Even after discussing and outlining the general process for how to pick the right stock options strategy in previous podcast and videos, I continue to get members who are confused how it should work and the steps one might take. I ultimately believe that in most cases you might be over-thinking it especially when it comes to choosing tickers and market direction.
General Framework for Picking the Right Strategy:
Start with liquid stocks and ETFs.
- You cannot focus your time on securities that are not liquid.
- If it is not liquid, it will not generate enough consistent returns and trades.
- Pricing is not reliable when the security is not liquid.
Pick a stock, then pick a direction.
- Question: is this security good for my portfolio?
- Goal is to get a good mixture of underlying securities.
- There is no perfect mixture; depends on how you want to set it up.
- Pick a direction: bullish, bearish, or neutral.
Find the implied volatility level.
- Use software like Thinkofswim to determine implied volatility.
- Take the highest implied volatility setups first.
Pick a day to expiration timeline.
- Decide upon an expiration date.
- Choose monthly, weekly, etc. cycles.
Enter data into the optimizer software.
- Plug in direction, account, and optimization factor — returns or Sharpe ratio?
- The optimizer determines exactly how to set up the trade for a given ETF.
- In different market situations, you might have different strategy setups.
Stock Options Strategy Example
Iron Condor Scenario I:
- 40 days until expiration, IV rank at 50.
Best setup: sell the short strikes at a 20 Delta with $10 wide wings.
Iron Condor Scenario II:
- 60 days out, IV rank at 25.
Best setup: sell the 25 Deltas at each side with a width of $15 strikes wide.
*Little tweaks in your strategy can cause a 2X increase in returns.
— The Option Specialist