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Options trading and investing strategy for 2019

I know, it is end of March almost and you may say that it is late to set a strategy and goal now. But I reviewed my 2018 strategy and realized that my trading changed. No too much though. Many principles still apply.

But there is one significant change some of my readers and followers are blaming me of – I am eliminating trading options against stocks and shift to index S&P 500 (SPX).


As the market became volatile again during 2018 and mainly at the end of 2018 I faced early assignments of my positions and thus losing money. I had no defense against calls or puts assignment to the stocks.

On the other hand, I can hold SPX until the very end of a trading day. I can hold until 5 minutes before the end of expiration day and then decide what to do next – roll, close the trade, or add a defensive position, or any sort of adjustment. And I do not have to fear to get assigned early.

That was a reason for me to start shifting to SPX for trading. I still plan on using naked puts or calls as before and as a mean of getting into or out of a stock.

Therefore, SPX options will be for active trading and generating income, stock options for investing.

Our accounts are not yet large enough to allow buying 100 shares in a single trade. That would exceed our investing amount rules. Currently, we have a limit to use 50% of all options proceeds to buy shares of our interest (dividend growth stocks) and that amount is still too small to buy 100 shares of a stock such as Johnson & Johnson (JNJ). I simply do not make $26,000 in a single month which would allow me to invest $13,600 to buy 100 shares of JNJ. To do so, I would have to wait months and months before I could buy 100 shares of JNJ. And that is not what I want.

So, I have a limit of $600 per purchase. If I make $1,200 or more, I can buy a few shares and spend $600 limit (or more). And as our income growths, we will be buying more and more shares and increase our amount.


 · Trading options using SPX


As mentioned above, we will be trading options using SPX to generate income during 2019 (or until situation in the market changes). We will be trading put spreads, call spreads, or Iron Condors. Here are the rules and mechanics of our trading:

1) Based on the net-liq of the account, spread width, and allowed total net-liq usage based on the current market level (cash rules), we will have max number of trades (or contracts) per account which we can open. For example, if our net-liq is $50,000 and the market is near the all time high, we can use 25% of all net-liq to be invested, then we can open 25 contracts (50,000 * 0.25 / 500 = 25 contracts, [net-liq * allowed max amount of net-liq to be used / spread width]).

2) If in the future all 25 contracts are used and there will be a necessity to start adding more contracts, then we will start widening the spread rather than trading more contracts in a single expiration date. For example, in 45 DTE cycle, there are 9 weeks. SPX has expiration 3 times a week. So, theoretically, we can open 27 contracts to fill all expirations for the next 45 days. If we can open more contracts, we will not have enough “space” and we would have to start selling either multiple contracts within the same expiration cycle, longer expirations than 45 DTE, or start widening the wings of spreads or Condors.

3) Then, as long as we have an “empty slot” in our options calendar (scheme) we can open a new trade.

4) We primarily select 45 DTE or around that time (the range is 30 – 60 DTE with 45 DTE as ideal DTE). We also trade short term trades (zeroes or up to 7 days) but these are different trading rules and different situation.

5) Then we select 1 SD strikes (16 delta) but we can adjust them so to collect at least 1/3 of the spread width of the premium. I am OK to go and adjusting deltas as high as delta-30 but we try to avoid these high deltas. If I can get close to 1/3 with smaller delta I do so (although studies show that delta 30 actually perform better and has better POP and ROC).

6) We can sometimes skew the trade of an Iron Condor to be more bullish or bearish, meaning that if I feel bullish I choose higher delta on puts and delta 16 on calls. If I feel bearish, I do the opposite and select higher delta on calls and delta 16 on puts. My feelings are based on the chart and identifying trends and supports. But I suck in chart reading, so it is still in a realm of feelings rather than chart reading science.


 · Managing winners


After opening a new trade we will watch the following metrics and close a trade if any of these happen:

1) Current profit (CP) / day > Max profit (MP) / DTE

For example, when we open a trade, Iron Condor, and collect 1.90 or $190 premium, then that is our “max profit” (MP) which we divide by the total DTE. If the current profit (CP) divided by days in trade (DIT) becomes larger than CP/DTE, we close the trade.

2) CP = MP * 0.5 and days in trade (DIT) < = 21 days

If for any reason the CP/DIT will not exceed MP/DTE but reaches 1/2 of the collected credit in the first 21 days, we close the trade.

3) CP = MP * 0.25 and DIT >= 21 days

If none of the above gets met for any reason, but a trade makes 25% of collected credit anytime after 21 days in trade, we will close the trade.

If none above is met, then we will continue holding the trade until expiration and do nothing, but that means that a trade is most likely a loser and one side or the other is possibly breached.


 · Managing losers


1) When the trade doesn’t meet the criteria above, meaning that after 21 DTE I still see no profit, I sit on it and do nothing.

2) If one side gets touched or breached and I still have more than 10 DTE in the trade, I start rolling down the untested side to re-establish the original delta.

3) If the market keeps moving and the tested side gets deep in the money, I attempt to roll the entire Condor down and closer to the money. I do this if there is only about 5 – 10 DTE left. If longer than 10 DTE then I only do #2 but try not to invert the Condor. If I would have to invert the Condor, I rather lower the entire structure down to get it ATM. After that I have both – puts and calls ATM.

4) Then I hold until expiration. With this adjustment, one side gets closed for 0.10 or 0.05 debit and I roll the opposite side away (usually 45 DTE) and sell new opposite side against it, for example, if put side is tested and in the money or ATM, I roll it to next 45 DTE and sell new call side against it. To do so, I wait till the very last minute (usually 10 – 15 minutes before market close).

5) Once rolled, I keep adjusting as mentioned above – I keep track of collected credits/debits, and attempt to close the trade either for 50% or 25 % or roll it as needed to keep it near the money.

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