Hey there! In this video, you’ll learn about a trading strategy called “The Unlimited Income” option trading strategy. The goal of this strategy is to extract as much Extrinsic Value (Theta Decay) from options as possible to generate consistent income. The video covers various aspects of the strategy, including the use of index ETFs, three option trading strategies (iron condor, bull put spread, and bear call spread), market conditions, trade management strategies, and more. The speaker also provides examples using the Russell 2000 ETF (IWM) and invites viewers to ask questions and subscribe to their channel for more informative videos. So, if you’re interested in learning how to generate “Unlimited Income” from the markets, this video is definitely worth a watch!
The Unlimited Income Option Trading Strategy
Introduction to the Strategy
In the “Unlimited Income” Option Trading Strategy video by Options with Davis, the host discusses a method for generating consistent income by extracting Extrinsic Value (Theta Decay) from options. The goal is to take advantage of the fact that Extrinsic Value will always go to zero when an option expires. By maximizing the extraction of Extrinsic Value, traders can generate unlimited income from the markets.
Benefits of Premium Selling
As premium sellers, the strategy aims to take advantage of Extrinsic Value decay over time. By collecting upfront premium and using Theta Decay to their advantage, traders can continuously extract Extrinsic Value from the market. The objective is to have trades on 80 to 90 percent of the time, consistently generating income.
Preferential Use of Index ETFs
To reduce volatility and unsystematic risks, the strategy favors index ETFs over individual stocks. Unlike individual stocks, index ETFs are not as susceptible to the impact of individual company news or earnings reports. This helps to maintain stability and maximize returns for premium sellers.
The Three Option Trading Strategies
Iron Condor
The iron condor strategy is a market-neutral approach that involves selling both a put spread and a call spread on the same underlying asset. This strategy benefits from a stable market environment, as it profits from the limited range of price movement. Traders using this strategy aim to profit from time decay and a decrease in volatility.
Bull Put Spread
The bull put spread is a credit spread strategy in which traders sell a put option and simultaneously purchase a lower-strike put option on the same underlying asset. This strategy is implemented when the trader expects the price of the underlying asset to remain above the strike price of the put option they sold. It allows traders to profit from time decay and a bullish market bias.
Bear Call Spread
The bear call spread is another credit spread strategy that involves selling a call option and simultaneously purchasing a higher-strike call option on the same underlying asset. Traders implement this strategy when they believe the price of the underlying asset will remain below the strike price of the call option they sold. It allows traders to profit from time decay and a bearish market bias.
Market Conditions and Indicators
Swing Highs and Lows
Market conditions play a significant role in the strategy. Traders look for swing highs and swing lows on the price chart as potential entry points for their trades. These swing highs and lows help identify the range within which the market is currently trading.
Stochastic Oscillator
The stochastic oscillator is a popular technical indicator used to identify overbought and oversold conditions in the market. Traders consider the stochastic oscillator reading to determine the ideal time to initiate their trading strategies. A neutral reading on the stochastic oscillator (around the 40 to 60 range) is often preferred before entering trades.
Using the Russell 2000 ETF as an Example
Overview of the IWM
In the video, the Russell 2000 ETF (IWM) serves as an example of an index ETF to trade. The IWM represents a broad range of small-cap stocks, offering traders exposure to the overall performance of small-cap companies.
Applying the Iron Condor Strategy
The host explains how they apply the iron condor strategy using the Russell 2000 ETF as the underlying asset. They look for favorable market conditions, such as a range-bound market and a neutral reading on the stochastic oscillator, to initiate their iron condor trades.
Placing Iron Condor Trades
Neutral Reading on the Stochastic Oscillator
Before placing iron condor trades, the host emphasizes the importance of waiting for a neutral reading on the stochastic oscillator. This indicates that the market is in neither an oversold nor an overbought condition, increasing the chances of the iron condor trade being successful.
Using Swing Highs and Lows
The host explains that they also consider the previous swing highs and lows on the price chart before placing their iron condor trades. By positioning the short strikes of the iron condor above the previous swing high and below the previous swing low, the trader aims to increase the probability of the trade staying within the desired range.
Current Iron Condor Position and Future Trades
Author’s Strategy and Position
The speaker shares their current iron condor position, highlighting the importance of managing multiple trades concurrently. They also mention that they take profit at 50% of the credit received and close a trade for a loss if the market goes below a specific level.
Potential Future Trades
In addition to discussing their current iron condor position, the speaker mentions potential future trades. They explain that if certain conditions are met, they may look to sell another bull put spread or adjust their strategy based on the market conditions.
Simulated Credit Trade and Expiration Dates
Preferred Time Frame
The host suggests a timeframe of 30 to 60 days for implementing the strategy. They explain that 32 days may be too short, while 60 days may be too long. Finding the right balance of time allows for optimal time decay and premium extraction.
Considering Different Expiration Dates
When selecting expiration dates for trades, the speaker emphasizes the importance of considering various options. They mention liquidity and bid-ask spreads as crucial factors to ensure smooth trade execution and minimize slippage.
Importance of Liquidity and Bid-Ask Spreads
The speaker emphasizes the importance of trading index ETFs with good liquidity and tight bid-ask spreads. This reduces the risk of not being able to enter or exit trades at desired prices, which can significantly impact profitability.
Analyzing Strike Prices for Call Vertical Spreads
Evaluating a 5-Point Spread
The host analyzes different strike prices for a call vertical spread and determines that a 5-point spread may not be worth it. They potentially find it too narrow, limiting potential profitability.
Suitability of a Strike Price of 165
Instead, the speaker suggests considering a strike price of 165, but cautions about its position relative to the support area on the chart. Analyzing the support and resistance levels helps determine the suitability of strike prices.
Initiating Iron Condor Trade and Prioritizing Trades
Importance of Starting with an Iron Condor
The speaker emphasizes the importance of initiating an iron condor trade first before considering other trades. The iron condor acts as the foundation of the strategy and provides a market-neutral approach.
Trade Management Strategies
The host discusses various trade management strategies, such as taking profit at 50% of the credit received and closing a trade for a loss if the market goes below a specific level. They also highlight the importance of managing multiple trades concurrently, including a bull put spread and an iron condor.
Conclusion
Encouraging Viewer Engagement
In conclusion, the “Unlimited Income” Option Trading Strategy video by Options with Davis provides valuable insights into a strategy that focuses on extracting Extrinsic Value from options to generate consistent income. The host encourages viewers to engage by asking questions, leaving comments, and subscribing to the channel for more informative videos.