Lifetime Performance (since November 2020) View More

Total Trades
964
Winning Trades
951 98.7%
Strategy
17.3%
-5.0%
Benchmark
21.0%
-4.2%

Welcome to WealthyOption.com!

This serves as a place to share a core trading strategy that is part of my investment portfolio. It's become one of my favorites over my 15 years of trading - and it's the first one that has led me to set up a website all about it!

This strategy deviates from the norm and is not what you're used to seeing. It's not for everybody. If that includes you, that's okay! I do hope that you can at least take away some valuable new information by reading. Enjoy!

Warning!

Please read all of the information here thoroughly to fully understand the ins and outs of the strategy.

If implemented incorrectly, this can and will blow up your account quickly!

Guide

Assumptions - Required Experience

As I lay out my strategy, I am going to assume that you have a basic understanding of options and the market. I'm going to use terminology that is foreign to a beginner. If that's you, I recommend familiarizing yourself with basic market and options trading before following my trading plan. I consider this strategy to be suited for intermediate options traders - somebody with at least a few years of experience. If you read this and run into something that you don't understand, then you're probably not ready to employ this strategy.


Overview

Cutting straight to the chase, this strategy involves selling out-of-the-money (OTM) weekly SPX puts 3-5x per week and buying them back for 70% profit before entering another trade. These are short-duration, 1-4 days to expiration (DTE), naked / uncovered puts! There's a lot of risk on the table, but the expected return is worth it.

My inspiration began after discovering Karsten from EarlyRetirementNow.com and his series titled Passive Income Through Option Writing. I started trading his strategy halfway through 2019 in the form of put credit spreads rather than naked puts as BigERN at EarlyRetirementNow does it. My put credit spreads treated me incredibly well over an 18 month span. So well that I decided to document both the strategy and my full trade history here at wealthyoption.com.

After setting up this website and sharing with other traders, I was challenged in many ways, ultimately leading me to backtesting my own strategy to find faults and/or areas for improvement. It's those backtests that convinced me to drop the spreads and move to naked puts.

I currently allocate 80% of my portfolio to this strategy (based on assumed max risk). This is 4x leverage. Allocation and sizing are extremely important and covered in detail below. You can adjust your leverage based on your goals and risk tolerance.


  • Systematic with no decision-making required
  • Requires little time to manage relative to other active trading strategies (20 minutes per week)
  • Higher return and lower drawdown (long-term) than the S&P500
  • Viable for small accounts ($10k minimum)


  • Theoretical undefined max risk
  • High trade volume (3-5 round-trip trades per week), but can be automated
  • Requires high level options trading permissions
  • Volatile short-term (days to a week), underperforming when volatility (VIX) spikes


Trade Process

I sell SPX puts at 6 delta* with 1-4 days-to-expiration (DTE). When I open that position, I'll enter a limit buy to close order at 70% profit (30% of premium/credit received on entry). That buy to close order is good-till-cancel (GTC). I enter a new trade either when my buy order fills at 70% profit or at expiration if it doesn't fill and SPX expires in-the-money. My new position is 1-4 DTE at 6 delta, with a 70% profit target, just like all others. I hold any losing trades all the way to expiration.

NOTE: I no longer sell only 6 delta puts. I have since expanded my autotrader's capability, and I now sell 5, 6, and 7 delta puts with total allocation spread among them, rather than just 6 delta puts. You can read more about this in my section on multiple delta positions.


Symbol / Instrument

I exclusively use SPX for the following reasons:

  • 3 expirations available every week (Monday/Wednesday/Friday)
  • Highly liquid
  • Cash-settled. No underlying given to me on assignment.
  • Low trading fees (for me personally - your mileage may vary)
  • Beneficial tax treatment (60/40% long-term based on IRS 1256 contract straddles)
  • Less "paperwork" to file for taxes. Futures and index options aggregate together on IRS tax forms, eliminating 200 line items from this trading strategy in a year

SPX will not work for everybody. Whether it's a lack of access to index options or a small account size, there are alternatives available which I'll discuss in the "Frequently Asked Questions" section at the bottom.


Timing

When I enter a trade, I immediately enter a buy to close limit order at 70% profit. I do not touch that position again. When that buy order hits (or the position expires ITM), I will enter a new trade using the same parameters. The new position is the next closest expiration that is 1-4 DTE. I don't open any 0 DTE.

I do not enter at any special time of the day or wait on any particular indicators to enter. I always have a position on the table and enter new positions when my current one either closes at its profit target or is at expiration.


Strike Selection

My short strike is as close to 6 delta as I can get. I have run many backtests against all deltas, and 6 seems to be a sweet spot for return vs drawdown. A 6 delta strike is going to be around 2-3% OTM in low IV environments and as far as 15-20% OTM in high IV environments.

You can bring your delta in or out based on personal preference. Generally speaking, deltas farther out will result in lower return and lower drawdown/volatility, while those closer will result in higher return and higher drawdown/volatility. This is generally speaking. Strikes that are really close can result in negative returns pretty easily! Be sure you understand the risk that you carry with varying strike distances.


Max Risk

These are naked puts. Technically speaking, risk is undefined.

You should operate under the assumption that the underlying could go to 0, right?

No!

Be realistic here.

First, we're dealing with SPX which represents 500 of the largest companies in the world. They're not going to go to zero, period. In the event that I'm wrong and they do, then either an asteroid has hit and ended humanity or the human race has nuked itself off the face of the earth. Either way, if SPX goes to zero, you won't be around to worry about your money.

Second, the absolute longest that you are going to be in any position is 3 trading days. The S&P500 has automated circuit breakers built in which halt all trading for the day if the index falls 20% from the previous close. This means that the absolute most that SPX can fall for any one of your holds is 60%. This would require that you buy at the very top on day 1, and SPX hits the max circuit breaker 3 days in a row. The S&P500 has only fallen 20% in one day once during its entire history! Just once. What are the odds that we could go from once in all of history to 3 days in a row?

Third, in the event that SPX has some kind of nasty selloff, with how rapidly my trade adjusts to changing IV (by cycling in/out every 1-3 days), that short strike absolutely flies away from the current market level as selling accelerates. Don't believe me? What if I told you that I ran my more aggressive spreads (very similar to this) when the stock market had its third worst day in history, and I didn't lose a dollar? How is that possible?

It's because heavy selling doesn't come out of absolutely nowhere like most would have you believe. It is always prefaced by at least some bubbling under the surface. That bubbling is enough to start pushing your short strike farther and farther away from the current price level. Before you know it, the market is puking its guts out but you're actually making money because your short strike is 15% below the current price level! Go look at my performance when I was trading in March 2020 and you'll see. Or take a look at these backtest results for to see just how far away the strikes were in March 2020.


For evidence of my claim that the market doesn't crater out of absolutely nowhere, take a look at the following two tables that were contributed by a reader.

The following table shows the likelihood of a certain percentage drop in SPX over a 2 day period under different volatility environments. This assumes that you enter near market close for a position that is 2 days to expiration (ie: enter Monday at 3:30pm for a position expiring Wednesday, or enter Friday at 3:30pm for a position expiring Monday).

What if you enter first thing in the morning for a position that expires in 2 days? You're in the market longer in this case, so it has more room to fall. An example would be entering first thing Monday morning for a Wednesday expiration. You're exposing yourself to a little more duration here because you have 3 full trading sessions but still only 2 overnight gaps. The risk of larger declines does go up some in this scenario, but not much.

So. We know SPX isn't going to 0. We know it's not going to see three 20% loss days in a row. And we know that even when we do see a huge daily loss, our strikes are going to be so far away that not only is there a good chance we don't lose any money, but there's actually a decent chance we make money when that happens. If all of this isn't enough to convince you that the "catastrophic loss" just won't happen, then this trade isn't for you. And there's nothing wrong with that.


Sizing

If you're still on board after reading the Max Risk section above, we can now go over how to size your trades. How many contracts do you sell to open?

I operate under the assumption that max risk for any one play would occur if SPX fell 20% below my short strike. This isn't 20% below my entry price, but 20% below my short strike. Any time you see "max risk" next to one of my trades or backtests for a naked position, it is based on the value I must pay to buy back my put if it expires 20% ITM. I consider this a fair, and conservative, assumption.

I backtested this trade over 4 years and 1000 trades, and the deepest any of those trades expired was 1.9% ITM. This included a period with a 35% drawdown in SPX and the third worst single day loss at 12%, and still, the deepest ITM a position expired was 1.9%. I feel 20% is more than conservative enough. If you don't agree and you think it's 30%, then modify your trading plan to account for that.

Once you settle on what you consider to be a realistic max loss, then that max loss is how much of your portfolio you need to allocate per trade. If we operate under the assumption that max loss is 20% below your short strike, and your short strike is 3000, then max loss for that trade would be $60,000 per naked put. That's 3000 * 100 * 0.20. The 100 is for the number of SPX "shares" that each option contract represents.

You take however much of your portfolio you are allocating to this trade, and divide that by your assumed max loss per contract. If you have a $200,000 portfolio and want to allocate your entire portfolio to this strategy, then you would divide $200,000 by $60,000 to come to 3.333 contracts. So you'd sell 3 puts. If you only want to allocate half of your portfolio, then just divide half of your portfolio's value by max loss per contract.

How much can you safely run?

I honestly do believe this could be run safely at 100% allocation. But in the interest of full disclosure, I am only personally running it at 80% allocation. Despite how good my personal experience, backtests, and prior research is, I'm not ready to take the plunge at 100%. But I do think it's safe to do so. I run 4x leverage. I think 100% allocation (5x leverage) is fine, but I don't recommend going much higher than that. If you do, be sure to purchase some tail risk protection.


ITM Positions & Assignment

Backtests show that you always want to carry your puts overnight. Overnight is when we make most of our money as put sellers. If you're going into market close with a position that is in-the-money (ITM) that's not going to hit your profit target, you need to figure out how to get into a new position so that you benefit from overnight gains.

You have a choice between:

  1. Hold your existing ITM position all the way to expiration and STO a new position so that you double up at the end of the session
  2. Buy cheap puts expiring today to convert your ITM naked position to a spread, and then STO a new position
  3. Manually buy back your existing ITM position before market close and then STO a new position

#1 is my preference. But to do this, your portfolio must have enough buying power available for temporary 2x exposure for your puts. Don't worry about perceived double the risk. This doubling-up should be done as close to the end of the market session as possible. Your ITM position has minutes to go until expiration, so it's basically already at the largest loss it will see. SPX is cash-settled, meaning you aren't assigned shares at expiration. No worries about waking up the next morning with a bucketful of SPX shares. That said, if you are running SPY, you should not carry puts to assignment. You should instead go with #3 above.

Doubling up your puts position will require that you're running no more than 60-70% or so allocation (3-4x leverage). If you're running naked puts much higher than that allocation, you may not have enough buying power at the end of the session to double your exposure. If this is the case, you can either convert your existing position to a spread (#2) or BTC your existing position at a loss (#3) and then immediately STO a new position.

To convert your naked position to a spread, buy some cheap puts for the current day's expiration. Buy the first strike with the cheapest asking price. This will offset a significant portion of your used up buying power and will free up enough buying power to STO a new position for next expiration.

If you don't want to buy puts to convert your current position to a spread, you can simply BTC your current position at a loss. This frees up all buying power so that you can STO a new position as normal. Beware of poor liquidity right at expiration for your expiring position. I recommend BTC on a ITM position at expiration somewhere between 3:45-3:55pm ET if you can swing it. You want to do it near end of the session, but liquidity starts to evaporate quite rapidly the last few minutes, and you'll lose a significant amount to slippage when buying back if you wait too long.

As to whether you buy cheap puts to convert to a spread or BTC your current position, just go with whichever one you are more comfortable with. The important thing is to make sure that you STO a new position before market close. Volatility is high on these days. You want to sell volatility into close.


Naked Calls

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Tail Risk Protection (OPTIONAL)

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Multiple Delta Positions (OPTIONAL)

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Put Credit Spreads (Alternative)

I strongly recommend running my strategy as outlined above using naked puts and calls. However, if you are running this in an IRA or do not have permission to run uncovered positions, then you can run put credit spreads instead and do quite well. This is actually how I started off with this strategy, using put credit spreads instead of naked puts. I did this because the thought of undefined risk was too scary for me. It was after backtesting the strategy and comparing naked puts vs spreads that I decided to move to naked puts instead. The spreads very rarely, if ever, provide actual protection. If they do offer protection, it is probably because you are using a narrow spread, and this eats so far into your profit that it isn't worth running the strategy.

How wide should your spread be? Make it as wide as you can go. The ideal would just be the cheapest strike in the option chain. For SPX, this might be 400-500 points out. That's fine. Find the first strike that will cost you $0.05. The goal here is not to find protection. The money that you spend on your long strike is not going to protect you on these trades, so you should spend as little on it as possible.

If you run spreads, I recommend sizing them as if they were naked. So, do not allocate based on spread width. Instead, allocate based on notional (20% below your short strike). What this does is keep your total leverage in check.

Resist temptation to narrow your spread to "reduce risk". My extensive backtests show that narrow spreads significantly underperform wide spreads. A narrow spread carries a lower total max risk per spread, but what most traders will do is simply increase the number of contracts they carry on a narrow spread so that they carry the same total risk that they'd otherwise have on a wide spread with fewer contracts. The narrow spread with more contracts carries more practical risk!! This is because you will experience max loss on a narrow spread much more often than you will a wide spread. Why? Because max risk is realized when your long strike is breached, and on a narrow spread, your long strike is much closer! Go as wide as you can on your spread, always. The long strike on the spread for this strategy is not for protection.


Automation & Time Commitment

As outlined above, the above strategy results in a lot of trades (3-5 round-trip per week) and may not be ideal for somebody who doesn't have quick and convenient access to a phone or a computer throughout the day. You need to be available to enter a new trade either when your 70% profit target hits or at expiration when a position expires ITM. Entering a new trade should take no more than 5 minutes, but you never know when that will happen.

Considering the mechanical nature of this strategy and the frequent but irregular attention required to manage new trades, I went as far as automating the entire trade. I integrated with my broker's (TD Ameritrade) API and have a process running during trading hours that will automatically enter and exit new trades exactly as I've laid out on this page. This won't be a viable option for everybody, but if you have the resources, this is certainly something you should consider.

If you're a TD Ameritrade customer and don't have the resources or desire to set up an autotrader yourself, I have good news! I made my own autotrading platform publicly available via Whispertrades. This is a fully-automated trading platform with a web interface. It is a paid platform but reasonably priced, will save you lots of time, and likely increase your returns thanks to more time in the market.

If interested, you can read more about what it has to offer in the Whispertrades guide. There's not much "brochure material" on Whispertrades because it's still fairly new. Take a look at the guide or hop in the public Whispertrades Discord server to ask questions about it.

NOTE: WealthyOption and Whispertrades are separate platforms. WealthyOption is a private community and Whispertrades is not. The Whispertrades Discord server is a place to discuss Whispertrades and its autotrading platform but not the WealthyOption strategy. You will not gain access to any of the private WealthyOption information by joining Whispertrades.


Backtest Validation

Backtests are notoriously bad at not reflecting reality. Sometimes this is from overfitting, which is specifically designing backtests to work best for your historical timeframe that is not reflective of the current or future environment. Sometimes backtests aren't accurate because the data is bad, the assumed fills are bad, or they don't account for slippage or fees. Sometimes backtests don't work because they lay out a trading strategy that is near impossible to actually execute in live trading. Backtests get a bad rap for good reason.

After much time and energy, I am confident in the accuracy of my backtests over the historical time period and also the ability to translate their parameters to live trading. To further build confidence, I created a page that will chart and compare my actual trades as executed by my autotrader against a backtest that uses the same parameters. Both use 6 delta short strike with 70% profit target, and 5 months into live trading, the two have moved in near lockstep, although a slight modification to backtest fills might be called for. You can view a snapshot of this chart below and also click here to view an interactive and up-to-date version.


Trust the Process

This trading style is unconventional. And it can be volatile. While the long-term equity curve is smoother than the underlying market, short-term volatility can be higher. There will be times where you lose money quickly. But those losses will be short-lived, and you will recover from them (and much more) if you let the odds play out.

Remember that you can adjust volatility by moving your short strike closer or farther from my 6 delta. The farther you move your short strike out, the lower your volatility and returns. The closer you place your short strike, the higher volatility and returns.

For the trades to work, you must be consistent and stick to them. It's not easy for many traders to just trust the process, and if that's you, this trading plan is going to be difficult to stick to. The short-term satisfaction isn't great. It's the long-term, over months and years, when consistency rewards you.


Recap

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Frequently Asked Questions

This should work on SPY, XSP, and /ES (S&P futures) weekly options. If you opt for something other than SPX, be aware of the following possible differences:

  • Size (contract multiplier for the underlying)
  • Early assignment (American vs European style)
  • Settlement (cash or shares)
  • Tax on gains
  • Transaction fees
  • Expiration dates and liquidity
  • Available strike prices

The way that options are treated can vary greatly. Rather than go into detail here on all the different combinations, I urge you to familiarize yourself with handling of SPY, XSP, and /ES options if SPX doesn't work for you. You should, at minimum, consider the factors listed above.

My max risk for each trade is based on my position expiring with SPX 20% under my short strike. While, technically speaking, SPX could fall more than that, realistically it cannot. You can read more about my thinking behind this in my section above titled Max Risk.

Read my section on Max Risk. While the chance of this 50% fall is not '0', it is as close to 0 as you can get. You can adjust your portfolio allocation or max risk assumption to whatever you would like to compensate for your own personal max loss event.

For my actual trading performance, return and drawdown are based on profit/loss in raw dollars divided by my total portfolio size. These are added up to reach total return.

It can, yes. At the time of this writing, 1 contract for SPY would carry about $7,000 max risk based on my 20% < short strike assumption. You could run 1 SPY contract on a $10,000 portfolio. I would advise against running this on a portfolio much smaller than that, though. If you do use SPY, don't forget about assignment and tax treatment. If your SPY put is ITM on expiration day, the likelihood of you being assigned shares is high! This can be an added headache.

If SPX is too large but you can go bigger than SPY, look into /ES which is larger than SPY but smaller than SPX. Consider factors other than size, such as commissions, tax treatment, and settlement (as covered above).

I always enter the next closest expiration that is 1-4 DTE. I don't enter any 0 DTE (options expiring on the current day). I'll enter 1 DTE if available. Otherwise, 2, then 3, then 4. 4 DTE is only used around stock market holidays.

After expanding the capability of my autotrader, I chose to shift from selling only 6 delta puts to 5, 6, and 7 delta puts instead. This is not necessary but something that I do because I'm able, and it does offer some benefits. You can read more about this in the trade process section.

If you are using something that is assigned with the underlying (like SPY and some /ES), then you should close out any positions at risk of assignment before close so that you avoid assignment. If you do not do this and are assigned shares, then you carry those shares overnight (or over the weekend) and can't open a new set of puts or you double your exposure. You can avoid this entirely by using SPX or /ES that are cash-settled!

My commissions on SPX are so low that I don't even factor them into my P/L. I estimate that about 1.5% of my total return is spent on commissions. While this is a measurable cost, it is not something that forces me to reconsider the trade. Commission will go up with SPY, XSP, and /ES, so factor this into your choice of a symbol to trade. If you do trade high volume (which this strategy will help with), I recommend contacting your broker to negotiate lower fees. I use TD Ameritrade, and while their fees are already quite low thanks to the low and no commission brokers (hey Robinhood!), I was able to talk TD Ameritrade even lower than their low published rates.

Backtested over 4 years, max drawdown for this strategy was 10%. SPX over the same timeframe had a drawdown of about 35%. I'm unable to reliably backtest farther back than 2016 because SPX Monday, Wednesday, Friday weeklies didn't actively trade back then. I did some rudimentary backtesting on the weekly and monthly SPX options that were available in 2008, and max drawdown was still only about 11% over that timeframe. When the market collapses, you'll find that you have a large loss very quickly, but once that loss is out of the way, you'll be on the 'road to recovery' long before the overall market.

Ah, one of the best benefits of this strategy that I haven't even covered. Your buying power requirements will vary based on your broker and account margin setup, but more likely than not, you'll find yourself with an abundance of buying power after implementing this. What you do with that remaining buying power is ultimately up to you. I'm not laying out a total portfolio strategy here, just one trading plan. You do with your remaining capital what makes sense for your investment goals.

For me, personally, at the time of this writing, I am allocating 80% of my portfolio to this put writing strategy. That 80% is the sum of my calculated max risk based on the number of contracts I am holding. This also happens to be 20% of the notional value held by my SPX contracts. If you prefer to speak in terms of leverage, this is equivalent to 4x leverage.

Considering that my account utilizes portfolio margin (which is more generous than "regular", Reg-T, margin), I have an absurd amount of buying power remaining. Selling puts doesn't actually require cash. When you sell puts, you still have all of your cash sitting around idle to do something else. I place almost all of my available cash in a conservative bond ETF, VGSH This is 1-3 year treasuries. It carries very little rate or default risk and will add another 1% to the portfolio per year right now (2021) and more if and when interest rates ever go back up. Be careful using your remaining funds on risky or highly leveraged products. The puts as I've outlined here are leveraged themselves!

I'm just a regular guy who worked in IT, benefited from some lucky outcomes, and retired in my mid-30s to raise my family and work this little gig on the side. I've been actively trading for 15 years or so, using options for close to 10 years. I've tried and seen a lot, but I'm not a pro! I tend to be a bit private in nature when it comes to revealing my identity online, which is why you won't see my name anywhere. If you manage to join the WealthyOption community, you'll find I'm an open book in many ways.

So why not just keep my head down and keep to myself? I've been through the struggle of being a new trader, and I've seen others struggle mightily with it as well. I've found something that is reliable and easy to follow and see a good opportunity to share with others who might be struggling. I enjoy helping and teaching others, so what better way than to offer free advice?

I could write a book, or sell this as an "eBook" or service, and that did cross my mind, but making money off of this just wasn't as important to me as sharing the info with others. If I'm being honest, I have gained financially through this site. Not by collecting money from you or selling your anything, but by discussing this with others and improving the strategy parameters. I've developed more and more research after sharing this, which has led me to incremental improvements that will improve my long-term returns.

I'm also a bit of a tinkerer and web developer. Setting up a website and trade log where I can easily log trades and track performance in my own way had some appeal as well. This is actually where the idea first started. I wanted to create a simple (private) trading log to easily track these trades. As I began working on it, I decided to go ahead and make it public and define the trading plan as well. Then came a backtester and autotrading. Who knows what's next!

If you like what you see and what to give back, donations are always appreciated but not expected. No, I don't need your money, but it could encourage me to at least keep the site going.

Something else I'd appreciate just as much is a quick message letting me know how this has helped you improve as a trader, or if you've got any advice for me to improve this strategy, I'd love to hear that as well! I know this strategy is far from perfect, and I'm always looking for ways to improve. If you have any suggestions or advice, let me know! Ideas for how to improve this website are also welcome.