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Time to switch to conservative options trading

After reviewing last week trading and next week outlook I decided to switch into more conservative option trading. I usually traded options very aggressively but it seems that now it may be time to slow down a bit.

What does it mean taking a conservative trading approach?

I usually take an aggressive approach. That means I select options strike price as close to the underlying price as possible. This works great in rising markets. It offers great premiums and is very profitable.

In falling markets this approach can be somewhat dangerous and you may be forced rolling over often. If your cash in your account is limited, you may run out of rollover opportunities and you will be assigned.

If you do not want to be assigned and still want to ride your trades, you need to step down and take safer trades.

20% rule

And that is all about the proper strike price selection. I call this a 20% rule after J. L. Lee who came up with this strategy in his book “Selling Put Options My Way“. This strategy dictates to select a strike price 20% lower than the current underlying price. Although everything can happen, it is very unlikely that good quality dividend growth stocks will fall more than 20%.

As all my option trades will be expiring or I will be rolling them over, I will be doing so based on the 20% rule as long as the markets stay depressed.

Happy Trading!

4 responses to “Time to switch to conservative options trading”

  1. Marvin says:

    I have never heard of that book Martin but will definitely pick it up. At first glance that logic makes absolute sense. How far out are you going to be purchasing these options?

    • Martin says:

      Hi Marvin, I still will be selling them as far out as possible (three to four months ahead) but allowing at least one month for rolling, and try to spread them in every month so I have expiration every month. Works great for me so far. I call it options time ladder. This ladder will have first expiration this February and then I should have expiration every month. You can check my calendar with options expiration here: https://hellosuckers.net/calendar/
      Thanks for stopping by.

  2. Moneycone says:

    Good luck! Options are risky but can be highly profitable. Thanks to EM, looks like the markets are going to be depressed for a while!

    • Martin says:

      I do not think options are risky, at least those basic one. Of course there are spreads an strategies which can wipe you out, but I do not trade those. And basic put selling? It is just about being assigned or expired, what else can happen? And if assigned it would be against a stock I want anyway…

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