In the video titled “My Top 3 Options Strategies (For Income Generation)” by Options with Davis, the author discusses their favorite options strategies for generating income. The video provides information on how to obtain a free copy of “The Options Income Blueprint” and mentions that many people have been curious about the author’s preferred options strategies for generating income. The video highlights three specific strategies: the short strangle, iron condor, and jade lizard. These strategies have high win rates and take advantage of positive market drift, making them suitable for both beginners and experienced traders. The video encourages viewers to subscribe for more videos and offers a free options income blueprint.
In today’s video, Options with Davis shares their top three options strategies for generating income. Starting with the short strangle, which is an undefined neutral strategy that involves selling a put option below the market price and a call option above the market price. The second strategy is the iron condor, a defined neutral strategy that combines a short put spread and a short call spread to limit risk. Lastly, Davis introduces the jade lizard, an undefined neutral to bullish strategy that combines a short put and a short call spread with no risk to the upside. These strategies are known to have high win rates and capitalize on positive market drift, making them suitable for both beginners and experienced traders. To learn more, viewers are encouraged to subscribe to Options with Davis and get a free copy of “The Options Income Blueprint.”
Short Strangle
Overview
The short strangle is an undefined neutral strategy that involves selling a put option below the market price and a call option above the market price. It is named “strangle” because of the positioning of the put and call options on both sides of the market. The strategy aims to generate income through the sale of options.
How it Works
To execute a short strangle, you would sell a put option with a strike price below the current market price and sell a call option with a strike price above the market price. Both options would be for the same expiration date. By selling the options, you collect the premium upfront.
The profit range for a short strangle is between the two strike prices. As long as the market price stays within this range at expiration, you keep the premium as profit. If the market price moves significantly beyond either strike price, losses could occur.
Pros
There are several advantages to using a short strangle strategy for income generation:
- High win rate: Short strangles tend to have a higher win rate, often around 70%. This means that the strategy is successful and profitable in a majority of cases.
- Pure theta decay: Since the short strangle involves only short options, there are no long options to offset the theta decay. This means that the strategy benefits from the passage of time, resulting in pure theta decay and potential income generation.
- Versatility and ease of rolling: If one side of the short strangle gets tested, it is easy to roll the untested side to adjust the position and potentially collect more credit. This versatility allows for adjustments to be made without incurring additional risk.
Cons
While the short strangle has many advantages, it is important to consider the potential risks and drawbacks:
- Undefined risk: Unlike some strategies that have defined risk, such as credit spreads, short strangles have undefined risk. If the market price moves significantly beyond either strike price, losses can occur. This means that risk management and monitoring are crucial.
- High capital requirement: Short strangles on index ETFs often require a higher buying power reduction (BPR) due to the higher volatility. This can make it challenging for traders with limited capital to execute the strategy on these instruments.
Iron Condor
Overview
The iron condor is a defined neutral strategy that combines a short put spread and a short call spread to limit risk. It is called an “iron condor” due to the shape of the payoff diagram, which resembles the wingspan of a condor.
How it Works
To construct an iron condor, you would simultaneously sell a put spread and a call spread, which consist of selling a put option with a lower strike price and buying a put option with an even lower strike price, as well as selling a call option with a higher strike price and buying a call option with an even higher strike price. The options would all have the same expiration date.
The goal of the iron condor is to collect premium while keeping the risk limited. The maximum profit is achieved when the market price remains within the range defined by the strike prices of the put and call spreads. If the market price deviates beyond either spread, the potential for losses increases.
Pros
The iron condor strategy offers several benefits for income generation:
- Decent win rate: While not as high as the short strangle, the iron condor still has a decent win rate. This means that the strategy can be consistently profitable in a majority of cases.
- Defined risk: Unlike the short strangle, the iron condor has defined risk. The maximum loss is known upfront and limited to the difference between the strike prices of the put and call spreads, minus the premium received.
- Takes advantage of IV overestimation: The iron condor strategy benefits from the fact that implied volatility (IV) is often overstated compared to realized volatility (RV). This means that the options may be priced higher than necessary, allowing for premium collection.
Cons
It is important to consider the potential downsides of the iron condor strategy:
- Lower win rate compared to short strangle: Due to the inclusion of long options in the iron condor strategy, the premium received is reduced, resulting in a lower win rate compared to the short strangle.
- Reduced profit potential: The limited risk of the iron condor also means limited profit potential. The strategy aims to collect premium rather than achieving large gains.
- Reduced theta decay: As the iron condor involves long options, the theta decay is offset by the long options, resulting in reduced pure theta decay compared to the short strangle.