INVESTMENT OBJECTIVE
The primary objective is to generate monthly income with a high probability of success.
INVESTMENT STRATEGY
The following two option strategies can be used individually or in combination on ETF's like QQQ & SPY:
- Seagull - An option combination consisting of a Cash Secured Put (CSP) and a Bull Call Debit Spread. The premium collected from the short Put plus the short Call should be more than the premium paid for the long Call. This results in a net credit and a risk free trade to the upside. This strategy reaches maximum profit when the stock price is above the short Call at expiration (i.e. it has an upward bias).
- Jade Lizard - An option combination consisting of a Cash Secured Put (CSP) and a Bear Call Credit Spread. The premium collected from the short Put plus the short Call will be more than the premium paid for the long Call. This results in a net credit and a risk free trade to the upside. This strategy reaches maximum profit when the stock price is below the short Call at expiration (i.e. it has a neutral to downward bias).
Seagull trades have 3 profit zones:
- Zone 1: Between the short put and the long call. Max profit is the net credit received.
- Zone 2: Between the long call and the short call. Max profit is the net credit plus the profit from closing the Bull Call Debit Spread, if any.
- Zone 3: Above the short call. Max profit is the net credit received plus the width of the Bull Call Debit Spread (e.g $200 on a $2 spread).
Jade Lizard trades have 3 profit zones:
- Zone 1: Between the short put and the short call. Max profit is the net credit received.
- Zone 2: Between the short call and the long call. Max profit is the net credit minus the profit from closing the Bear Call Credit Spread, if any.
- Zone 3: Below the long call. Max profit is the net credit received minus the width of the Bull Call Debit Spread (e.g $100 on a $1 spread).
Combining both strategies produces 3 primary profit zones:
- Zone 1: Between the short Put strike and the long Seagull Call strike. Max profit is the net credit received (e.g. $300).
- Zone 2: Between the long Seagull Call strike and the short Jade Lizard Call strike. Max profit is the net credit received plus the Bull Call Spread width (e.g. $500).
- Zone 3: Above the long Jade Lizard Call strike. Max profit is Zone 2 max profit minus the Bear Call Spread width (e.g. ($400).
In a cash account or IRA, the margin requirement is equal to the strike price of the combined short Puts (e.g. a $300 strike would require $30,000 per strategy for a total of $60,000 margin requirement.). In a margin account, the requirement would be much less.
POSITION SIZING
Positions will be established at 1 contract (i.e. 100 shares) per option per strategy.
TRADE SETUP
Before entering a trade, be sure the underlying is in a neutral to bullish trend. Use Ichimoku Cloud to determine the trend. Key indicators of an uptrend:
- The cloud is Green (Senkou Span A > Senkou Span B).
- The stock price is above the cloud .
- The Base Line (Kijun-sen) is above the cloud.
- The Lagging Span (Chikou Span) is above the cloud.
Support is at the bottom of the cloud, so look for short Put strikes below the cloud.
ENTRY STRATEGY
Every week, enter positions with expiration within 14-18 days. This is a continuous strategy with options expiring every week.
Seagull
- Buy an ATM/OTM Call with a delta of 50+ (50+% Probability ITM).
- Sell an OTM Call 2 strikes above the purchased Call (i.e. spread width of $200).
- Sell an OTM Put with a delta of 20 (80% Probability OTM). Ideally the strike should be below the cloud.
- Note: The premium collected from the sale of the Put and Call must be greater than the premium paid to purchase the lower strike Call, resulting in a net credit and risk free spread.
Jade Lizard
- Sell an OTM Call with a delta of 20 (80% Probability OTM).
- Buy an OTM Call 1 strike above the sold Call (i.e. spread width of $100).
- Sell an OTM Put with a delta of 20 (80% Probability OTM). Ideally the strike should be below the cloud. Use the same strike as the Seagull.
- Note: The premium collected from the sale of the Put and Call must be greater than the spread width, resulting in a net credit and risk free spread.
MANAGEMENT/EXIT STRATEGY
Each strategy consists of 2 parts (CSP + Call spread) and should be managed separately.
Cash Secured Put
At or before expiration, close the short Puts if they can be bought back for $.10 or less to take off the risk and margin requirement.
If the stock price reaches or breaches the short Put strike, consider rolling out, and down if possible, for a net credit to avoid assignment.
Ideally, the CSP will be OTM at expiration and expire worthless for maximum profit.
Bull Call Debit Spread
At or before expiration, close the short Call if it can be bought back for $.10 or less. This leaves the long Call uncovered for potential unlimited upside gain if the stock rises.
At expiration, if the long Call strike is ITM, but the short Call strike is OTM, close the spread.
At expiration, if both Call strikes are ITM, let them be exercised/assigned.
Ideally, the Call spread will be ITM at expiration for maximum profit.
Bear Call Credit Spread
At or before expiration, close the Call spread if the short Call can be bought back for $.10 or less.
At or before expiration, if the short Call strike is ITM, but the long Call strike is OTM, close the spread.
At expiration, if both Call strikes are ITM, close the spread if it can be bought back for less than the spread width, otherwise let them be exercised/assigned.
Ideally, the Call spread will be OTM at expiration and expire worthless for maximum profit.
