – aggressive accumulation of assets. I will be buying dividend stocks, ideally dividend aristocrats, and accumulating them to the point when I reach 100 shares so I can trade options against those positions.
I consider the stocks to be my property, like real estate, which I will monetize by collecting dividends, and trading options around those positions.
We will never sell our property (stocks). Once we buy shares, we will not sell. It is like a home you buy. You do not buy a house just to sell it the next day because someone thinks your windows are not pretty. No, we buy and hold. That’s why we want to buy a good quality stock so we can hold them. We want businesses, which grow their dividends, and their managers and CEOs to act responsibly. A difficult task as I will have to learn a lot about how to choose the proper companies. In the past, I tried to simplify my selection to pick companies that were on the dividend aristocrats list, yet, it didn’t help much either as in 2020 a few dividend aristocrats cut their dividends.
I will use the benefit of zero commissions trading and will be buying shares of the selected stocks one by one. Now, I can buy one or two shares and start collecting dividends, and it will cost me nothing.
· Monetizing stock positions – Options trading
As I said above, I will be monetizing my stock holdings by trading options around those positions. If I save enough cash to trade puts, I will sell put options to buy the stocks (100 shares). The premium from the put option will be immediately reinvested to increase my stock holdings. I will invest in the same underlying stock which generated the income or re-invest into another stock (mostly the ones in which I do not own 100 shares yet, to quickly raise the position up).
If the put gets in the money, I will attempt rolling the put lower and away, but only if such a roll will result in a credit trade. If a roll cannot be done for credit, I will let puts assign.
If I do not have enough cash to trade puts outright, I will be just accumulating the stocks until I reach 100 shares. Once I reach 100 shares, I immediately proceed to sell covered calls. Income from covered calls will be reinvested either back into the company by acquiring more shares or another stock to raise shares to 100.
If a call option gets in the money, I will attempt to roll higher and away. This can be done for a credit, or I may allow rolling for debit as long as the debit is smaller than a gain on the stock by raising the profit ceiling. For example, if an original strike was 36 and I rolled the call to 40 strikes, I raised the ceiling by $4 dollars per share. Thus the debit paid must be smaller than that otherwise, I will let the calls be assigned, sell the stocks and start selling puts again.
All collected dividends will also be reinvested to raise stock holdings to 100 shares.
Occasionally, I will be trading other options strategies, such as Poor man’s covered calls (PMCC), Butterflies, or equity spreads, to generate investable income, which will be reinvested back to acquire equities.
Grt read
Very clear information thank you
I’ve read through the pages, but what are your typical parameters for your puts (i’ve seen different deltas and closing %) but i’m unsure if that’s part of your current strategy. Since you’re going ahead and using your credit to buy stocks, I assumed you were letting them expire worthless, but I was just looking for some clarification, thanks.
Moreover, when we start trading options in our challenge account, I will be explaining this process more in detail.
Thank you for your input and question. I have tried to write my rules or metrics when selecting strikes for a strangle in my latest report, hope it helps. Trading options is very flexible trading so no rules can be set in stone. But usually, I start with delta 10 to 15 to set my strikes and to collect at least 10% of the stock value (e.g. if the stock trades for $40 then 10% from 100 shares or $400 would be $40 or 0.40 credit I would like to get). The rest is pretty much mechanical. Then I monitor the trade and roll it if I do not want an assignment or need to release buying power.
Thanks. I just read that. I was curious about the closing mechanics (50%, etc) since you’re reinvesting that credit towards stocks, if you only reinvest half of your credit. Yep, i assumed we’d dive deeper as the challenge went on, but having a little extra capital to utilize, i was hoping to do a little more before our challenge got there. Thanks for the post and response!
Yes, I let the trade run to expiration and let it expire. I roll it if I see it may not expire safe OTM, then I roll it, but if it is safe, I let it expire. I reinvest the entire credit I received.
I think it’s smart to step away from 0DTE trades, they work until they don’t…you’re ‘staring down a train to pick up pennies’ as they say.
I agree. The problem is that when they stop working the losses are catastrophic compared to the gains. I tried to push it hard but failed. Time to trade what I know and what works for me.
Thanks for stopping by.
when you said in the monthly spx
1) DTE shall be 50 or more.
2) The IC width shall be 25.
3) The collected premium shall be $3 or more, the more the better
what do you mean by width shall be 25? the difference between the sell strikes (cal and put) to be 25? if you choose one side 10 delta, the other should be 25 strikes away? so if the sell call is 3555 and sell put should be 25 point away (3555-25 = 3530) but this will be ITM put and not OTM… just trying to understand how to construct it at 10 delta and get 3$ premium. any help is appreciated.
25 is the width between short and long leg of the option, that is 25 dollars, or 2500, So, if you sell 3000 put and buy long put, it is 25 below the short one thus 2975. Then the entire spread will be 3000 / 2975. Then you do the same on the call side. Let’s say you want to sell 3400 short call then you open 25 points call above the short one, thus 3425. The entire spread then will be 3400 / 3425 call spread. Both shorts (put and call) shall be at delta 10).
Martin,
I think I understand most of the statement above and makes perfect sense, except this part “Both shorts (put and call) shall be at delta 10).”
So on the example above the IC will look like this:
Buy 3425 Call
Sell 3400 Call
Sell 3000 Put
Buy 2975 Put
#1 Question: How did you derive the 10 delta? (can’t quite wrap my head around that part)
#2 Question: I see the width between selling 3400 Call vs selling 3000 put is $400 dollars…. Did you come up up with this number based on the support/resistance for the 1-2 months ?
Currently using Robinhood for the options at the moment.
Thanks again Martin for this take!
The option chain should show you current deltas. So you just go and find deltas 10 for each short option. See picture below for 57 DTE trade. So, if you find delta 10 you get your short legs, Then buy 25 points wide long legs. In this example, you will get a 750 points wide Iron Condor body with 25 points wide wings and collect 4.40 (or $440) credit.
Amazing! Thank you so much for explaining that Martin. Now it makes sense.
Also how do you usually best define the Short Call & Put Positions….let’s say for Weeklies ending in Friday and for Monthlies?
I was thinking support/resistance based on last 30-40 days.. thoughts?
I do this solely on delta but depending on the market outlook I may skew the trades to the market direction or omit one side completely. For example, in a strong bull market, I may choose higher delta on puts and skew calls higher or omit calls whatsoever.
Hi Martin,
I’ve got some doubts concerning your new strategy. Rolling untested side when the tested side reaches delta 30 is a no-go in practice. The untested side is so deep out-of-the money that you can’t trade it. This is particularly challenging for your 3-day strategy.
Could you please clarify it a bit?
Keep up great work !
Paul
On the contrary. When you roll untested down (calls) or up (puts) you collect more credit and offset the potential loss. At some point you end up having an Iron Fly strategy when your puts and calls (short) are at the same strike. I also use the credit to roll the tested side, these days. Works well. With SPX I do not have any problem rolling untested side closer to the tested one.
Thank you for all the work and guidelines you post here for free.
I had a look at the champions list and found it still needs a lot of screening as many stocks just don’t have enough option activity to be worth considering for put selling.
The champions list is mostly for purchasing the dividend stocks, so yes you need to screen them for being optionable. It is however difficult to find good optionable stocks. Those worth selling options on are in my Watch List.
Really cool website this.. have been reading a lot. I notice in your strategy rules above that there is only one that mentions any technical analysis. You mention looking for getting in around supports etc. What tools would you use for that? Just drawing lines or do you use any indicators at all?
Hi, I use Fibonacci levels and then draw supports and resistances based on the market behavior.
Thanks Martin, keep up the great info!
This is fantastic. Thank you!!
Thank you. Found your blog and it has been immensely informative.
Thank you. Hope it helps others to avoid my mistakes…
What are your thoughts on selling puts on a 3x fund such as TNA?
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.
Hello,
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.
Steve
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.