How to Generate Consistent Income Streams with Option Premium Ladders


May

17

2018

How to Generate Consistent Income Streams with Option Premium Ladders

Staggering expirations is a cornerstone you need to Build a Consistently Productive Account.

Watch Michael Gross Explain in the video, and read more here.

Click To Read Video Transcript

(Video Transcript)

Hi, this is Michael Gross of OptionSellers.com I’m here with your Option Seller Email Seminar. The title of this week’s seminar is Building Your Premium Ladder. What we’re going to talk about today is not so much the strategy of selling options but how you position those options throughout your portfolio through time to achieve maximum results and also to manage your risk. When we’re talking about option selling, one of your most important things you can do initially is to set a goal. Where do you want to be at the end of the year? Why are you using this strategy? What do you want to accomplish? After you set that goal, the second most important thing is how you’re going to get there.

When you’re trading, regardless of the strategy you’re using, how you get there sometimes can be just as important as getting there. In particular, with an option selling approach, do you want to get there like you’re riding a roller coaster where you have highs and lows, a lot of gut-wrenching decisions, a lot of market volatility, or do you want a smooth equity curve? I don’t know about you but I prefer a smooth equity curve, sleeping at night, having a pretty good idea of what to expect. So, those are all things you have to take into consideration. Building your premium ladder is all about how to achieve that.

I’ve been working with options now for the better part of 15 years and one way we found, actually, the best way we found to help smooth out that equity curve is through a concept called staggering. For those who have read The Complete Guide to Option Selling, we have a full chapter on that devoted to staggering and you’re probably already familiar with it, but we’re going to discuss it here. Staggering accomplishes a couple key things that you want to accomplish as an option seller. One, it helps to give you that smooth equity curve. Two, it helps to manage the times when your premiums are going to be coming in. Three, it’s also going to help you manage your risk and I’m going to show you that here in just a second. First, let’s explain what staggering is. To give you the short version of what staggering is, a lot of people when they first start out selling options, they just start selling them willy-nilly. “Oh I like this one, I’m going to sell it. Oh there’s another one, I think I’ll sell that.” There’s no plan to it. What we want to do is have a plan.

By staggering, what you’re going to do is you’re going to be selling a group of options in month one with 90-120 day expiration periods, sometimes we go a little longer than that but that’s the target range where we’re going to look, okay? You sell a certain group of options in month one. 30 days later, month two, you sell a second group of options. 30 days later in month three, you sell a third group of options. Now how does that benefit you? Well, I’m going to show you here. You sell your first group of options here in month one, we sell option Group A.

We’re selling them 90-120 days out so they’re down here expiring and expiring at the end of month three, maybe in month four. 30 days later when we’re selling the second group of options and, sometimes these are in the same commodity, most often you want to also stagger your commodities to stay diversified, so you may sell options in corn and cattle in month one. In month two you’re selling options in silver and coffee, and in month three you’re selling options in natural gas and soybeans, okay? Just as an example. Come month two, these options have already had 30 days of time decay, so then you put on month two. Now come month three, these options have 60 days of time decay. These options (month two) have 30 days of time decay, so by the time you’re at month three you’re putting fresh options on and you have two months worth of options that have already shown substantial time decay.

The point of this is to, one, come month four here your first group of options are going to be expiring. So, you’re realizing your first profits if everything goes correctly and you haven’t taken any losses, which is not guaranteed. You can take losses, but this is for example purposes. We’re assuming that these go to full expiration and they expire worthless down here. 30 days later, after Group A options expire, we’ll say month two is Group B and month three is Group C, Group B options will be expiring. 30 days after that, Group C options will be expiring.

So, you can look at your portfolio and see, “Okay. This month I have this group of options expiring. Next month I have this group of options expiring.” It gives you some idea of what you have on the table. What the object is here is to collect a certain amount of premium every month and to reap a certain amount of that premium every month or realize it, if you will. That’s the goal? Is it always going to work out that way? Of course not: You’re going to have losers along the way, but you still want to have a plan. You want most of your options working this way and, yes, you’ll take risk evasive measures in some of these and have to shift them into other options. You’ll still want to try and stick to the formula where you have certain groups of options coming off every single month.

It not only gives you the peace of mind of knowing at least what you have scheduled to expire, but it helps you manage your risk, and this is a key concept to the reason you’re doing this because when you sell an option and the option has 90-120 days on it, as time passes that option starts losing time value. What that means is even in adverse moves it becomes harder for that option to gain value. If you get an option that’s in its last 30 days of life and it’s far out-of-the-money, the market can do a whole lot of movement and it’s not going to affect the value of that option very much, unless it goes in the money. Which, if you sold far enough out, hopefully there’s not much of a chance of that happening. So, when you sell an option that’s 90-120 days out, just ahead of that sweet spot of time decay, your biggest risk in that option is likely going to be about the first 30 days you’re in it depending on how far out you went, 30-60 days.

As your month one options get into month two and month three, the risk of those options moving against you or hitting your risk parameters begins to fall. So, by the time you’re into month two or three, which month three you start seeing expirations, but as you get down here these are lower risk options. Your fresh options, when you put them on, are the highest risks. What that does is, you have a portfolio of options that are higher risk, moderate risk, and low risk, so it helps you diversify the option risk, as well. That’s how you build a balanced portfolio, and that’s more or less how and why you want to stagger your portfolio. As I said, it’s a key concept of the type of portfolios we recommend here and it’s a key concept in the book.

I hope you found this week’s lesson of interest. For those of you out there if you’ve been watching these videos or you’ve been reading some of seminars, if you like what you see here and you’d like to know how to work directly with us in a portfolio, if you’re a high net-worth investor I do strongly recommend our investor Discovery Pack. It tells you everything you need to know about our program, how to qualify, and how you can get started in it. There’s quite a bit of information in there about our whole option selling approach. It also comes with a free DVD of James Cordier’s seminar to high net-worth investors. You can request this at www.OptionSellers.com/Discovery or at the link on this page. I hope you’ve enjoyed the lesson. Have a great week of option selling. This is Michael Gross of OptionSellers.com.

  1. scott michael dachishen Says:
    September 7, 2017 at 12:36 pm

    Michael
    Since we cant roll the options for commodities futures what are your normal rules of thumb for managing and defending trades that don’t go our way? Do you you use a stop loss n X original premium collects close trade and call it a day? Thansk in advance

    • Michael Gross Says:
      September 7, 2017 at 1:59 pm

      Dear Scott,

      Not sure what you mean by “can’t roll the options for commodities futures.” Rolling is one of the cornerstone risk management techniques described in our book. That being said, it is certainly not the only one. I recommend reading chapters 12 and 18 in the The Complete Guide to Option Selling, 3rd Edition (www.OptionSellers.com/book).

      Thanks,
      Michael

Share This

Share This

Share this post with your friends!