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…

 
Here is an updated strategy:
 

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

 

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

 

3. 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.

 

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

 

5. 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.

 

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

 

7. 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.

 

8. 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.

 

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

 

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

 

11. 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.

 

12. Limit open trades to max 50% of available buying power (BP). For example, if a BP is $90,000 only $45,000 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.

 

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

 

14. 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.

 

15. 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).

 

16. Sell new put contracts at 1 SD (first standard deviation).

 

17. 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.

 

18. Open a trade with minimum of $15 credit per trade.

 

19. 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.

 

20. Purchase only stocks from DGS watch list which are in a “correction” mode. The correction mode is determine by how much the DGS stock is off of its 52 week high.

 

21. 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.

 

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

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.

 · 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).

 · 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.