Secret to Consistent Income with Options

Tony Zhang
March 19, 2018
3 minutes read
Secret to Consistent Income with Options

The success to trading any strategy on stocks or options is consistency. This is true for both researching the underlying stock or ETF, and choosing the right trading strategy. Having a consistent approach such as technical or fundamental analysis leads to reliable research that doesn’t conflict. The same applies to choosing your trading strategy, which includes risk and money management.

Trading income option strategies with limited reward make selecting a consistency strategy the single most important aspect. The best way to gain consistency is to use the same method for selecting your expiration and strike prices each time you enter a trade. Selecting the same expiration, strikes prices with a consistency methodology, coupled with a solid risk and money management plan will bring consistency to your trading results.


Expiration selection:

Income trades such as covered calls, short puts and credit spreads are capturing time decay, which accelerates within the last month of expiration. Ideally, these strategies should utilize options anywhere from 2-​4 ​weeks out. Keep in mind, very short-term options provides the best time decay, but have substantially larger transaction costs compared to the income received.


Strike Selection:

The ideal method for selecting strikes is using Delta or Probability of Profit. Both indicators factor into implied volatility and normalize your strikes against higher and lower volatility environments.

Example: Selecting a covered call or short put using 20 Delta allows you to always​ ​have trades with a 20% chance of being​ ​assigned.​ ​Using methods such as 5%​ ​above the current price will result​ ​​i​n​consistentices due to the fact that 5% during an earnings cycle is very different from 5% when there isn’t. Delta has been shown to reliably estimate the probability of a stock being above/below the strike price over the past 10 years of backtesting data.

When trading credit spreads, use the Probability of Profit of the breakeven price as your indicator to gain consistency.

Example: Selecting your strikes so that your breakeven price has an 80% Probability of Profit will result in credit spreads that are profitable 80% of the time.

Lastly, with any strategy, having an exit plan before entering the trade is critical to success. Income strategies generally have risks that are greater than the income received, making risk management even more critical. Having rules such as exiting a trade if the unrealized P&L of the trade exceeds 100% of the premium received will help prevent blow-out trades that set you back weeks or months of income! Additionally, risk no more than 1-3% of your total account value on any single trade to avoid account blow-ups.

Tony Zhang
Tony Zhang

Head of Product Strategy for OptionsPlay


Tony Zhang is a specialist in the financial services industry with over a decade of experience spanning product development, research and market strategist roles across equities, foreign exchange and derivatives. As the current Head of Product Strategy for OptionsPlay, Tony leads the research and development of their OptionsPlay Ideas & Portfolio platform. He has leveraged his interest in financial technology and product development to provide innovative, reimagined solutions to clients and the users they seek to serve. Previously he spent 7 years at with a capital markets and research background as a market strategist specializing in equity and FX derivatives markets.

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