INVESTMENT OBJECTIVE
The primary objective is to generate monthly income from the sale of options with a high probability of success. The secondary objective is to generate capital gains from the sale of any exchange traded funds purchased.
INVESTMENT STRATEGY
The primary strategy will be the Wheel Strategy, which consists of selling cash secured puts (CSP) to establish new positions, followed by selling covered calls (CC) until the underlying is called away. Then rinse and repeat.
EXCHANGE TRADED FUNDS
The following 10 ETF's will be used for this strategy:
Market ETF's
- DIA, IWM, QQQ, and SPY,
SPDR Sector ETF's
- XLB, XLE, XLI, XLK, XLV, and XLY.
POSITION SIZING
Positions will be initially established at 1 contract (i.e. 100 shares) per underlying per strike. Each underlying will be limited to 4 open positions at different strikes/purchase price.
TECHNICAL ANALYSIS
Ichimoku Cloud will be used to determine both trend and support/resistance levels.
Probability of Expiring Cone will be used to plot the price levels for a 1 standard deviation move at the desired expiration dates.
Slow Stochastic will be used to determine overbought/oversold conditions.
TTM Squeeze will be used to determine if the underlying is consolidating or trending and whether a squeeze breakout is expected.
Daily charts will be used primarily for trading signals. Weekly charts will be used to analyze longer time frames.
The chart analysis will help identify when to sell puts or calls and at which strikes.
ENTRY STRATEGY
Cash Secured Puts
Each new position will start out as a cash secured put (CSP) with the following criteria:
Entry criteria
- Sell on a down day since it increases put premium.
- Strike price below a support level.
- Delta of -20 or less (80% or more Probability of expiring OTM).
- Premium for market ETF's of at least $1.85 and for sector ETF's at least $0.65.
- Days to Expiration 30-45.
Covered Calls
If a CSP is assigned and the underlying is purchased, sell a covered call (CC) with the following criteria:
Entry criteria
- Sell on a up day since it increases call premium.
- Strike price at or above the assigned strike and above a resistance level.
- Delta of 20 or more (80% or less Probability of expiring OTM).
- Premium for market ETF's of at least $1.02 and for sector ETF's at least $0.36.
- Days to Expiration 30-45.
If it's not possible to sell a CC at or above the assigned strike then hold the position until a CC can be sold according to the entry strategy.
EXIT STRATEGY
Cash Secured Puts
Profit targets will be 55% of collected premium if the underlying stays the same or goes up. This should allow the positions to be closed before expiration. When a CSP position is closed, a new CSP will be established in the same underlying according to the entry strategy.
Covered Calls
Profit targets will be 55% of collected premium with DTE >=30, or 80-90% of collected premium with DTE <=15. If the CC reaches its profit target and is closed, sell another CC according to the entry strategy. If the CC goes ITM, either allow it to be assigned and the underlying called away, or roll out and up for additional capital gains.
ROLLING STRATEGY
Cash Secured Puts
- Consider rolling out or out and down when Delta is >= 50.
- Do nothing and accept assignment.
Determine the buying power effect of rolling vs accepting assignment and selling a covered call. In some case it will be better to roll and in other cases it will be better to accept assignment.
Covered Calls
- Consider rolling out and up when Delta >= 50.
- Do nothing, accept assignment and allow the underlying to be called away.
