Here is a great option income trade set up / adjustment that we’ve been using & teaching now for years with GREAT results.
When set up and managed correctly, this type of option income trade can be a monthly income generating position that can be COMPLETELY IMMUNE to volatility risk.
Most option positions will have volatility risk. For example, a calendar trade can benefit if volatility rises. But – it can get hurt if volatilities decrease. On the other hand, a butterfly position can benefit when volatilities sink. But it can get hurt when volatilities rise.
Well, this particular option trading strategy is an income generating position that will benefit / profit when volatility goes up – as well as when volatility goes down. Either way volatility moves – up or down – this trade will benefit. And the trade will do well if volatility levels remain flat as well. Again, this is a trade that we have been trading and teaching for years now – and it has served us very well – especially in the more recent type of wildly moving trading months.
Typically option income positions like the iron condor, butterfly spreads, calendar spreads, etc perform their best when markets are calm and in more of a range bound mode. Wild fluctuating markets – like what we have seen over the last few years – can be disastrous for option income traders – and these types of trades – unless the one trading them has a good handle on how to properly manage and adjust the position – OR – unless they construct – or ADJUST – their positions in a way similar to how these trades are constructed.
These types of option income trading positions offer the best of both worlds. They can produce reliable monthly income just like the traditional iron condor, butterfly, and calendar spread type positions – WHILE AT THE SAME TIME – they can provide amazing protection from huge volatile moves, market drops, and flash crashes. In fact, they can thrive in stock market crashes – kicking out profits MANY TIMES GREATER than what was ever originally ever hoped for at the start of the trade. With this option strategy set up – you WANT the market to crash hard – as it can produce huge profits that dwarf your initial profit targets and even your max risk in the trade.
Again, this is an option position that volatility really can’t hurt. If volatility SINKS, the trade will benefit profit wise. If volatility RISES, the trade will benefit. It’s the best of both worlds. You get to have your ‘volatility cake’ and eat it too.
Here are some risk graph screen shots from an example trade set up we created for the March 12 option expiration cycle to help better demonstrate the potential and incredible flexibility of this trade:
In the above risk graph we see the position where the market is currently trading at – with current volatility levels. The position shows a current profit of $28.00 (the slightly curved white horizontal line towards the bottom of the graph). The hard horizontal red line at the top of the graph represents the expiration day total profit potential in the position: $1488.00. The total risk in this position can be seen under the words ‘BP Effect’ in the lower right hand side of the risk graph screen – total risk in the trade is: $13,512.00.
So, at expiration, if were to be able to capture the total amount of premium available in the position ($1448.00 found at the hard red horizontal line at the top of the screen) we would make just over %10 in this trade.
Now, lets ‘stress test’ this position from a volatility standpoint and see what happens if volatility levels were to suddenly DECREASE by %20…
The above risk graph shows the exact same position with volatility DECREASED by 20% (see the ‘Vol Adj. -20.00%’ along the bottom right hand side of the risk graph window).
With the volatility decreased by 20% our current white profit and loss line (the white line in the graph) which represents our ‘current profit’ in the trade – shoots up to $1485.00 – just below our expiration max profit potential in the trade.
Now let’s ‘volatility stress test’ this option trading position in the other direction…
Now the above risk graph shows the exact same position with volatility INCREASED by 50%. The risk graph above shows what would happen to this position if the volatility were to suddenly spike up by 50% (which CAN and HAS happened – for example the huge market crash that happened last summer in early Aug).
With the volatility increased by %50, the ‘current profit’ in the trade is now at $15,254.00 – SOARING ABOVE the red hard horizontal expiration graph line below that represents what would ‘normally’ be our max profit potential in the trade. The current profit in the trade is around 10X the amount we previously considered our ‘best case profit scenario’ – and represents over a 100% return on our total risk in the trade.
Now let’s rise the volatility levels even more…
Now the above risk graph shows the exact same position with volatility INCREASED by 100% – which could also easily happen in a dramatic market drop or market crash.
Now our current white profit and loss line shows a ‘current profit’ in the trade of $41,390.00 – around 27 TIME GREATER then what our hard red horizontal would have given us at expiration had this been a ‘traditional’ option income trade – and almost a 300% RETURN on our total risk in the trade.
This is a great option income trade – and while the above example trade is built from monthly options – weekly options could be utilized / added into the mix as well.
This is a perfect ‘low stress’ trade for wild volatile markets where you want to generate income but might be concerned about a crash occurring – or you simply don’t want to be locked down to your desk having to watch your trading screen all day just in case you need to make necessary adjustments. Once the set up is complete you can walk away and spend very little time having to actually monitor the position. And – especially during wild swinging market times – you’ll sleep much better at night too.
This trade can be initially set up from scratch in this manner – or you can also take an existing ‘regular / traditional’ option income trading position like an iron condor – and just make a few simple tweaks and adjustments to it – and easily transform it into this type of an option play.
In upcoming posts we’ll include more detailed and expanded examples of this options trading set up – some which we currently have on and working this month – as well as examples of how we used this strategy during the Aug. 11 market crash with amazing results.
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