- Open position [Step 1]
Find a stock with clear trend (up or down). It should not have more than 5-6 consecutive weeks with reversed trend on the 1 year – weekly chart.
For example MSFT doesn’t have more than 3 consecutive weeks down in a year:
Sell a option spread a on the money in the direction of the trend.
In the MSFT example sell Bull Put 187.5/182.5 spread
The spread expires with in 1-2 weeks. It should be narrow as possible – 1 or 2 strikes apart. One option strike is above the stock price, the other is below. Aim to sell the spread for more than 50% of the total possible loss. Price of the spread is 2% of the available money in that strategy.
- Closing the position [Step 2]
If the price of the position drops to 5% of below of the price it was sold for, buy it back and closing the position. Nobody ever went broke collecting profit. Start again from Step 1.
- Rolling [Step 3]
On expiration day,
If the spread is on the money or in the money, the position is not profitable and it has to be rolled over.
Roll it to next week in the following manner:
– Buy back all spreads from the position.
– Sell same number of spreads for next week at a price that is no at least 66% of the price used to close the initial spreads. The strike of the new spread should be closer to the stock price if possible. The spread is still one strike wide.
– Sell one more spread on the money for the other 33% of the money used to close initial spread. The number of spreads should be less ( about half) than the number of initial spread.
The new position should bring the same amount or more than what was used to close the previous week position. All new spreads strikes should be closer to the stock price than the previous week strikes.
- A week later go to 4.
This kind of rolling adds only 50% more spreads to the position which allows more rolls before the amount is too big for the account. Once start rolling, do not change direction of the spread until it expires. This means bull spreads keep rolling into bull spreads, bear spreads keep rolling into bear spreads. As exception change direction only something dramatic happens on the market.