Tag: managing options

Buy an Out of the Money Call Spread

Over the years I noticed that when I sold a call spread that was supposed to be profitable, those spreads seemed to lose money often, and often lost a lot. One thing I’ve learned in trading is that if a strategy you use continually loses, try doing the opposite.

Buying an out of the money spread seems counter to every theoretical calculation a person can do. The probability of expiring in the money is low by definition and time decay is our enemy big time. But, over the years I noticed that when I sold call spreads that were supposed to be profitable, either alone or as part of an Iron Condor, those spreads seemed to lose money often, and often lost a lot. One thing I’ve learned in trading is that if a strategy you use continually loses, try doing the opposite. So, here we are. I’ve done a lot of back-testing and trading my own positions to come up with a low probability strategy that actually wins over time.

Just to be clear, this trade can be named a lot of different things. Some may choose to call it a bullish or bull call spread because it benefits from prices going up. Others may call it a debit call spread because a trader pays a debit to get into it, versus a credit spread where the trader collects a credit. So, it’s a debit spread, a bull spread, and it means we are buying one call and selling a less expensive call.

As I tested different variations of this strategy, it became clear that the key was to keep the amount of capital required low with lots of upside potential, but high enough that the position has a chance for success. Also, this is a trade that works best when the trade is closed for a win and not held to expiration. It also does best with low Implied Volatility in a bull market.

In high Implied Volatility environments, options are expensive, and it is hard to justify buying them. A big move is needed to make up for the large amount of premium paid, and time decay eats away at the position.

In low Implied Volatility environments, the cost of options is low, and strikes with fairly low deltas are often inside the Expected Move. This is much more true for calls than puts, due to skew. So, for not much cost, we can get into a position that often out performs its probabilities. And with active management we can greatly improve the long-term profit and loss.

Why buy a call spread and not just buy a single call option, you might wonder? Two reasons, cost and time decay. Buy selling a lower probability call, I can significantly reduce how much I pay for the position, but see an even bigger decrease in Theta, the Greek variable measure for daily time decay.

A key relationship to know is that the Delta values of the two options in the spread give a relative calculation of the value of the spread. The average of the Delta values taken as a percentage represent roughly the percentage of the spread width that the premium is worth. A call spread of a 30 Delta call and a 20 Delta call will have a premium value of about 25% of the width of the spread. So, if the strikes are $2 apart, the premium will be approximately 50 cents. The percentage is usually a little closer to the Delta of the higher Delta strike due to skew, but as a rough estimate, the calculation works well. Why would we care? Because if we double our Delta values, we double the value of our premium in a spread. That will be a key theme for this particular trade.

Call Spread Set Up

Here is the set up of my preferred strikes for an out of the money call spread. I try to open this trade with somewhere around 6 weeks until expiration so that time decay isn’t too bad and I have plenty of time to manage the position. Like most option trades, I choose my strikes based on Delta values. For this trade I look for a call to buy that has a Delta value in the 20s, and a call to sell with a Delta in the teens. I want the difference in Deltas to be somewhere between 10 and 15.

Let’s look at an example of a stock or ETF currently trading at $100 per share. I find that the 103 and 105 strikes meet my criteria with 42 days until expiration. The Delta values are 29 and 16, a difference of 13. The premium is 54 cents, or 27% of the $2 width between the strike prices. We are closer to 29 than to 16 as a percentage value. Our short strike has 2/3 of the Theta decay as the long, despite being less than half the premium to start, a contrasting relationship to our advantage. The net Delta of 15 also represents that we have the equivalent of 15 shares of stock, but instead of paying $1500 for them, we only pay $54.

set up for out of the money call spread
There's a lot more upside than downside for an out of the money call spread.
There’s a lot more upside than downside for an out of the money call spread. The key is to avoid expiration and limit time decay.

Looking at the profit chart, most analysis of this trade by others would focus on the expiration values, and note that at expiration we need the price to rise to around 103.54 to just break even. That’s true if the trade is held to expiration. But look at the colored curve lines that represent the value at different stock prices in a week or in three weeks. Those lines don’t need much of an increase in price to be profitable, and hold decent value in a small downturn as well. These curves are the secret to succeeding consistently with this trade.

The curved lines also bear out that Delta tells us how much we make or lose based on a dollar change in the underlying stock. We should make or lose about $15 for a dollar move in the stock price, and we can see from the 35 DTE curve that this is about what we’ll get.

Finally, notice that the colored curved lines of profit and loss don’t drop very far below the starting point of zero profit at $100 stock price. This is because there is only a small amount of Theta or time decay at the beginning of the trade compared to the days that come as expiration nears. Our goal will be to avoid the times when time decay kicks in.

We also would like to act based on the part of the curve that is better before expiration than at expiration. If we hold until our position is in the money, Theta switches and moves our profit toward the maximum at expiration. But the probabilities are that we won’t see these positions go into the money and Theta will be taking money from us in ever increasing amounts every day.

Managing the Out of the Money Call Spread

Like most option trades, I like to evaluate the trade with three possible management tactics, hold, fold, or roll. Holding to expiration lowers the probability of success, but might make sense if the market jumps up shortly after entering the trade. Folding or getting out early isn’t a bad strategy to lock in gains or limit losses with this trade by using limit orders. Rolling out regularly is best if the goal is to stay in the trade for the long haul. Let’s take these one at a time in more detail.

Holding a Call Spread to Expiration

Call Spreads are an interesting contradiction in the way Theta decay works. Theta either works for the trade or against the trade, and it can switch depending on whether the trade is in the money or out of the money. Theta is driving the value of the trade toward either zero or maximum value. When we own a Call Spread, Theta works against positions out of the money, but works for positions in the money. Since this particular version of the trade starts with strikes well out of the money, we need the underlying price to go up in a substantial way to make money.

The best time environment to trade this strategy is when IV is low and markets are rising. So, a nice move up can often happen. When it does and the position is in the money, the call premium will be less than maximum profit because the two call options have different levels of extrinsic (time) value left. We can hold the position until expiration to get the last bits of decay and get maximum profit. The risk is that the price can also reverse back out of the money and make the call spread decay toward zero value. For this reason, this is a trade that I don’t like to hold to expiration, I like to get out with a big profit, either with a profitable limit order, or rolling to a longer duration while taking profit.

If the market goes down instead of up, I think it makes even less sense to hold, because the probabilities will have gone down for profit, and the remaining premium will decay even faster. A turnaround to get into the money is needed and there probably isn’t enough time. So, I’d again fold or roll.

Folding with Limits

Many traders like to use limit orders to cash out wins, or limit losses. For traders that are inclined to use limits, this call spread trade set-up has some natural places to get out. Since the upside is higher than the downside, but the probabilities are that the trade loses more often than wins, we need to make sure that wins are much bigger than the losses. One easy natural limit is to take a win when the position doubles in value, or fold for a loss when the position is cut in half. Doing this means we need win better than one out of three trades to make a profit over time on the trades that close on a limit. Let’s look at each scenario, plus the scenario of hitting neither limit.

This trade starts with a long call that has somewhere around a 25% probability of expiring in the money. But it also has about a 50% chance of a touch- the price reaches the strike price sometime before expiration. Depending on exactly which strikes we started with in our call spread, our initial premium is likely 20-25% of the width of the spread, as we discussed earlier, based on the Delta of our two strikes. That means we need the width of the spread to move up to 40-50% of the width of the spread to double in value. Getting our long strike to go in the money, even briefly, should do the trick. Are you with me on the logic and statistics here? Based on all these assumptions, we have somewhere around a 50% chance to double our money on this trade at some point before expiration. But we don’t have a 50% chance to expire in the money. So, if and when it happens, the logical thing to do would be to take the money and run.

Wait, isn’t there some old trading rule that you are supposed to let your winners run and stop your losses? If we close for doubling our money, we give up the chance to get triple or hit max profit. Yes, but with options, time is limited. Markets go up and down, and nobody knows what will happen next. When we get a big win, it makes sense to take profit before it evaporates, and then don’t look back. Usually by the time we hit double our initial premium, a lot of time has passed and there isn’t that much time left in the option, and the probability of making more is still no better than 50/50. We started with a low probability trade, and have a shot to double our money 50% of the time, let’s take that.

A couple of additional factors to consider. Theta decay increases as the trade goes on, so if we can get out early before Theta has a big impact, the big decay at the end can be avoided. Second, one assumption going into the trade in a low Implied Volatility environment is that we are in a bull market, which actually helps our chances of a win.

What about limiting the loss? If we enter a stop limit at half the premium collected, are we giving up too early? Looking at our initial Deltas and how that relates to the width of the spread, our call spread will lose half its value if our Deltas drop in half. Whether that happens due to a downturn or due to time passing, the probabilities of a winning trade or especially doubling the initial value of the trade decline significantly, and the probability of the trade expiring worthless if left alone will have increased significantly. So, the idea is to cut our losses and save some of our capital for another day. Additionally, Theta decay is only going to increase and quickly doom the trade to zero if we don’t exit.

If we enter this stop loss limit order, how often will it execute? Somewhere close to 50% of the time, maybe a little more. But we can’t have a profit limit order executing 50% of the time, and a stop loss limit order executing over 50% of the time. That would be over 100% of the time, and we haven’t even talked about a third possibility. The issue is that if we use a stop limit, some of the occurrences that we are stopped out on are situations where we would have doubled our money if we hadn’t been stopped out. So we actually reduce our odds of doubling to less than 50% with a stop loss, but not a whole lot, because to go from a 50% loss to a 100% gain would take a 4x gain from that low point, a low probability, but not zero.

Let’s look at the math. If our long call Delta falls to the 12-15 range, our chance of that strike being touched would then be 25-30%. But if that situation happened in 50% of our total occurrences, we would be giving up 12-15% of our occurrences that are destined to win, so now our doubles are 35-38% of all occurances.

There’s a third possibility with our fold strategy. We could have neither limit order execute and the trade expire somewhere between losing half and doubling. This is a fairly low probability with the two limit orders in place, because as expiration nears, the trade gets more likely to move toward max loss or max gain. To expire between the long call needs to expire in the money and the short call out of the money. And the position would have to have crept into that position and been very stable especially in the last few days to not trigger either limit order. The probability of this happening are difficult to calculate, but will be well under 10%, maybe less than 5%.

If the trade gets close to expiration and hasn’t triggered a limit, it might be a good time to consider closing early to reduce drama and hopefully collect a profit on the trade. But again, that will change the overall probabilities slightly.

With the bull market on our side, let’s assume we can double our initial premium 40% of the time, stop loss limit out 55% of the time for a 50% loss, and hold on somewhere between to expiration 5% of the time. If these probabilities held up over time, we’d average a 13% gain on this trade.

For these probabilities to play out in actual results, a trader would need to trade the same amount in dollars or in number of contracts each trade. So, set aside the winning amounts to use for making up for losing trades. It’s likely that there would be many winning trades in a row, and many losing trades in a row. Having a variable amount of cash to both compensate for losses and bank winnings would be critical.

Alternatively, letting the size of the trade double or be cut in half based on the result of each previous trade wouldn’t work. Since there are more losses than winners, the account would get cut in half more often than it doubled, and eventually be cut to essentially no value.

Thinking about this way of managing the trade over time and the implications of huge wins and huge losses, this management tactic seems pretty extreme. It provides very extreme volatility, even if a trader consistently trades the same amount of capital trade after trade. As such, this would only make sense as a very small portion of a portfolio.

Continually rolling a credit spread

If you’ve read very many other trading strategies I’ve written about, you’ll know I generally like the concept of rolling my option trades. Rolling is the concept of closing an existing trade and opening a similar trade at a later expiration and/or different strike prices. In most platforms, this can be done in a single simultaneous transaction, so that the net result is clear- is the trade collecting a credit, or paying a debit to re-position?

With a debit call spread (a spread that we are buying), we can still collect a credit to roll from one position to another. This is because we can sell a call spread that has increased in value to buy a cheaper spread that is further out of the money. If we roll to new positions over and over, and the total of our credits are more than the total of our debits, this is a winning management tactic. Both back-testing and my experience show that this tactic works for this trade most of the time, particularly in bull markets.

I like to set up a trade like we’ve used as an example earlier in this post with 42 days to expiration, and then roll after a week. After a week, time decay is relatively small, and a price move up in the underlying of a percent or two makes more than a price move down of a percent or two loses on the trade. The longer the position sits, the more time decay moves the profit curve down, requiring a bigger up move to be profitable. If the market chops up and down, the trade can eke out a profit over time. The reason is that there is much more upside than downside because of the strikes that were chosen to start the trade. But, because the underlying market is bullish, the wins should be more frequent than losers, which really makes this strategy work over time.

Let’s take an example. We buy the call spread in our example for $54 with 42 DTE. After a week the stock is up 2% and our position is worth $80, a $26 gain. We roll this trade by selling our now 35 DTE call spread for $80, and buying a new 42 DTE call spread for $54 again, but now at $2 higher strikes than the week before to have essentially the same Deltas as the position we started with a week earlier. We collect a credit of $26.

A week later, the stock goes down 1% and our call spread is worth $34, a loss of $20. We roll out to 42 DTE again, and this time pay $20 to buy more expensive strikes at $1 lower prices. Now, we have a total of $6 collected from our two rolls.

The next week, the stock jumps 3.5% and our call spread is now worth $110. We roll our position out again to 42 DTE and buy higher strikes for $54, a net credit of $56. Now, we have $62 collected.

The next week, stock drops back 4.5% to our starting price of 100 and our call spread is only worth $3. Ouch- a $51 loss! But, we roll back to 42 DTE and our original strikes paying $54, paying a $51 debit.

After 4 weeks with a stock going up and down and ending in the same place, we have collected $11 total on a $54 use of capital. That’s a 20% return on capital on a stock that didn’t move.

But, we haven’t accounted for broker commissions. At 50 cents a contract, that’s $2 each week, or $8 for 4 weeks, most of our profit. So, we might want to look for stock that has a little higher price where the commission is less of a percentage of the likely profit.

We also expect the market to trend up in a bull market, so that winning weeks outnumber losing weeks.

The advantage of rolling and staying well away from expiration is that we avoid the rapid decay near expiration and we achieve much of the same result as the previous “folding” limit management tactic with constant trade size, but in a more disciplined drum-beat approach. We aren’t tempted to bump up our trade size or cut it way down, because we are just rolling the same number of contracts out week after week, adding or subtracting cash as we go.

From a practical standpoint, each week we have to evaluate what the right strikes to choose are. I try to maintain the same width, but then look for Delta values that meet my criteria. The higher the strike prices, the further out of the money the strikes are, and the lower the cost and the lower the Deltas. I can maneuver around a little to make my new position cheaper than the one I’m closing and collect a credit.

Also, if we have a big move in less than a week, I may choose to roll up my strikes in the same expiration to bank my profit and limit the downside in case of a reversal. In our example, if the stock price went up $4 in a couple of days, I’d roll up my strikes $4 and collect $65 to get my Deltas back to the starting range.

Why this Delta range works

Delta is a very handy measure for options. And for this call spread trade, its many uses really illustrate how this trade works. For call spread, we can take the combination of the Delta value of the two call options to get a net Delta value. In this example, with Deltas of 29 and -16, the net Delta is 13. (Call Deltas are positive. Owning a call is positive Delta, being short is negative Delta.)

If we look at Delta’s definition as a relation of change in price of the stock to change in price of the call spread, we can see that if the stock goes up $1 in price, our call spread premium goes up 13 cents, or $13 for the full contract. As a representation of equivalent stock, 13 Delta means we have the equivalent of 13 shares of stock.

Now, we could have this same price movement and share equivalent with any number of call strike price combinations. We could have bought a 50 Delta and sold a 37 Delta, or bought a 93 Delta and sold an 80 Delta and had the same behavior. 13 Delta is 13 Delta. So, what is the difference?

Remember, Delta is also a measure of probability and value of a spread. Both of these are tied to the individual Deltas more than the net Delta. Probability informs us of what is likely to happen to each option if held to expiration, or how likely it is that the stock price will touch the strike price before expiration. These probabilities inform our management of the option, as we’ve discussed earlier in this write-up. If we chose different strikes, we’d probably want to consider management tactics differently to optimize the trade.

But the real key is the relationship of Delta as a measurement of the value of the spread. Earlier, we mentioned that the average Delta of the two options in a spread roughly approximates the premium when calculated as a percentage of the width of the spread. Sounds complicated, but not really. In our example, our strikes are 103 and 105- the width of the spread is 2. The average of our Deltas is 23.5, so we should expect premium to be around 47 cents (23.5% of $2)- it’s actually 54 cents, but close enough for a rough estimate.

The value of our call spread can vary anywhere from 0 to $2 by expiration, so there is a lot further to go up than to go down. Picking lower delta strikes limits our downside, but gives us lots of upside. That plays out over time with this trade, as long as we don’t plan on holding on too long.

If we chose strikes deep in the money, we’d be virtually guaranteed to expire in the money, but our profit potential would be very limited, while our potential loss would be high. I think there are better ways to use deep in the money calls like a stock substitution strategy using calls, or a poor man’s covered call.

At the beginning of this writing, I mentioned how initially I used to sell call spreads, but realized I was consistently losing money. I looked at a lot of different ways to trade the opposite, to buy call spreads instead of selling. One tool I use for analysis is back-testing. As commercials like to say, “past results is no guarantee of future earnings,” but with big samples back-tests can provide a clue as to what works more often than not. I back-tested a wide variety of call spread values at different Deltas, different expirations, different management strategies, and different market environments before settling on this variation. I’ve traded it a lot myself with good results.

The example I’ve used in this writing is a little closer to the money than I’d ideally prefer. A little further out of the money would get the premium more around 20% of the width, which would cost less to start. The net Delta is fine, but if there were more choices, I might make is slightly less. Wider spreads are good for selling spreads, narrower is better for buying spreads, due to Theta differences.

Can we get too far out of the money, or too narrow? Yes, at some point the premium we pay and the potential profits get too small compared to the commissions and fees required. So, small spreads on cheap stocks may not make enough to pay for trading costs. And for those that might get options trades for free or close to free, there is still the cost of bad fills if an option is not extremely liquid.

This isn’t to say that other variations won’t work. There are pros and cons to every element of this trade. The differences in returns and risk can be adjusted many different ways. I’ve tried to illustrate the trade-offs so each trader can make their own informed choice.

Assignment Risk

One factor we haven’t discussed yet for buying call spreads that can’t be ignored is the risk of having a short call exercised while still holding the long call. As with other strategies that have an element of selling calls, there are some call assignments that can be avoided and some that can’t.

There are three situations that greatly increase the chance of a short call being exercised by the buyer. They are having a call in the money, having a call near expiration, and being short a call when a stock goes ex-dividend. The good news is that the way I execute this trade, these factors should rarely come into play.

First off, the short call is much less likely to end up in the money than the long call. If we start by selling a call with less than 20 Delta, it has less than a 40% chance of having the stock even touch its strike price.

My plan is never to hold until expiration, so that part of the assignment risk is mostly avoided. For those who hold in the money spreads near expiration to try and get max profit, this is a double dare to the buyer of the trader’s short call to exercise early. So, someone who holds a winning trade until expiration shouldn’t be surprised to wake up short 100 shares of stock instead of being short a call option.

Dividend risk is probably the hardest call exercise to avoid, but the key is to have a short call with more extrinsic or time value than the anticipated dividend, and have strikes further out of the money than the dividend. If a trader can do that, there is no reason for a call owner to execute from the other side of the trade. The easiest way to keep a high extrinsic value lines up with the other tactics- get out of positions close to the money and keep expiration away by closing or rolling anything with short duration.

As I’ve explained in other write-ups, having a short option assigned/exercised isn’t that big of a deal to undo, especially when it is part of a spread. A trader may wake up and find a large amount of short stock and a large amount of cash that wasn’t in the account the day before, but that’s what happens when shares that you don’t have get called away. In this case, the intrinsic/in-the-money portion of the long call will always be worth more than the intrinsic value of the short call, so the long call can be sold and the short shares that were assigned can be bought back, all in one transaction, for a tidy overall profit.

Final Thoughts

Buying a call spread like the trade discussed here should not be the core of a portfolio- the trade is simply too volatile for anything other than a way to supplement returns in appropriate market conditions. But, as used as a part of broader portfolio of trades, it can be a way to take advantage of a bullish market with low Implied Volatility. Buying calls out of the money doesn’t have to include a lot of decay. Using a spread reduces the time decay and makes what would seem like a losing trade show profits over the long haul.

The Poor Man’s Covered Call

if we sell a call against our stock equivalent we can have a low cost equivalent of a covered call, in other words a Poor Man’s Covered Call. One difference is that our long calls have decay, and we want to counter that decay by selling calls with the same or more decay in our favor. A great way is to create a diagonal spread, selling calls that are closer to expiration while buying calls that are further away.

Covered calls have a number of trading advantages- they reduce volatility, provide some income, somewhat cushion a position from a fall. But, to have a covered call, you have to own stock first to sell a call against it. However, we have discussed the idea of using long calls as a substitute for stock, so if we sell a call against our stock equivalent we can have a low cost equivalent of a covered call, in other words a Poor Man’s Covered Call.

One difference is that our long calls have decay, and we want to counter that decay by selling calls with the same or more decay in our favor. A great way is to create a diagonal spread, selling calls that are closer to expiration while buying calls that are further away.

By selling a call with faster decay against our long call with slower decay, we can actually get a trade that has a greater than 50% probability of profit. The trade-off is that we limit the upside. The trade has defined risk and defined maximum profit.

My typical setup is to buy a 75 Delta call about 12 weeks out and sell a 25 Delta call about 6 weeks out, or half the time. If we look at a chart of each of the options profit potential along with how they compare to just owning stock, we get a bit of a complex chart:

The two legs of the diagonal spread that make up a Poor man's covered call.
In this chart we have two options with their own profit profiles at expiration. But, since they don’t expire at the same time, it is more important to see how they will perform at a certain point in time, like half-way to expiration for the shorter duration short call. After 21 days, the short call profit profile hugs the expiration profit profile much closer than the longer duration long call.

The key thing when looking at diagonal spread positions is that we really can’t think that much about expiration, especially for the long duration portion of the trade because it expires later. So, we really have to pay attention to how the projected values will behave at different points in time prior to expiration.

Another thing to notice is that the short call we sold has a strike price much closer to the current price than the long duration call. This means that there is more potential downside than upside, but that’s true with a regular covered call as well, actually even more so. At least our downside on this trade is limited.

When we put it all together in a chart, we can see how the trade profits not only when the market is up, but when the market is flat as well. Profitability with no underlying price change is due to the faster decay of the shorter duration short calls.

The poor man's covered call is profitable in a wide range of price movement.
Notice the 21 days in trade profit line is profitable even in a slight down move.

Looking at the overall Delta of this trade, it opens with a net Delta of 50, or the equivalent movement of 50 shares of stock. So this position is half as volatile as owning 100 shares of stock for a cost equivalent to about 7.5% of owning 100 shares.

From a profit standpoint, our capital required was $750 and the maximum profit is $250. This shows how much upside we’ve given up by selling the call, compared to unlimited upside with the call alone. However, if we look at a “sweet spot” on the profit chart above, we can see that if price goes up from 100 to 102 in 21 days, the profit is around $150, a 20% return on capital for a 2% move. In comparison, a 2% price move on the earlier long call option only would yield about a 7% return on capital, and owning stock outright would net the owner, well, obviously 2%.

Managing the Poor Man’s Covered Call

How do we manage a Poor Man’s Covered Call? Generally, there are three ways to manage positions like this: hold, fold, or roll. Let’s take them one by one.

Hold means we just hold until expiration. But, remember these options expire at different times, so we could hold until the short leg expires and close the long. We’ll get good Theta decay and not really need to pay much attention. Probability of profit is over 50%, so it’s a viable strategy. However, if we let both options expire independently, we can see from the expiration profit chart that we need an increase in price to be profitable, so we do need to get out of the long call before expiration, preferably when we exit the short call.

Folding or getting out with an early exit isn’t a bad choice either. We can set a profit target, say half the maximum profit and set a limit order and also have an equal stop loss or slightly larger stop loss, and let the trade play out. Probability is over 50%, so hopefully we catch a modest up move and miss any big down move, collect a nice profit, and move on. As a short term strategy, this can be a good approach, especially if we were to set up a ladder of ongoing versions of this every few weeks and just let each one play out individually.

If you’ve read much of the other parts of this site, you know that I tend to favor rolling strategies, often continuous rolls. I like to roll positions out in time, over and over, adjusting them up or down with the market. Generally, the plan for this trade is to actively manage the short duration leg more than the long duration leg, but keep the long duration out in time and the short duration around half the time as the long, give or take a bit.

Rolling a Poor Man's Covered Call can mean moving the legs independently.
Here’s an example of rolling a position that starts with a short call at 42 days and a long call at 84 days. Typically, the short leg will get rolled more often, since it is decaying faster and is more prone to changes in Delta value and its premium.

In the chart above, I’m illustrating the concept. The idea is that every two to three weeks the short leg gets rolled out in time. Well, which one is it, you might ask, two or three? I would look at it based on criteria, if the short has gotten way out of the money, say below a 12 Delta in two weeks, I’d roll out and establish a new 42 day position and collect a net credit. Or, if the short strike is being tested and has moved to a Delta of 40 or more, I’d roll out and try to reduce Delta and collect a credit in the process- it’s easier to roll a single short leg for a credit than to roll a spread, so I should be able to improve my position in the process. If however, the price keeps Delta between 12 and 40, let’s just keep collecting Theta and wait until 21 days left to roll. At that point, we roll out to 42 days again and pick a nice strike and get a nice credit for our effort.

For the long call, I mostly just leave it alone. I let it do its thing until it gets down around 42 days and kick it back out to 84 days. If the market is up, I can move the strikes up to 75 Delta and get a credit. If the market is down, I’ll have to pay to roll out. If there is a really big move one way or the other, I can roll out at the same time I’m repositioning the short leg.

Managing Big Moves

So, we can set up rules to guide our rolls and generally just let the data from the market dictate our actions. The only other thing to consider is what to do if the price jumps way outside our strikes? With individual stocks, this is a clear possibility, so there needs to be a plan. On a huge jump up, the choices are to close for a max profit and move on figuring that all the good news is priced in, or reset with a roll to new strikes in anticipation of further up moves. On a huge down move, we can close out both sides for whatever premium is left on the long call if it looks like the bottom has fallen out for good, or just hang on to the long call and hope for a reversal, maybe selling a new call at the same price to cushion the blow. There’s no right answer, just the right answer for each trader’s personal tolerance for risk. But, every trader needs a plan. The one strategy that many traders take by default is to cash in small gains and hang on to big losers, which pretty much guarantees a losing portfolio over time.

Overall considerations

Is there any magic to 84 and 42 days? Not really, it’s just a time frame that I find fairly manageable without a lot of stress, but with plenty of premium to collect on the short side of the trade. Longer durations have less stress, and shorter durations are more volatile with more potential profit. It’s a choice that depends on your trading preferences and risk tolerance. Many traders of this strategy like to go to much longer durations with their long strike, to six months or even a year, to keep Theta less, but the trade-off is that the cost and downside risk is more.

Similarly, is there magic to 75 and 25 Delta? Not magic, but the goal is to have more decay in the short strike than the long, so equally distant Deltas at different expirations should achieve that. Many traders will buy call strikes deeper in the money to make this advantage greater, with the trade-off of a higher premium cost and having more more capital.

Between time to expiration and the Deltas chosen, we can significantly adjust Theta of our long strike. We can also greatly control the amount of capital required for the long call, from around 5% of the cost of stock to 20%. Understand that this is the trade-off, capital cost and downside risk vs. decay. The ultimate extreme is going back to a covered call, where we own stock instead of a call. Buying a call instead saves capital, and also limits the loss. So, in choosing the long side of the strategy, consider the choice of time and Delta as part of a continuum of risk and reward.

Trade Sizing: Leverage and Risk

Finally, remember that just because a poor man’s covered call has less capital required than a standard covered call, it doesn’t mean that it is a good idea to do 10 poor man’s covered call positions instead of a single covered call. Just because a trade is affordable, it doesn’t mean it is a good idea to bet the farm on it. The poor man’s covered call is a trade of leverage. It can be a trade to reduce volatility or greatly enhance volatility.

Let’s look at our example trade on $100 underlying stock on a $10,000 account. We could buy 100 shares of stock for $10,000 as a base case and use all our capital and we have market risk all the way to zero with a Delta value of 100.

If we set up one contract of the poor man’s covered call like our above example, we risk $750 and have the equivalent of 50 shares of stock, so much less volatility and downside risk, while still controlling a notional 100 shares through our contracts. Our loss is limited to $750, which will occur if we hold our long to expiration with a stock price change of more than 7%. This becomes a very conservative trade compared to owning stock or a traditional covered call, if we keep the rest of the account in cash.

If we trade two contracts, we have 100 Delta in total portfolio for a cost of $1500. At this point, our volatility is the same as 100 shares at the current price. However, our loss is limited to $1500, not $10,000 like stock. But now, we lose 15% of the account value on a 7% down move as we are controlling 200 shares of notional value through 2 contracts. We also get double the benefit to the upside compared to one contract. We also get double the Theta of a covered call, or a single contract of a Poor Man’s Covered Call. So the trade acts like stock when the price stays close to the opening price, but shows some leverage on moderate price moves. Arguably, one could say the extra benefits of leverage are worth the potential added risk to the downside- we still are only risking 15% of the account value, not all of it.

What if we take the trade to an extreme? We can easily do 10 Poor Man’s Covered Call contracts for $7500 cost. Our Delta increases to 500, so we get 5 times the movement of owning 100 shares, and our ten contracts now control 1000 shares of stock, a notional value of $100,000! With all this leverage, we get huge Theta. We also get a lot of volatility. If the stock goes up 1%, we make 5%, but the downside is the opposite. The big risk is that we can now lose 3/4 of our account if the stock goes down just 7%. Now we’ve made this trade into a virtual roulette wheel, big wins or big losses. Our probability of profit is still over 50%, but we’ve taken on a huge risk. Our max loss is a move down of just one standard deviation, which is not that unlikely. In fact, if we trade like this for very long, we will surely hit max loss within a small number of trades. We can potentially limit worst case scenarios by cashing out when the going gets tough, but that goes against natural instinct and can be hard to follow as a plan. The bottom line is that this would be a clear example of way too much leverage.

The point of these capital use examples is to show that a trader has to really understand the advantages and risks of leverage in a trade like this. The same trade can be very conservative, or extremely risky, depending on the context of the account it is in. So it is up to each trader to evaluate how the combination of trades affects the performance of the full account. You can read more about these concepts in my write up on Portfolio Management.

Assignment Risk

Since the Poor Man’s Covered Call involves selling calls, there is always the potential for those calls to be exercised by the buyer. With an actual Covered Call, the exercise means the covered shares are sold to fulfill the contract. But with a Poor Man’s Covered Call, there are no covered shares, just a long call in the money. Assignment in this trade means that the account has to sell shares that aren’t in the account, so the account holder will end up with short shares plus cash from their sale.

From our example we have been using, let’s say that the stock goes up to $105 and the short call of our position gets exercised by the owner of the call. We wake up the next day with -100 shares of stock and $10,300 added to our account. And we still have our long call contract well in the money. It’s a mess. A lot bigger mess than just having our long stock sold, because there are more moving parts. But it’s a good mess, because our positions have made a nice gain, especially our long call.

We can untangle our mess by buying our short shares back. We can also sell our long call at the same time to get a clean slate and then decide whether we want to open new positions at Deltas that are closer to where we’d like to be. So it isn’t that hard to straighten everything out.

In my write-up on Covered Calls, I wrote a long section on how to avoid assignment. The discussion is the same for this trade, so I won’t repeat it. Read the Covered Call write-up if you want to explore those tactics. There’s really less concerns about assignment with a Poor Man’s Covered Call because eventually the long call needs to be sold or rolled and the combination of the two can be re-positioned together if needed.

Final Thoughts

The Poor Man’s Covered Call has a lot of advantages compared to owning stock and selling calls. The trade provides a bullish outlook with positive Theta decay, while limiting risk to the downside. It typically has a greater than 50% probability of profit, while being a debit trade, which is rare in options trading. The trade does provide leverage, so care must be taken in managing the size of the position within any account.

Replace Stock with a Call Option

Buy stock at a big discount? This strategy is often referred to as stock replacement. We buy calls, have the same upside as shares of stock but at a fraction of the cost. Look for two things: relatively high probability and low Theta decay.

Want to buy stock at a big discount? This strategy is one that is often referred to as stock replacement. With this strategy, we can buy options that have the same upside as shares of stock but at a fraction of the cost. In theory any time someone buys a call, there is the same upside as stock, but some setups give a trader more of the upside benefit than others.

When I think of using options in place of stock, I’m looking for two things, relatively high probability and low Theta decay. When buying a option with no hedge, the natural way to lower time decay is to buy a call well out in time where it will decay slowly. To get it to move with the underlying stock, having an in-the-money option can get most of the move up (or down).

So for this strategy, I look for options 6-12 months out with a Delta value of 75-80. These options will likely cost 10-20% of the cost of the shares as they have significant intrinsic and extrinsic value. With over 6 months until expiration, time decay is slow, but still present.

Stock replacement uses long call options to get similar returns as stock.
In this example, a call is purchased with 9 months (273 days) until expiration with a Delta of 0.78. Notice that even after a month or even three months, the profit curve is very close to that of owning stock around the money. Notice that the downside is significantly less than stock.

Because I’m buying an option with a Delta of 75-80, I have the equivalent of 75-80 shares of stock from a price movement stand-point. If the price goes up, over time the Delta will increase and the option will behave closer and closer to the movement of 100 shares of stock.

The risk to the downside is limited to the amount paid for the options, so a big market drop could wipe out the position, but even a big drop would still likely hold some value, but mostly the extrinsic time value. However, the really good news is that losses in the options on a downturn are less than the losses that would come from 100 shares of stock.

My goal in this trade is not to hold until expiration, but to either exit or roll to a longer duration before we get into the last quarter before expiration. If the stock price has gone up, I can roll to a new time at a higher strike price and collect the amount the stock has appreciated less the time decay that was lost.

This trade needs a small move up to break even, so the theoretical probability of profit is a little less than 50%. But, by getting out way before expiration, the odds get ever closer to 50/50, and in a bull market the unlimited upside with limited downside is a pretty compelling proposition.

One watchout with this trade (and other long call option strategies) is thinking that since we use just one fifth or one tenth of the capital of buying stock that we can now buy five or ten times as many options and really cash in. We have to respect the downside risk. A big move down will wipe out this position. So we don’t want to put all our eggs in this basket.

But when the market is frothy and looking like it is going nowhere but up, this is a good way to participate in the upside while protecting the downside, assuming that there’s plenty of capital left to deploy if the market suddenly goes against the position.

Trading Options with a Full Time Job?

Most people have full time jobs. Can someone manage an options portfolio and work full-time without watching the market all day? I say yes.

Most people have full time jobs that don’t involve the financial markets. Can someone manage an options portfolio and work full-time without watching the market all day? I say yes, and they may do even better than a full time trader. The reasons may surprise you.

For several years I was a full time options trader, watching positions in a bunch of accounts, adjusting every day as the markets moved. Many of my positions were short duration, which meant that I needed to stay on top of them. Much of my strategy involved rolling to avoid getting to expiration or to keep my strikes out of the money. There were lots of good reasons to spend the day reviewing every position in every account to determine if any adjustments were needed. And I enjoyed it. It was fun managing accounts that were growing and generating the income I needed.

But in 2022, I had a series of events that drained my accounts that provided my spending money. (Separately, I’ve written about my lessons learned in 2022.) I’m not yet to the age where I can take money out of my retirement accounts without penalty, and I didn’t want to get into Substantially Equal Payment Plans (SEPP) to commit to withdrawls- that’s a big topic for another day in itself. The bear market coincided with some unexpected expenses, so I liquidated most of the liquid accounts I had available at bad times. My accounts that had been providing nice streams of income lost a lot of value when I needed them most. So as the year came to a close, it was clear I needed to get a “real” job again.

Changing to a full time “real” job

In January of 2023 I started working full-time, a typical 9-to-5 job. But I still had a number of accounts to manage, a combination of retirement accounts and leftovers from my cash/margin accounts that I hadn’t completely used up. (I didn’t go broke, I just wasn’t flush enough to live off my accounts that I could draw from.) I had to have a different approach to account management- the days of full-time trading were over.

I still wanted much of my portfolio to be option-based. I’ve seen how options give me leverage and the ability to manage in any type of environment. But I knew that my approach to managing daily had to dramatically change. I couldn’t watch the market and do my job, so I needed to completely change my trading routine.

First, I decided to stop all 1 DTE and 0 DTE trades. Honestly, these had not been that profitable and were the most time-consuming positions I had been trading. It was almost like I had been trading them to keep my day completely filled with activity. If you read about my 1 DTE Straddle management approach, you’ll see that I try to take profit and adjust positions throughout the day, which is very time-consuming. 0 DTE trades are just as time-consuming for most strategies. I know some traders open a position and set up stop and profit limit orders and go about their day, but even that seemed like more than I wanted to do. So, no more expiring option trades.

Next, I moved all my shorter duration trades out in time. I was doing some 7 DTE put spreads, rolling almost every day. These were problematic in the 2022 bear market anyway, so it wasn’t a hard decision to get rid of them. I also decided to mostly stop doing 21-day broken butterfly trades. This was a harder decision, as I’ve had good success with defending these even in tough times, but I knew that I just didn’t want that responsibility to keep an eye on them.

So, I was left with positions mostly 4-7 weeks from expiration- put spreads, iron condors, covered calls, covered strangles, some 1-1-2 ratios, and some long duration futures strangles. All these trades are far enough out in time that a move during the day won’t be a huge loss or need an immediate adjustment.

Initially I thought I’d try to spend a half hour each morning when the market opened before I started my job. For a few weeks I did this, but I found that my work often required me to be available for an early call during that time, or there were urgent items that couldn’t be delayed, and that time wasn’t available. I’d miss a day, then it was two or three in a row, and I realized I needed to be able to have an approach that could go several days at a time without requiring action. But, I also noticed that missing several days wasn’t hurting my market results, especially in a choppy market.

Since almost all my trades are based on profiting from premium decay, time is my friend. I need time to pass and the market to remain somewhat stable. Getting away from the daily noise of the market up for some reason one day and down the next for another reason helped remind me that selling options is about being patient. It also reminded me that market movements are mostly noise that is statically insignificant. If I don’t react to every move, the market tends to chop up and down and not really move that much or that fast over time, which is exactly what a seller of options needs.

My new routine

With time, I’ve settled into a trading routine of doing a thorough review of all my positions about once a week. For positions in the 4-7 week to expiration window, I like to roll and adjust Delta about once a week, essentially kicking the can down the road, trying to pick up a percent or two of return on capital each time. Timing isn’t critical, but I want to keep my spreads in the sweet spot where they decay the most, with short strike’s Deltas in the high teens to low twenties. I’ve written about this in many posts that address best Deltas for put spreads.or for rolling put spreads. I’m leaving a bit of money on the table, missing the very best timing, but I’m making up for that by not over trading, which I clearly was in 2022.

Some of my longer duration trades, that are 2-4 months out, can go weeks or even a month or more without an adjustment roll. My weekly checks just make sure that they are not getting close to being tested or getting to a duration that I want to extend. My philosophy with those positions is an “if it ain’t broke, don’t fix it” approach. So, not much to do with these.

So, it takes me about an hour a week to make adjustments during market hours. I find a break in my day, or a day when I can get trades in early before my work day starts. I’ve been surprised at how manageable it all is. I’ve realized that when the day comes that I don’t need a job anymore, I will be able to manage my trades with a lot less time than I was using the last several years. I don’t plan to ever trade all day long again.

Results

The great news is that I’m very happy with my results. My most aggressive accounts have been pulling in about 10% returns each month so far in 2023, and all my accounts are handily beating the market. So, I’m very happy with my new approach. I know that the market isn’t always this calm, but I also know from 2022’s bear market that longer duration trades in high volatility have much better outcomes than short duration trades, so I’m confident that this approach would have done well in that environment, better than I did trading every day with short duration trades.

0 DTE Option Trading

Many people are buying and selling options with zero days to expiration (0 DTE in option lingo). But is this a good idea? Are there strategies that actually work? Or is this just gambling? Well, like many things in options, it depends. There are strategies that have been successful with years of history, and we’ll dig in to discuss them.

In 2022, the option exchanges rolled out options on a few indexes that expire every day of the trading week. This has caused a frenzy of option trading by individuals who are trading a variety of expiration day strategies every day. Many people are buying and selling options with zero days to expiration (0 DTE in option lingo). But is this a good idea? Are there strategies that actually work? Or is this just gambling? Well, like many things in options, it depends. There are strategies that have been successful with years of history, and we’ll dig in to discuss them.

Over the past several years, the frequency of option expirations has increased dramatically, particularly for the major indexes, the S&P 500, the Nasdaq 100, and the Russell 2000. Initially, there were only monthly expirations that expired on the third Friday of the month. Options expiring every Friday were added several years ago, and Monday and Wednesday were added a few years back, and finally in 2022, Tuesday and Thursday expirations were added. Trading volume has grown exponentially, and trading on options expiring within the next few days are now the majority of option trades. Clearly, expiration day trading is very popular.

I’ve been exploring trading strategies for expiration day for several years, going back to when we started having expirations available for Monday, Wednesday, and Friday. I’ve discovered that 0 DTE is not for everyone, can have many elements of gambling for many, but has a few strategies that have a positive expectancy of profit.

Things to know about 0 DTE

First off, 0 DTE requires a different mindset than longer duration trading. Profits and losses explode in minutes, making the importance of having a plan critical. Options in general require strategies and planning, but 0 DTE is significantly more volatile. So, for traders that can’t handle huge swings in value over very short periods, 0 DTE may not be a good place to go.

For traders that do trade 0 DTE, I highly recommend keeping a log of all trades to be able to evaluate whether the strategy being used is actually working. Some trades have fairly high win rates, but have big losses when they lose- a log will help a trader determine if the wins outweigh the losses over the long run. Also, keeping note of what went well and what went wrong will help a trader learn from success and failure. I can tell you that most traders that fail do so by not sticking to their own rules for managing risk.

One key consideration is the Pattern Day Trade Rule that applies to accounts with less than $25,000. Federal regulations prevent small accounts from opening and closing the same position the same day more than three times in any 7 day period. Doing so will place severe limits on the traders account. If you have an account with $25,000 or less, or even just slightly more, you need to be very aware of this rule and how it works before even thinking about 0 DTE trading or any short duration in and out trading strategies.

There are a number of ways to trade 0 DTE. Some traders try to get in and out, while others hold a trade to expiration at the close of the day. Some are net buyers of options, what I will call debit trades, while other are net sellers, or credit traders. I say “net” because many strategies involve trading spreads, buying one option and selling another, generally the more expensive being hedged, protected, or partially financed by the cheaper option.

When options are expiring at the end of the trading day, all the characteristics of options are sped up. From a data driven standpoint, there are three key Greeks to consider. The two most obvious are Theta and Gamma which essentially battle it out for the day. But Vega also plays a key role, as big moves spike up Implied Volatility and option’s premium, and calmness can sap premium almost as fast. With hours or even minutes until the options expire, the Greeks’ calculations stop meaning as much as the concepts behind them.

Options sellers are banking on Theta eating away the premium as the day progresses. If the option ends out of the money at the end of the day, it is worthless. On the other hand, Delta will end the day at either 100 or zero and is likely to swing huge amounts during the day, which is the measure of Gamma, the change of Delta. So option buyers are looking for options to get in the money and run way up in value.

Since we are talking about expiration, it is important to understand the implications, which vary depending on what underlying the option is based on. Remember, there are four types of underlying securities, and at expiration the differences really stand out when an option expires in the money. For stock and ETF options, in the money options are settled with shares, which may not be the best outcome for day trading. In addition, while expiration option trading ends at the closing bell, expired stock and ETF options can be exercised until midnight, so even options that end trading out of the money still might be exercised if market conditions change after hours from news or earnings impact. Index options are much more straightforward. Index options are cash settled based on the price of the index at the closing bell. Because of this, index options, like SPX, are generally the preferred trading vehicle for traders holding options through the closing bell. Futures options settle with futures contracts unless the futures contract is also expiring the same day. However, futures options are assigned based on the price at the closing bell, not any after hours moves, so a trader knows at the bell whether there will be an assignment or not. So switching between underlying types for 0 DTE trades in not a trivial decision.

As mentioned before, because 0 DTE trades can rapidly change in value, having a mechanical trading plan becomes critical for consistent success. Most traders that trade short/selling strategies use stop losses to keep losses from getting out of hand, and long/buying strategies use some type of trailing stops or rolls to protect winning positions and keep upside unlimited. There are a few trades where holding to expiration (no matter what happens) could be considered, but I think 0 DTE are best managed by active trading based on market action.

So let’s get to it. Let’s discuss some typical strategies, both from the long and short side, considering what it takes to be successful.

Selling options with 0 DTE

Most 0 DTE option sellers I know actually sell spreads to define risk. Selling naked options on expiration day simply requires too much capital and carries too much risk for the average trader. The width of the spread can vary based on the strategy or capital available to the trader, but wider spreads tend to decay faster than narrower spreads. These trades are expected to win a high probability of the time, but to avoid severe losses, stop losses are also critical parts of the strategy.

While there are many variations of these strategies- different times to enter and exit, trading one side or both sides (puts and/or calls), entering or exiting all at once or legging in based on the market, the core of the strategy is the same. Sellers want to sell at a relatively high premium and buy it back for less or even let it expire worthless. I’m going to focus in on two common strategies that I have had success with and 0 DTE trading friends have done successfully- a wide Iron Condor and an Iron Fly. For discussion, let’s assume that we are selling spreads directly on the S&P 500 Index, ticker symbol SPX.

0 DTE Iron Condor

Iron Condors on expiration day seem to perform best way out of the money, selling options with 10 Delta or less and buying 30 to 100 points further out of the money. Greek calculations for 0 DTE can be flaky and vary widely, so many traders are more comfortable choosing strikes based on the premium available. For example, a trader may sell the lowest put strike that sells for over $1.00 or maybe over $1.50, and buy the put that sells for under $0.75 or $0.50. For perspective, you can estimate the expected move at any time in the day by adding the premium of the at the money put and at the money call. Generally, these strikes are between 1.5 and 2 times the expected move for the put being sold and another half expected move further for the put being bought as a hedge. So, it’s highly likely that the strikes will expire worthless.

Similarly, we do the same thing on the call side, selling a call and buying a higher strike call for less. If we choose similar Delta values, the premium for each call will be less, but the difference in premium may actually be more if we have the same width wings. It is a matter of preference as to whether to try to collect as much on the call side as the put side.

The risk vs reward for this set-up is the net premium difference between what was sold and what was bought and the difference between strikes. For example, if we sell a put for $1.50 and buy a put at a strike price 40 points lower for $0.70, we are risking 40 to make 0.80. Then, if our calls were sold for $1.20 and bought for $0.40, we have another 0.80 on another 35 wide spread. So in total we have 1.60, but still only 40 risk because the options can’t expire in the money on both sides. Actually, because the options are for a multiplier of 100, we risk $4000 to make $160. So, if all goes well, we make a 4% return on the capital needed in one day. Some traders sell slightly closer strikes to try to collect more premium, and others sell for less to improve probabilities.

While probabilities are fairly high that the strikes will end up out of the money, we never know for sure, so we have to protect our capital. Most traders I know use a 2x stop loss on each side. They limit their loss to twice the premium they collected on each side. So, if a put was sold for $1.50, losses are limited to $3.00 by entering a stop loss on the short put at $4.50. While a stop can be entered for the price of the spread, it isn’t recommended because during the day prices can vary in weird ways and stops can trigger on spreads when the price hasn’t really moved much. I’ve read numerous posts of traders who were frustrated by a stop that was executed when there position was in no danger because of a rogue quote. If possible, it’s best to have the stop trigger based on the bid price of the option if your broker allows it- for the same reason- to avoid bad quotes triggering a stop.

It can be frustrating when a stop triggers just as the underlying price hits the high or low of the day and reverses. A trader looks at this and thinks, “Gee, if I wouldn’t have triggered the stop, my option would have expired worthless. I took a 2x loss when I could have had a gain.” Unfortunately, a trader never knows when the price will reverse and when it will keep going. The goal is to stop our loss at 2x and not let it get to 10x or 20x. We can recover from small losses, losing all the capital of a spread trade can be devastating.

The Iron Condor is a 4 legged trade, so if one leg is stopped out, we still have three legs. On the side where the stop occurred, the long position will have gained value, although not as much as the short strike lost. We can hold the long strike in the event that price keeps moving, making the long strike more valuable. However, since the strike is likely still well out of the money, it is likely to expire worthless and probably is best to be closed out soon after the short strike stop occurs.

When we are stopped out on one side, it is even more likely that the opposite side will expire worthless. However, there is a small possibility that price action could reverse and move far enough to stop out the other side as well. For that reason, some traders will close out one side if the net premium has decayed 80 or 90% of the way while there is still a lot of time left in the day. The choice is take risk off the table, or hold out for that highly probable last 0.25%. Again, it’s personal preference.

So, let’s look at the various potential outcomes of our $1.60 Iron Condor:
1. most likely (~70%) both sides expire worthless $1.60 profit
2. sometimes (~25%) one side is stopped out and the other expires worthless ($3.00 loss on short stop, $0.20 gain on long, $0.80 profit on other side) $2.00 loss
3. rarely (~5%) both sides stopped out, assume no net gains from long strikes so $6.00 loss ($3.00 each side)
Adding all the probabilities together, we get an average return of 0.33 profit, or $33 on our $4000 capital. That’s just under 1% per day.

Can some traders do better? Yes, there are lots of variations that some traders believe give them a better advantage. But lots of traders do worse. Why? Because managing trades while sticking to a plan isn’t easy for most traders.

How can the trade be varied? Some traders enter the trade at different times in the day. They may enter at market open and again a few hours into the day. They may open on just one side based on technical indicators predicting movement in a certain direction. They may add based on one side based on market movement. They may have plans to add new positions when an old one is stopped out. Which variations work and which ones don’t? The probabilities are essentially the same but can be tweaked by collecting a little more or less in each trade.

Some may wonder why we wouldn’t just look at stopping out the whole Iron Condor when it loses twice the premium collected instead of managing each side separately. While it could be done that way, the challenge is that each of the legs of the trade are very dynamic in their values and the relationship between them changes dramatically during the course of the day. If the trade is opened early in the day, it is likely that by the final hour of the day only one position will have any meaningful value. Also, managing puts and calls separately allows traders to add and take away positions on either side independent of how they treat the other side.

On an ideal day for this trade where the market doesn’t move much after the Iron Condor position is opened, all the legs will decay proportionately and have little value left by the afternoon period a few hours before expiration. This is because expectations of the remaining move for the day will decrease and the price distance that was 1.5 times the expected move will become 3 to 4 times the remaining expected move. Since the probabilities are exponentially smaller of being tested, the premiums simply evaporate. One doesn’t have to wait to the very end to see the result.

Other days Iron Condor traders may see the price creep around moving toward one of their short strikes. Big moves early in the day can quickly lead to executing a stop, but the nerve-wracking position is the one is close to stopping out all day as the price moves ever closer to a strike price but not close enough to trigger a stop. For some traders this is stressful, for others fascinating. To avoid stress, many traders set their stops and go on about their day knowing that the market will decide whether the trade wins or loses.

Iron Fly 0 DTE trades

A completely different approach to capturing decay on expiration day is selling an Iron Butterfly or Iron Fly as it is more commonly called. The Iron Fly is created by selling an at the money call and an at the money put and buying protective wings outside the expected move of the day. The trade simulates a straddle, but defines the risk as the width of the wings to keep buying power reasonable. Most traders try to open these trades soon after the market opens and get out fairly soon, taking advantage of early morning premium decay as the market settles in.

As discussed earlier, the at the money put and call premium imply an expected move for the remainder of the life of the option. How big the expectation is varies from day to day. For example, on days when the Federal Reserve announces interest rate policy, the expected move is much higher than other days. Other anticipated news events can also trigger uncertainty about pricing changes to expect later in the day, driving premium higher. Other days, little news is expected and low premiums reflect that. So setting up this trade requires a review of prices to pick wing strikes that are appropriate.

Generally, most traders look for Iron Fly wings that are 1.5 to 2 times the implied or expected move. For example, if the total premium of the at the money put and call is $30, one might choose to buy puts and calls $50 away from the money. These should be fairly cheap compared to the at the money strikes. The idea is that there isn’t much decay left, these long options are simply protection from a sudden outsized move. An alternative is to use a set price for one or both of the longs, like $1 for the long call and buying the equidistant long put, which may cost slightly more due to pricing skew.

The most common management strategy I’ve seen for this trade is to set a win target and an offsetting stop loss, and let the odds play out. Iron Fly sellers pick either a percentage target or a dollar target for profit and typically set the stop loss at twice the win target. For example, one trader may target a profit of 5% of the premium, while another may target $1.50 profit every day. There’s logic for either approach, big values may hold value until the news event that is expected to move price, while low values may decay slowly. The key is that the bigger the target, the longer a trader is in the trade.

Why not go for it all and let the position expire? First of all, one short strike will definitely be in the money at expiration while the other short strike will be worthless. The day to day variation in results would be huge, perhaps making 50% return one day and losing 140% the next day. In addition, most studies I’ve seen on this approach suggest that this is a net losing trade over time.

The idea of getting in and getting out is that there are periods of time during the day, primarily at the open, when the level of uncertainty drops significantly in a matter of minutes or a few hours. Even with price movement, expected moves drop faster and the premium of the Iron Fly decays for a win.

In practice, the Iron Fly can tolerate a move of a few strikes up or down initially without stopping out. Early in the day the market often moves around searching for a price to stabilize on. The Iron Fly seller expects that movement to be small enough most days that a stop isn’t triggered and the settling price is close enough to the price where the trade started that the profit target can be achieved.

Setting a stop order or profit limit order is trickier with an Iron Fly than with the Iron Condor. The issue is that with the Iron Fly, a price move of the underlying generally impacts three of the four legs. One short goes into the money and the long on that side starts increasing in value, while the other short starts decreasing in value. The long on the untested side goes from low value to nearly worthless and isn’t a factor. A set and forget stop strategy would be to set a stop for the whole four legs, but triggers and fills can be inconsistent. Another approach is to watch the direction of price and set a stop for the three legs that are most impacted. Another is to set a mental stop and manually close if the price goes beyond your mental stop.

For example, let’s say we open an Iron Fly for $30 credit and target $1.50 profit. We can enter a limit buy to close order to buy the whole position back for $28.50. We could alternatively place a stop loss order at $33. Some brokers allow a bracket order that combines the two orders into one for a situation like this. If we want to watch and mentally manage the order, we may choose to only close the three legs that have meaningful value.

Time in the trade can vary from minutes to hours. Some days the price sticks right where the Iron Fly was sold and the price decays in 5-10 minutes. Other days, the price may grind away varying premium between the profit and stop targets for hours. Many traders set a time limit- if the trade doesn’t hit a stop or profit target in 2 hours, close it and move on.

Time to enter is a bit of a personal preference as well. Some traders try to enter within seconds of the market open when there is the absolute most premium available. Others wait five to fifteen minutes for the initial big move to stop. Some do just one of these trades a day, while others open several at different points in the day. Some avoid Federal Reserve days while others embrace them. There are advantages and disadvantages to each way of entering, but often it comes down to comfort of the trader with a chosen approach, the probabilities are similar.

Over time, the math is fairly simple with this trade. We need to win more than twice as often as we lose. The studies I’ve seen show this as a net winner. The other key is stay mechanical and respect identified stop values. Most people who fail at this trade do so by getting sloppy with their stops and hoping for prices to reverse while the loss multiplies. Discipline can’t be overstated.

Long Strategies for 0 DTE

Buying an option on expiration day requires a strategy that can overcome the rapid time decay of the option purchased. Since there are huge volumes being bought each day, there must be some validity to this approach.

Buy 0 DTE Straddle

One simple approach is to buy a straddle and hope for an outsized move. This is essentially the strategy discussed in the post on the 1 DTE Straddle I’ve written about separately, just done on expiration day. The difference is that at 1 DTE, there is overnight movement that may impact pricing, while once the 0 DTE trading day has started, we only have the day’s price movement to consider.

This strategy is essentially the opposite of the Iron Fly strategy and counts on movement of price to exceed time decay. Since risk is limited to the premium paid, there isn’t much value in selling wings, which would limit the upside of any move.

When would one open a 0 DTE straddle? Perhaps right at the open, looking to capture a big early morning move. Or just before a big announcement, like the Federal Reserve interest rate announcement or press conference. Or maybe at a point in the day where there is time left but the straddle is just very cheap and a small move will make it profitable.

The biggest challenge is deciding when to get out both for winning and losing positions. The position won’t expire worthless, so should there be a stop loss? When a position wins, when is the profit enough to justify the strategy over time? Since the trade has theoretical unlimited profit, shouldn’t we preserve that potential? Tough choices, so thinking through a plan ahead of time for the situation is critical.

My go-to plan is usually to roll in the money puts toward the current strike price when I can collect a significant percentage of the roll distance. Early in the day, I might roll my strikes $10 when I can collect $7. Later in the day I may do it if I can collect $8. The idea is to take some of my winnings off the table while allowing for additional movement to make more. I protect myself from a reversal wiping out my profit. I find this approach reduces the volatility of my win and loss amounts.

Jump on the Trend with a Long Option

Many traders like to use Technical Analysis to predict future movements of the market. They detect when a trend in one direction is starting and determine how long they expect it to last. A great way to take advantage is to buy a call when the market is trending up and sell it at the top before it has time to decay, or buy a put on a downtrend and sell it at the bottom.

Generally, the idea is to get in opportunistically and get out. Time is ticking against the option buyer on expiration day, so the buyer has to be right on direction and right on timing. If the trend is small or slow moving, premium will decay faster than the underlying price can increase it.

A typical strategy on an uptrend is to buy a call a few strikes out of the money. For SPX, this might cost $10 premium or $1000 for the contract. The Delta value might be 30, so that a $10 price move would net $300.

If the strike ends up in the money and is above 50 Delta, a roll to a higher strike should net at least half the distance of the roll. For example, one might roll up $10 for a $5 credit. Or wait to get further in the money where a roll up could net a higher percentage. Or just close the trade when technical analysis says that the move is approaching the top of the range.

The same basic strategy would work with puts on a downtrend. In either case, the market needs to move decidedly in the buyers favor for there to be a profit.

Time of day impacts premium pricing as well. Early in the day there is obviously more premium than late in the day. Buys earlier in the day can follow long all-day trends and make up for the high premium to get in. Late day buys can pay off quickly with a fairly small move in the direction of the trade. A trader has to be aware of the time left and manage accordingly.

The Binary Event

Often, the option premium and price movement of a day is greatly influenced by a single scheduled event. A piece of news, like an economic report, or a Federal Reserve rate announcement is often anticipated by the market with high option premium before the event and much lower premium after. These events are referred to as “binary,” in other words true or false, 1 or 0, good or bad. The impact of these events really have three outcomes for option traders- the market goes up, the market goes down, or the market basically doesn’t move. A trader doesn’t really know what the market will do, so how can we play one of these events.

A starting point might be to look at how much premium is elevated. Sometimes the market is expecting a big impact and sometimes a small one, and it often pays to be contrarian in regards to expected impact. How do we know if the premium is high or low? It takes only a few weeks of watching premium prices to grasp whether premium is higher or lower than normal, and if the high premium for a binary event is extra high, or actually a bargain. If premium is lower than normal, it might be a good time to buy options, either a straddle, or an out of the money call or put in the direction that the market is most susceptible to a big move. If premium is extra high, selling an Iron Fly or Iron Condor might make more sense.

Binary events tend to behave in crazy ways. When the initial news comes out the market may rocket in one direction for a few minutes and then reverse back to where it started or even switch from a big move in one direction to another. Most market observers explain this by noting that the very first reaction is from robot traders that look for certain numbers or words in a statement and interpret them as bullish or bearish, triggering large buys or sells. Then a combination of cooler heads prevail, as the market digests the information and puts things in context. After a while, the market decides whether to take the event as a positive, negative or neutral for the near-term future.

I know many traders avoid binary events because of the unpredictability of market behavior. There simply isn’t a built in probability advantage to any specific trade, and big losses are a distinct possibility. For traders that do like these trades, a plan for managing the trade is critical, when to get in, and a plan to hold, fold, or roll depending on the behavior of the market.

Conclusion

0 DTE trades are extremely popular now that they are available every trading day. However, that doesn’t mean that they are an easy way to make money. In many ways, they are the closest option trade to gambling that there is available. Gaining an edge requires developing and following a plan that accounts for both the potential movement of the market and decay of options. For traders that regularly trade 0 DTE options, it is critical to track all trades to make sure that the strategies used actually average a positive return over time.

I’m actually not a big fan of 0 DTE. For me it is too much drama with too little edge. The rest of this site is dedicated to other strategies that I prefer. But for traders that have the wits and discipline to trade 0 DTE, all I can say is “best wishes!”

2022 Learnings

In 2022 I had a rough year in many ways, but also had many successes, and need to take away some lessons from it.

Moving into a new year, it is always good to review trading in the past year to see what can be learned. 2022 is no exception. I had a rough year in many ways, but also had many successes, and need to take away some lessons from it.

Overview

2022 was a bear market year. Coming into the year, I was trading some very aggressive, short-duration bullish options positions, despite lots of warnings of troubles on the horizon. This resulted in a big loss in January and February, until I adjusted to a more neutral approach. However, I got away from many core philosophies and still didn’t recover as well as I could have.

What didn’t work and why

My biggest losses came from three main strategic mistakes, one that was new to me, and two that I should have know better. The new one was selling short duration without an appropriate exit strategy. The old should have known better losers were trading options on individual stocks and selling calls too close to the money.

Short duration trades

In 2021 I rode the bull market with a trade that was perfect for an almost straight up market, the 7 DTE rolling put spread. I’ve written about it, and you can read about how great it worked. However, when the S&P 500 went down over 400 points in a month at the beginning of 2022, there was no defense with the strategy of rolling. Because I had so much success with selling 7 DTE put spreads, I was reluctant to admit that the strategy wouldn’t work. I wasn’t prepared for a move down that didn’t bounce back. We had plenty of warning that the Federal Reserve was going to stop pumping money into the economy and instead raise interest rates and reduce the money supply. But, I left myself exposed with lots of short duration put spreads as the year began.

I tried to fight the down moves with rolls and a variety of other tricks I’ve used over the years, but there really was no defense for short puts close to expiration in a plummeting market. As I’ve come to learn, in down markets puts can be underpriced for the risk, and short duration puts can actually be a good buy. The book “The Second Leg Down: Strategies for Profiting after a Market Sell-Off” by Hari Krishman details a number of studies to back this up.

I’ve heard from a number of people that they had success with short duration options even in 2022 by going a little further away from the current price and either holding or using stop losses to keep losses from getting too big. But, I didn’t do that. Later in the year I tried to get back into selling some short duration options and got burned again. My style of rolling is just not a good fit for short duration options.

So, as expiration approaches, there is a lot of time decay that is very tempting to take advantage of. The flip side is that to get that decay, options must be sold quite close to the current price making them susceptible to a sharp move. Short term move of several times the expected move are not uncommon, especially in a bear market. For me, the returns are not worth the risk. My temperament is just not set up for this kind of trade.

More time gives more forgiveness. Looking to reduce risk from short duration options, I’ve focused studying ways to get the most out of longer duration options. I’ve done additional research on optimal Delta for selling put spreads at different time durations to maximize Theta. I’ve also gotten back to waiting for down days to sell bullish put strategies.

The only short duration trade I’m currently doing is an opposite trade to most of my other strategies. I’m buying 1 DTE straddles, as I’ve written about in a previous post. So far, so good with that.

Selling Calls too Close to the Money

Even in a bear market, selling calls can be painful. In a bear market there are often large counter-trend rallies where calls with strike prices close to the money quickly end up in the money. Implied volatility on index options is almost always significant skewed to the downside, making calls cheaper than puts. Selling the lesser call premium tends to not be adequate for the risk of a big rally. When I combine selling calls close to the money and with fairly short duration, I set myself up to be whip-sawed back and forth, reacting to each move in ways that locks in losses each way.

Ideally, I want to have positions outside of the market moves, far enough away in time and price distance that day to day price changes have little impact on me and I can just wait for time decay to work my option prices down over time. Puts tend to have more strategies that can be profitable when selling than calls. If you don’t believe this, just try back testing short option strategies and see if you can find one where calls beat puts- I haven’t found one.

Selling Options on Individual Stocks

I’ve written a number of times about how indexes are much less likely to have extreme outsized moves than individual stocks. 2022 is a great reminder of that. Many formerly valuable stocks lost well over half their value during the year, and a number of them lost over 90% of their value. I was exposed to some of this mayhem when I sold puts well out of the money on a few that seemed like they couldn’t miss, but then did.

I completely botched a trade on a company that I really like. Generac makes back-up generators as well as systems that store and manage electricity generated from solar panels. With the electrical grid getting less reliable, people are in need of their products. So, to mix it up a bit, I sold at $20 wide put spread in the low 200s early in the year after the stock had fallen significantly and seemed to be on an upward trajectory. Despite all their success in the market, the stock slowly declined, and I found myself rolling my position down and out a few times. Then, I made the fateful decision to sell my long put of the spread and switch from a put spread with $20 risk, to a naked put with a strike price of $200, cash secured. I figured that the stock was surely at the bottom of its range, and I wouldn’t mind owning it if it dropped a little more. Then Generac announced that they were going to miss earnings substantially because of a lack of installers available to deliver and install their equipment at residences. Overnight the stock dropped 30% after previously losing over 20%. Before I knew it, I was stuck obligated to buy a $100 stock for $200. I tried to roll out, but there were no takers to make a trade. I was assigned the shares, losing $10,000 per contract on a trade that originally had a max loss of $2,000 per contract. Multiple bad ideas- individual stock risk, getting cute when tested, not accepting a loss and moving on.

I also sold puts on ARKK, the Ark Innovation ETF. It’s not an individual stock, but it is a volatile managed fund of a relatively small number of innovative companies. Again, I thought that we had seen the worst of the market drop, especially for this fund, and I sold cash secured puts in the middle of the year. Since then, the stock has fallen by half- I had about a 10% cushion to start, but that is long gone and now I have shares.

There are some others that weren’t that bad, but the conclusion is the same. Options on major indexes are much less likely to be hit by outsized moves, particularly if there is a decent amount of time until expiration and the strikes are well out of the money. That is one of my core mantras and I strayed at my own peril.

What went well

Fortunately, not everything went as badly as the trades described above. I re-discovered some strategies that I had stopped using that worked well, and started using some new strategies that I was either skeptical of or unaware of prior to putting them into practice.

Selling Long Duration Puts

I’ve sold puts well out of the money well out in time many times in the past, but the allure of big Theta from short duration started getting the best of me. Why sell at 6 weeks or 12 weeks when we can make bigger returns selling at one week? Well, lots of reasons. Short duration takes lots of effort and is much more stressful. It doesn’t take a big move to blow past strikes that have value less than a week until expiration, while positions outside of the expected move a month or more out in time are much less impacted.

With positions 4 to 6 weeks out or even more, we get more consistent results and can reduce volatility of the portfolio. When a big move happens, we can wait a few days to see if the move reverses before making any adjustments. Often it does and there is no reason to intervene.

I’ve found that I can still sell spreads with Delta values in the teens that are in their maximum percentage of decay weeks or even months before expiration. While the percentage return isn’t as high as short duration, it is more consistent and higher probability of being positive. It isn’t exciting, but that’s okay.

Put Ratio Trades

The most popular page on my site every month is my explanation of how I trade broken wing butterflies. For a while I got away from trading this, chasing some other “shiny object.” I re-started trading the strategy and got back to winning. I have been a little more opportunistic with this strategy, opening on down days to get my strikes lower with higher IV, but the trade is high probability with rapid decay. The way I trade it seems to be just far enough out in time to buffer it from the volatile weeks that have come along regularly in 2022.

I’ve also had good success with the other put ratio cousins of this trade, the broken wing condor (or 1-1-1-1), and the 1-1-2-2 trade. The common thread to each of these is that there are two competing spreads in each case. I start with a debit put spread, typically where I buy a 25 Delta put and sell a 20 Delta call which acts as protection for a higher priced and wider credit put spread at lower delta values. The wider and lower Delta valued credit spreads decay faster than the narrow debit spread, and often switch from a negative value overall position when sold to a positive value position that I can sell to close prior to expiration. This happens when the wide credit spread decays to the point that it has less value than the narrower debit spread. So, I often collect cash when I open and collect cash when I close these.

Finally, I’m seeing success in the naked versions of these trades as well. Instead of having two spreads, I sometimes skip using the low long leg of the credit spread and go with selling a naked put. This leaves me with a debit spread protecting a naked put or two below it. So I end up with 1-1-1 or 1-1-2 versions of the above trades- true ratio spreads. These have undefined risk to the downside unless cash secured, and I trade them on margin. That ties in nicely with some of my other take-aways.

Using Futures Options to Pump Up Returns

After avoiding futures for many years, I’ve really become fond of them. I avoided them because I didn’t see the strategic value of buying or selling futures contracts on an index or commodity. I was also scared by the risk of aggressive use of SPAN margin. But what I’ve found is that futures options in particular allow me to sell high probability positions for very low amounts of capital, and then allow me to buy or sell actual futures contracts to use as a hedge and neutralize overall Delta. It can get complex very quickly and a trader has to be avoid building a house of cards that could collapse in a outsized market event. But when used with care, futures options and futures themselves provide valuable tools to increase returns.

I haven’t written much about the use of futures strategies on this site because I’m still working to distil the approaches into content that can be readily applied. Risk vs reward becomes much more significant with futures options, so risk management becomes a primary consideration in every trade and isn’t something to jump into without a comprehensive understanding.

All that said, I’m finding futures options allow me ways to magnify returns and also hedge my risks. I’ll be writing more in subsequent strategy discussions, but if you look at pages on four different underlying types and four levels of risk, there’s some initial content to consider. One specific hedge trade I’ve started using, the 1 DTE Straddle, came from my futures experience.

Selling Naked Futures Options

One place where I’ve found success with futures options is selling naked options well out of the money well out in time. Because of SPAN margin, these trades don’t require much capital. They also don’t move that much because of the long duration. I’m finding trades with lots of decay and really seeing the appeal of naked options. Long duration and low deltas cushion the positions from big day to day moves and give me plenty of warning to adjust when needed. While spreads have windows where they can be rolled for credit and other Delta values where they can’t, naked options can always be rolled out in time for credit. The issue is that some rolls are more lucrative than others.

So I finally see the flexibility and adjustability that naked options provide in defending against big price movements. The key is to manage size to keep risk reasonable.

Naked to me involves a variety of strategies from selling a single option, to selling the naked put ratio trades mentioned above. As I better define consistent management and hedging approaches to these trades, I’ll explain my naked strategies in more detail.

Using Research to Test Strategies

Finally, I’ve re-discovered the importance of doing my own research to understand trades I’m doing. I’ve shared many of my insights on this website, but I always have new ways to look at trade set-ups, impact of management, and understanding risk. I’ve written about the sources I use to research the market, and I still use the same primary approaches. I use current option tables, I do backtests, I analyze historic trends, and I model potential outcomes.

Sometimes it is easy to get caught up in what I’m doing every day and not stop and ask if the approaches I’m using at the moment are really valid. I don’t look to see if there is a better way. Research keeps me fresh, and often validates findings I’ve observed in the past, but strayed away from in my current trading. So, constantly looking at data from different strategies in different ways actually keeps my trading focused on approaches that work.

I also find that the biggest beneficiary of the studies I share is me. Writing things down to share makes me double check my work and get clearer as to what I’m doing. Sometimes in the course of providing data for a trading approach I’m doing; I realize that I could do better, and revise based on what the data says.

I also get a lot of inspiration from other sources- groups I’m a part of and sites I follow. My favorite source of inspiration continues to be TastyLive, which I often have playing in the background while I trade. I interact with a lot of other traders which also helps. I’ve written about the value of community in the past.

So my final thought is that I need to challenge myself to always keep learning and base my trading strategies focused on proven approaches with high probability of success and manageable risk.

Buy 1 DTE Straddle

I buy a 1 DTE straddle on indexes for two reasons. 1, It has a positive expectancy over time. 2. It is a hedge against short option positions

I’ve started buying 1 DTE straddles on the S&P 500 for two reasons. First, this straddle trade has a positive expectancy- over time it has made more than it has lost. Second, and perhaps more importantly, the straddle is a great hedge against my many short option positions further out in time. How I came to these observations and how I manage this trade are the topics of this discussion.

A straddle is buying a call and a put at the same strike price and same expiration. When traded at the money, it roughly represents the expected move of the underlying for that time period. So, buying a 1 DTE straddle for $30 would mean that the market expects the SPX index to move around $30 plus or minus the next day. Buying a straddle means the buyer is hoping the market will move more than expected, and the seller is hoping the market will move less than expected.

Normally, I only sell options or spreads for a net credit and wait for the value to decay away for a profit. I mostly sell options with expiration dates weeks or even months out and a decent distance out of the money. Those trades have a high probability of profit. However, they also carry the risk that an extended big move in the market could result in a big loss.

Profiting from the trade outright

With 2022 being a bear market year, I have studied more about ways to manage positions in downturns. One interesting book on the topic is “The Second Leg Down: Strategies for Profitting after a Market Sell-Off” by Hari P. Krishnan. One observation in the book is that options under 7 DTE tend to be undervalued and have good potential to make money or protect a portfolio in the midst of a downturn. The book has numerous interesting strategies to help navigate downturns. I’ve toyed with a few of these, but I couldn’t find a trade strategy that achieved the type of positive outcome I was looking for.

As I’ve noted elsewhere, I’m a big fan of the TastyLive.com broadcast site. Just before Christmas at the end of 2022, Jermal Chandler interviewed Dr. Russell Rhoads on his Engineering the Trade show. The topic was short duration options that are now quite prevalent. One key point is how very short duration at the money (ATM) straddles on SPX (S&P 500 Index) and NDX (Nasdaq 100 Index) are actually underpriced. If you buy a 1 DTE straddle at the end of the day and hold to expiration the next, it has averaged a positive return in the past year, which says these options are actually undervalued, counter to what we would normally expect.

I’ve added the presentation, which is broad ranging on the topic here:
(Press the red play button to watch)

Starting at about 8:00 into this video, the discussion starts on how 1 DTE premium has been underpriced for the past year.

I decided to try buying these as a one lot and so far I’m seeing this work out with a positive return. And this has been during a few mild weeks with little movement. The straddle never expires worthless as one side is always in the money- it’s just a matter of how much. I have generally closed these early, selling the side that is in the money when I can for more than I paid for the straddle. So far, this has worked better than holding to expiration because we have been range-bound. When we get into a trending market one way or the other, it will likely make more sense to hold.

The hedging benefit

However, I found a second benefit that may be much bigger. I decided to switch over and buy a 1 DTE /ES (S&P 500 mini futures) option straddle in an account with a lot of short futures options for a 1 DTE straddle- not sure why I even decided to other than the size is half as much. Anyway, I noticed that buying one straddle greatly increased my buying power by over $27K, which didn’t make sense initially because I was paying a debit and I thought that would reduce buying power by what I paid-about $1500 ($30 x 50 multiplier).

It turns out that the futures SPAN margin saw this as a big risk reduction. (For more on futures options and margin, see the webpage on different option underlyings.) Buying the /ES straddle gives me 500 equivalent shares of SPY notional in either direction of price movement. This will counter several short options out in time and out of the money. So essentially it is a shock absorber for my futures positions.

Many traders are nervous about the overnight risk of holding short options, due the possibility of a big gap in price overnight. Having a hedge like this can help mitigate that risk.

The biggest question is how big of a position is appropriate? Well, keep in mind that if the market doesn’t move at all and closes very close to the strikes of the straddle, the straddle will be nearly a complete loss. So the size of the trade should be a very small portion of a portfolio, as this trade will be very volatile, going from losing nearly 100% some days to returning several multiples of the initial value others. Think of it as a volatile side trade that can reduce volatility of a much larger set of positions. Kind of a contradiction.

Futures make this obvious, but the same logic applies to any portfolio full of short option premium. The S&P 500 and Nasdaq 100 indexes have a variety of options underlyings at different costs to allow traders of virtually all account sizes to utilize this kind of trading strategy.

So, I think there are a number of angles to pursue this from a trading and portfolio management tool. I thought it might make a good topic to discuss with this group- the gamma of this trade provides a lot of protection at a low cost, essentially free over time, although likely to have periods of loss.

Essentially, I look at it as a great hedge that can still make money on its own. If I have out of the money longer-dated short options in a portfolio, they will make money on calm days, and the 1 DTE straddle will make money on turbulent days. And if I manage each correctly, each should make money over time.

Managing the Straddle

I tend to buy these straddles right at the close the day before expiration. On Fridays, I buy Monday’s expiration, which surprisingly often is about the same price as other days. I’ve tried buying two days out and laddering, but that gets to be a lot to keep track of if I try to manage early, so I prefer to buy at the money at the close for just one day.

A 1 DTE straddle benefits from big moves on expiration day
Big moves by the end of the day can be very profitable for a 1 DTE straddle, so so can smaller moves overnight or early in the day that allow a trader to manage the trade or take some risk off the table.

Like all option trades, there’s always a management choice of hold, fold, or roll. This trade has all those elements to choose from.

As mentioned earlier, probably the simplest choice is to just hold to expiration. The odds are that over time, the trade will win more than lose. However, this may mean that we have a day where a trade is profitable at some point in the day, but then moves back toward the strike price and loses money. Finding a way to beat simple holding takes a lot of effort and since we know the worst case scenario is losing all the premium we paid, we may want to just let it ride. On days where the market is on the move, this can be very lucrative, as the max move may be at the close of the day. Think of holding as the default way to manage the long straddle.

I’ve found that calm days in a range-bound environment are ones where prices explore support and resistance levels before returning to a point closer the strike price. As the day goes on and price stays constrained, I look for a chance to sell one side of the straddle for a price more than I paid for the total. Earlier in the day, I feel like I can be greedy and wait for a big profit, but as the day goes on, I’m happy to get out for any profit. So, I’ll fold one side of the straddle for a profit when it doesn’t look like we are going to close at an extreme move. Occasionally, I might get to sell the other side if there is a late move in price to the other side of the strike price.

So, that’s hold and fold. How/why would I roll? Let’s say the market has moved a significant amount from the strike price, and I’d like to take a profit but still have the possibility of taking advantage of additional movement. I can roll my in the money option toward the current price for most of the distance rolled. For example, let’s say the price of SPX is down 40 points midway through the day and I’m worried it might come back up, but want to also benefit if it keeps going down. I could roll down my put 20 points and maybe collect $18, locking in 90% of the move. If the price keeps moving, I could keep rolling. The downside of this is that I don’t get 100% of the move, and I’m paying commissions on each roll, and these trades will be pattern day trades if I close the new position before the end of the day. I also will have a hard time locking into a profit that is beyond my purchase price, unless I have a really big move. But rolling is a choice to consider for some traders and some accounts.

Conclusion

So, there you have it. A volatile option buying strategy one day before expiration that averages a profit and can hedge other positions in a portfolio. I have found expiration trades stressful in the past, but this one has been much less stressful to me despite the volatile nature of it.

Best Delta for Rolling Put Spreads

I’ve noticed some put spread rolls collect more credit than others. This study shows that there is an ideal Delta for rolling put spreads

After trading put spreads for several years, I’ve noticed that some rolls collect a lot of premium credit, and others are a struggle to collect any credit at all. I decided to study this to see if I could find if there is a “sweet spot” for rolling put spreads based on Delta values. I’m happy to report that there is.

It’s no secret that if a put spread gets fully in the money, it is impossible to roll to the same strikes in a later expiration for a credit. But when a spread is out of the money, I’ve seen a wide variation in credit when I roll, and I’ve often thought that there must be a best place to make a roll to get the most credit. If there is, I could devise a strategy to take advantage. So, I copied some option tables into Excel and pivoted the data a few different ways to figure out how premium from rolls vary.

Before jumping into the study, let’s discuss what rolling option spreads involves and why we might do it when a spread is out of the money. Rolling is one three ways to manage an exisitng trade- I covered the three ways in the page on managing by holding, folding, or rolling. One of my common management techniques is to continuously roll a position- I let the short spread decay in value, then roll it out in time to get more premium, and then let it decay all over again. Just repeat over and over. For those not familiar with the roll concept, rolling means executing a trade where an existing position is closed and a new position is opened all at once in one trade. The new options may be at the same strikes, which would be rolling “out,” or the strikes may be higher, which would be rolling “up and out,” or we could also roll “down and out.” Rolling a credit put spread that is out of the money out to the same strikes, will almost certainly generate a credit, which is the goal of this strategy. I’ve discussed this -approach in detail in other pages of this website, including roll for 6 percent a week, goals for rolling Iron Condors, the power of rolling Iron Condors, and rolling losing positions.

Rolling Spreads in the Study

I looked at a lot of different combinations of rolls, different durations, different times between durations, and I saw similar results. In the interest of keeping this write-up from getting lengthy, I’m choosing to just show a few examples.

7-10 DTE Roll

While I don’t trade a lot of options with durations of a week or less, I thought it would be good to look at this timeframe as the lower end of timeframes where we get outside of current week expirations. The following chart shows all the available combinations of 40 wide 7 days to expiration (DTE) SPX credit spreads rolling to the same strikes at 10 DTE.

Rolling out from 7 DTE to 10 DTE has the best credit when the 7 DTE short strike is between 10 and 20 Delta. Note that the Theta peaks at a slightly higher Delta.
Rolling out from 7 DTE to 10 DTE has the best credit when the 7 DTE short strike is between 10 and 20 Delta. Note that the Theta peaks at a slightly higher Delta.

I’ve shown the net credit for each roll combination, as well as the raw Theta difference for each existing 7 DTE 40 point wide spread. The x-axis is the Delta of each 7 DTE spread. The roll credit is shown on the left axis, and the net Theta is shown on the right axis. Looking at a peak value of approximately $1.20 per roll, we would collect 3% of the 40 wide spread. Meanwhile, the peak Theta of around $0.45 per day would equate to 1.1% of the width. So, holding might get a similar daily return, but with increasing risk as expiration approaches, but a roll would allow us to collect 3% and still collect additional Theta over again. Actually, that’s double counting. The Theta would just be the decay of the premium we are collecting. Just a few ways to think about the transaction. We can also look at actual strike prices and look at a few other values.

This graph shows roll credit plus Delta and Theta values for the positions
This graph shows roll credit plus Delta and Theta values for the positions

On this next chart, I’ve shown the x-axis as the strike price of the short put of the credit put spread. I’ve also added the Delta values of each of the puts for the 7 DTE spread as well as the Delta of spread position. In addition to the net Theta of the 7 DTE spread, I added the net Theta of the 10 DTE spread that we would roll to. So, each strike price on the x-axis is tied to six different pieces of data for a potential spread roll. While the roll premium and net Theta of the 7 DTE spread is the same information as the previous graph, the additional data can add more context.

Note that the Theta values of the longer duration spreads are generally lower than shorter. That should be expected. More time means slower decay. But the new spread will have a slightly higher Delta, which moves the peak of the Theta curve down in strike prices, because as we have seen in our study on maximizing Theta for a put spread, Theta tends to max out at short Deltas around 20, which will be further down after a roll. So, note from the chart that the maximum roll premium lines up for the most part with the maximum Theta of the spread we are rolling to.

The take-away from the Delta information on the chart is that as we get closer to the current price and have higher Deltas, the net Delta goes up, and the value of rolls goes down. Also, if Delta gets too low, there isn’t as much premium available in a roll to the same strike prices. I picked out the Delta values of the spread with the highest roll value, and it is approximately 14 Delta on the short strike and 8 Delta on the long strike.

So, the ideal scenario is to start with Deltas of around 20/13 and see the positions decay and Deltas to decline to 14/8, and then roll out to new strikes with Deltas of 20/13. If only the market would cooperate with our plan and let us do this all the time. Obviously, the market isn’t that consistent, so we have to manage in other ways.

Sometimes, we may want to roll down and out. Let’s look at the premium for 40 wide spreads and see what is possible if we want to collect a credit.

Looking at the premium differences, we can see opportunity to roll down at some strikes more than others.
Looking at the premium differences, we can see opportunity to roll down at some strikes more than others.

On the above chart, I have plotted the premium value of 40 wide put spreads at 7 and 10 DTE, along with the premium collected to roll out to the same strikes. I’ve also highlighted possible rolls down and out. The highest strike where it is possible to roll down a strike and collect a credit is to go from 3920/3880 at 7 DTE to 3915/3875 for a 10 cent credit. When a spread is being tested, every bit helps, but clearly this roll doesn’t give the position much more breathing room. On the other hand, if we had the 3800/3760 spread, we could roll down 25 points to 3775/3735 for no cost. So, again it pays to stay away from being tested. But at this short of timeframe, it doesn’t take much of a move to get a spread in trouble, so let’s look at how a little longer duration would fare.

21-42 DTE

Let’s look at an example that generally matches up with the common strategy often associated with TastyLive.com. Interestingly, values peak out at about the same place based on Delta.

This example shows rolling from 21 DTE to 42 DTE, essentially doubling the time until expiration.
This example shows rolling from 21 DTE to 42 DTE, essentially doubling the time until expiration.

Again, the best premium for a roll is in the mid to low teen values of the Delta value of the short strike of the 21 DTE spread. Here we are collecting just over $6.00 to roll our 100-wide put spread out to 42 DTE. In that case, we would be collecting an additional 6% of the width of the spread. The 21 DTE spread would be decaying about $0.30 per day, so the roll allows us to collect around 21 days of decay in cash.

Notice that the observations we made on the 7-10 DTE roll hold almost exactly the same on the 21-42 DTE roll, even though we have much higher time to expiration, wider spreads, and proportionally longer rolls. One difference to note is that amount of premium and Theta are much less on a daily basis, but that should be expected as daily decay for similar Deltas gets higher as expiration approaches.

This graph shows the premium levels of 100 point wide spreads at 21 and 42 DTE, as well as the premium collected to roll out at the same strikes.

Another key difference is the distance that our strikes can be from the current price, giving the position more wiggle room for price changes. The above chart shows the premium of the various spreads available at 21 and 42 DTE. Notice that the lower strikes approach zero value while the spreads at higher strikes approach 100, which is the width of the spread and would be maximum loss for a credit spread at expiration. With spreads, the closer expiration gets the more of an S-shape we get when charting the premium. Since we are selling the spread, we’d like to see the value decay, either by staying out of the money as time goes by, or seeing the price go up, which would shift all the lines to the right on the chart.

What if we want to roll down to lower strikes when rolling out from 21 to 42 days? Let’s look at what would be available by zooming in a bit to the chart above to the area where there is credit available to roll out.

In this chart, we can see that the further we are out of the money, the more we can roll down for a credit. Once a spread is in the money, the opportunity to collect a credit is gone.
In this chart, we can see that the further we are out of the money, the more we can roll down for a credit. Once a spread is in the money, the opportunity to collect a credit is gone.

With plenty of time to expiration, we can roll out for nice credit or roll down quite a ways for some credit. For example, in the chart above, the 3700/3600 spread could be rolled down 150 points to 3550/3450 for 20 cents credit or rolled to the same strikes for $7.50 credit. The closer our strikes are to the money, the less credit we get to roll and the less we can roll down for a credit. And as we’ve seen, if our strikes are in the money, we would have to pay a debit to roll out. Having more time allows us to sell spreads that are much further away from the money and be able to roll out and away much easier than spreads that are closer to expiration.

42-49 DTE

One last example for contrast, we will roll out a relatively short amount of time from a 42 DTE put spread.

Again, we compare rolls at different Delta values, along with the net Theta of our current position.
Again, we compare rolls at different Delta values, along with the net Theta of our current position.

So, this roll is from 6 weeks to 7 weeks until duration. However, our previous observations generally hold. The peak premium is at a bit higher Delta, in the high teens. This makes sense if we consider that we are only rolling out for about 16% more time, so our new spreads will have peak Theta much closer to our old spreads. This would point to the idea that the best roll is the roll that gets us to a new spread with a short strike Delta of around 20.

Again, our max roll amount equates roughly to the daily Theta multiplied by the number of days we are rolling out.

How to Use This Information

Readers may wonder, what good is this? A trader can’t really control where prices move to, so the Delta value is not really controllable by a trader. This is somewhat true, but prices do move up and down all the time, and so if I’m looking to roll out to get to a timeframe that has less volatility, I might be able to enter a limit order that seeks to collect close to the maximum roll credit possible. Often, I’m not in a big hurry to roll, so I can check out where the maximum should be and set up an order for 90% of that amount and go about my business. If it doesn’t execute after a day or maybe even a week depending on the timeframe of the position, I could change the order to something less lucrative.

Another way to look at this data is to realize that if my position has both strikes down in the single digits of Delta, I’ll likely want to roll up my strikes when I roll out to get to optimal Theta. On the other hand, if my position has strikes with Deltas in the twenties or thirties, I may want to try to roll down and out, and hopefully still collect a credit.

If my position has gotten even closer to the money or even into the money, I’m going to have trouble rolling for a credit, and I have some tough decisions to make. I need to consider all my choices: holding, folding, or rolling. If I’m deep in the money I might consider taking desperate measures. It all comes down to risk appetite and an overall plan of action. It’s best to have a plan for all possibilities ahead of time, and not try to figure it out when times get tough.

Final Take-aways on rolling put spreads

My thought process for looking into this was to find optimal credits for rolling spreads, so I could devise strategies to improve my results. After studying this, I was excited to find an answer that makes sense. Deltas in the teens for the short strike of the spread are ideal for rolling. The further out in time the roll is as a ratio of current DTE to future DTE, the lower the delta of the current spread for best credit from the roll.

A good starting point for estimating the best credit is to take current Theta of the spread and multiply by the number of days that are being rolled out. So, if Theta is 20 cents and the roll is going out 5 days beyond the existing spread, the best credit will be around $1.00.

Finally, realize that this study was for put spreads, not call spreads, iron condors, or naked options. Spreads have unique characteristics compared to naked positions, and their behavior does not translate over. So, I only apply this information to rolling put spreads.

I am studying how naked puts best roll as well and plan to do a write up in the future on the topic.

Goals for Rolling Iron Condors

The goals of rolling are to neutralize delta, harvest profits, collect credits, and widen body width of the Iron Condor.

I see four ideal goals for executing a roll of any position, but specifically Iron Condors. First, I want to neutralize the position delta. Next, I want to harvest profits from the existing position. I also want to collect a net credit with the roll from the old position to the new. And finally, I want to improve probabilities of success by widening the body of the Iron Condor. If I can achieve all four, that’s the quadruple crown of rolling.

Often I see posts in social media lambasting rolling positions as a way to lock in losses and having no point. While that can be a possible scenario, I’d like to take a moment to discuss the ideal outcome of a roll, and share a recent example of what we are striving for with a rolling strategy.

For more information on the initial setup of Iron Condors, refer to my earlier post on the subject. This post is meant to build on that earlier post.

Example Iron Condor Roll

Earlier today I rolled an Iron Condor from 36 days to expiration out to 43 days to expiration. I opened the old position 10 days ago when the market was a little higher. Today, I wanted to better center my position to bring in my position Delta, and be less at risk for a move up. So, I rolled both sides up, rolling the calls up 20 points and rolling the puts up 10 points, which widened the body of the Iron Condor from 120 points to 130 points. Here is a summary of the old and new positions, with key points highlighted for further discussion.

Iron Condor Roll
Here is the key data from my tracking sheet for the old and new positions involved in this roll.

Let’s look at each goal and see how I did.

1. Neutralize Delta

While I don’t track Delta in my trade records, I do look at it for my open positions every day. For background on what Delta is for an option, a position, or a portfolio, see my posts on the topic. The account with this position was showing a lot of negative Delta, so I wanted to bring that in to a more neutral amount. Specifically, this position had a position Delta of -4.7, which equates to a Beta-weighted Delta of -47. This would be the equivalent of being short 47 shares of SPY. With my short call strikes slightly in the money, I wanted to reduce delta, get out of the money, and get more time. Rolling out a week accomplished all of that.

By rolling up 20 points, I got my short call out of the money. I rolled out a week, so I have more time. But most importantly, I cut my Delta almost in half from -4.7 to -2.5. I’m not zero delta or completely neutral, but it is a move in the right direction. I try not to over-adjust and chase being neutral too much or I can get whipsawed back and forth. So, now my premium value will be less volatile as the market moves up and down. Goal 1 accomplished.

2. Harvest profits from old position

The market has moved the direction I was positioned for, and today seemed like a good time to roll and recognize some profit. I’ve been in this position for 10 days, just over 20% of the life of the option. I’ve had some help from all the main pricing factors- price has moved down while I had negative Delta, time has passed while I had positive Theta, and volatility has come down slightly while I have negative Vega. All good for me. Notice that my put side lost money and my calls made money. I track them separately which helps me see trends, but the goal is for the net profit to be positive. And this position made $611 over 10 days. That’s around 8% return on capital. Goal 2 accomplished.

3. Collect a net credit from the roll

With a roll up on both sides, I had to pay a debit to roll up the calls, but I collected a bigger credit to roll up the puts. So, the net of the transaction is that I collected $0.35 per unit, or $35 overall. I try to collect credits in every roll because this is cash going into my account, while debits are cash leaving my account.

This old position wasn’t centered, and I widened the position while rolling out, factors that limited my net credit. However, I was able to find strikes that accomplished my other goals while still collecting a net credit. My new position isn’t ideal, but it is better than where I was and I got paid to make the change. Setting up a roll is an exercise in balancing many different desires, and I focus on collecting a credit as a way to determine how far I can go with my other desires. It isn’t a lot, but I collected a credit, so Goal 3 is accomplished.

4. Widen the body of the Iron Condor

The body of my Iron Condor is pretty narrow. How do I know? Look at the profit profile and it is clear that the whole position is inside of one expected move either way. Ideally, I’d like to get the expected moves inside my short strikes, but I’m managing a trade that is much tighter. So, every chance I get, I want to widen the body, the distance between the short strikes. Why do I want to do that? Because wider strikes have faster decay, up to a point, and we aren’t near that point. This position has strikes close to the money and the Theta values of the longs tend to cancel out the Theta of the short strikes more than I’d like. And the wider the distance between short strikes, the higher the probability of the price staying out of the money. Over several rolls, I want to get wider to where the position can tolerate moves without getting into the money as often. I went from 120 points between short strikes to 130 points, so Goal 4 is accomplished.

Quadruple Crown!

This roll accomplished all four of my goals for an Iron Condor roll. As I mentioned, I had to make some trade-offs along the way to accomplish all four goals, but this is an example of how I use all the data at my disposal to pick the trade that best suits the current situation.

Not every roll can be hit all four goals. If the current trade is a loser, the best you can do is meet the other three goals. Sometimes, I have to miss one goal to make another. In those cases, I choose based on what goal I’m most concerned with- do I need to neutralize delta more than I need a credit, or do I need to maintain body width more than I need a credit? Generally, I have a good shot to meet most of my goals if the current underlying price is inside the short strikes. As short strikes go deeper into the money, it becomes more and more likely that a roll will miss many of my goals.

This mindset of positive goals for trades isn’t exclusive to Iron Condors, but I thought today’s example would be a good way to illustrate the thought process involved in rolling for positive outcomes.

Change Log for Website

This post lists recent additions and changes to the website. For frequent users, this change log might be helpful to see what has changed from past visits.

The following is a listing of recent additions and changes to the site. For frequent users, this change log might be helpful to see what has been added new or changed.

December 16,2024: Added a new page for the Very Long Very Short Put Diagonal Trade. This trade, also a version of a “Poor Man’s Covered Put” has much more to than what one would expect at first glance. However, this trade has elements of almost every aspect of options there is, so a lot to study for every option trader.

October 30,2024: Added a new post with a cautionary tale of trading the 112 trade on August 5, 2024, the fastest volatility spike ever.

October 2024: Lots of new comments from readers and responses on various pages of the site. Keep those questions and ideas coming!

August 24, 2014: Added an update to the page about 100% success in the 112 trade to highlight the issues with the August 5 volatility debacle that did wiped out many 112 traders.

July 23, 2024: Added a new post sharing results from the 112 trade in the first half of 2024. 100% success.

July 2,2024: I added a new page contrasting debit vs credit option trading strategies. It’s one of a few considerations traders should consider when picking strategies that work best for their style of trading.

May-June 2024: Lots of new comments and replies came in from readers. Always good to hear from folks with their questions and comments.

December 30, 2023: I added a couple more books to the Resources page. I also updated Tasty links for their new TastyLive.com URL.

December 20, 2023: Made a number of changes and additions to the home page of the site. With all the new content, it seemed like it was time to highlight some of the content that isn’t as obvious.

November 22, 2023: Added a duplicate post on the 1-1-2 Put Ratio Trade. I did this to capture the search engine traffic from the numbers of traders looking for information. So, whether it’s 112 or 1-1-2, there’s a write-up. Just read one or the other- they are the same.

November 14, 2023: Added a page on the 112 Put Ratio Trade. While I mentioned it a bit in the post on the 1112 Put Ratio Trade, I decided the naked option version deserved a write-up of its own.

September 19, 2023: Added a page on Covered Calls. Yes, I know I just wrote a post on the same subject. (Secret note: the write-ups are exactly the same. This is actually a test to see if pages do better than posts in getting search engine connections. Universally, my most read articles are always pages, but maybe that’s just a coincidence. Most readers would never recognize the difference between a page and a post, but posts are supposed to be part of an ongoing blog, while pages are more “permanent.” I’ve used them interchangeably, and I want to make a data-driven decision on what the impact of that choice is.)

September 18, 2023: Added a post on 5 Bullish Call Trades. This is the culmination of a series of trades that I felt like I had overlooked regarding data driven ways to utilize calls in a bull market without absorbing too much time decay. With the market in what appears to be a bull market, it was time to focus in on this topic. 4 of 5 of these trades have recent extensive write-ups that were completed in the past 3 months.

August 4, 2023: Added a post on Buying Out of the Money Call Spreads. This is a strategy that would appear to most option traders who mostly sell options to be a sure loser, but back-testing shows it to be quite profitable over time.

July 26, 2023: Added a post on the Poor Man’s Covered Call, a low cost variation of a Covered Call, based on selling a call against an in the money long call that acts as a replacement for stock. So, a bit of a cross combination of the two most recent previous write-ups.

July 25, 2023: Added a post on Covered Calls. Not sure why I never wrote one before, but given it is one of the most popular option trades around, I thought it was time to weigh in on it with a level of detail that isn’t available many places.

July 5, 2023: Added a post on Replacing Stock with a Call Option. When markets are going up and IV is low, buying calls can be a good way to get in at a low cost. This post goes into more detail.

June 19, 2023: Added a post on Underlying Security vs Risk Permission. There are a lot of factors to picking the type of security to buy or sell options for a specific type of trade. This post digs into what to consider and why some approaches may be better than others.

May 24, 2023: Added a post on Trading Options while working a Full Time Job. I went back to work this year and changed my trading routine. I know many readers can relate, even if they just want to make better use of their time.

May 20, 2023: Added a chart to the 1 DTE Straddle post to show profit and loss at various times of the day.

May 17, 2023: Added a post on Covered Strangles, a conservative options trade that reduces volatility with higher probability of profit than owning an equivalent amount of stock outright. It’s my first deep dive into Level 0 option trades, something I’ve had a number of requests to address.

February 27, 2023: Added a new Phone Stock Charts page with stock price charts formatted for a smart phone, and potentially screen-cast onto a monitor or TV. Not for everybody, but if this is something you are looking for, like I was, you’ve found it.

February 27, 2023: Updated the Current Prices page with more interactive charts, replacing those from a previous provider that had security flaws.

February 26, 2023: Added a post on the topic of 0 DTE trades.

January 16, 2023: Provided responses to a couple of great reader comments and questions regarding the 1-1-2-2 trade.

January 13, 2023: Added a new post on my 2022 learnings.

January 3, 2023: Added a new post on buying 1 DTE straddles on indexes.

December 28, 2022: Added a new page describing the 4 Different Types of Option Underlying Securities– stocks, ETFs, indexes, and futures.

December 23, 2022: Added a post regarding the best Delta for ROLLING put spreads. This is a new topic that I had curiosity about from years of observing that some rolls do better than others, and I couldn’t figure out why.

December 20, 2022: Added a post researching the best Delta values for selling put spreads. This is a follow up to page on credit put spreads written earlier.

December 6, 2022: Added a page on Options Portfolio Management.

November 28, 2022: Accepted an extended comment to the page Rolling Iron Condors and added a response. Comments are always welcome and appreciated. Note that comments from first time commenters must be reviewed and accepted to keep those crazy spammers from ruining the site.

November 9, 2022: Response added to a comment about how to roll a back ratio call spread up or down to get back to Delta neutral.

November 3, 2022: Added a new page on Options Margin Usage. In this page, I compare different types of margin available for option traders and the benefits and risk of each.

October 15, 2022: Worked with the ad provider to reduce the number of ads on the site and make them less obnoxious. Should be no more pop up adds when changing pages, and less ads per page.

September 30, 2020: Added a new page explaining how brokers permit different levels of risk in option trading.

September 7, 2022: Updated the Favorite Strategies Page and the Ratio Spread Page, adding more details to both.

August 25, 2022: Added a new post with an example that illustrates the Goals for Rolling Iron Condors.

August 23, 2022: Replied to a new comment about my alternative 7 DTE trade posted a week ago.

August 18, 2022: Added an alternative strategy in a comment for the post on 7 DTE trades.

August 18, 2022: Added a post describing the 1-1-2-2 Ratio trade.

August 2,2022: Responded to a comment on rolling Iron Condors with perspective on defending call side in up moves.

June 5, 2022: Added this page- the change log

June 5, 2022: Added new post explaining the Expected Move and how to visualize it.

June 4, 2022: Added a new post explaining my approach to rolling Iron Condors in bear markets.

March 12, 2022: Added a post explaining different types of options on the S&P 500 index products.

January 14, 2022: Added a post about comparing risk of different option strategies.

If there are subjects you’d like me to address in future, leave a comment below.

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