Options for Consistent Income
The use Options for consistent income is what every trader wants. Is there a way to achieve this? We are using Options Delta to locate the short strikes. Graphically it is represented in the Probability Mode. We use Delta to determine the trade risk and the Probability Of Profit (POP).
It is an objective approach based on numbers and random distribution instead of the reliance on subjective expectations. Together with high probability option strategies, the use of the Probability Model provides a distinctive edge.
Use the Probability Model for Consistent Income?
We are using stock options to receive option premium for consistent income. Options are derived from stock. The Price of stock can be one day up and the other way down. It is difficult to predict how much it moves. If you take all the different stock prices together you have got a log–normal distribution. It is often referred to as a Bell Curve patterned after the geometric Brownian Motion, see the picture below. In other words, we are statistically determining the probability that the price of a stock (option) will fall within a range over a specified period of time and with the current level of volatility.
This relies on the notion that the daily percent change in price of an asset, a stock or an index is predominantly random. When you have an idea of how much a stock is moving then you can buy the right kind of options for consistent income.
Much research has been done in this area, and it has been shown that the price action of index like the S&P500 are predominantly random, It is reflecting a near normal distribution.
There are three key inputs to the Probability Model that probability traders focus on: price of the asset, Implied Volatility, and days to expiration of the option (DTE). It then becomes a simple matter to determine the range of prices and the POP based on the expected move for a given level of risk.
What Risk do You want to take?
If you are using options for consistent income there is a certain risk you take. Of course you want to take the smallest risk possible. With the amount of risk you take comes also the amount of profit you make. Nowadays it is possible to determine the risk you want to take when selecting options for consistent income.
Risk is measured by Standard Deviation (SD),with 1SD representing approximately 68% chance that the price will fall within that range at expiration.
- 1 SD representing a 68.2%
- 1.5 SD representing 90%;
- 2 SD representing 95.4%
When we sell options to receive premium you determine your risk at order entry. Most of the strategies use options with 1 Standard Deviation away from the market price. That means that there is only approximately chance of 68% that the market will reach the strike price.
How to Select Options for Consistent Income
On Dough you go to the trade tab, enter the symbol and you see directly the picture below with the 1SD and 2SD lines. From the diagram the first lines from the right and the left of the dot represents the 1SD. When selecting the short strike we choose the $1040 Put and a $1140 Call to sell option premium. You may also buy the $1030 put and the $1050 call for protection. By doing this you sold an Iron Condor and could collect $2.28 option premium with a probability of success of 68%.
The Probability Model is for the RUT, S&P500 and other stocks quite reliable. The shorter the Days To Expiration the more reliable the outcome. The reason for this is that Implied Volatility fluctuates, it will change over time as markets are impacted by future events.
We sell options to receive Options Premium for a consistent income. With order entry we determine how much risk we want to take. The Probability Model helps us to get a graphical overview and helps us to see where to sell options. Sell premium and select options which are 1 Standard Deviation away. You may calculate Standard Deviation manually or use the Dough platform that does it automatically for you. By looking at the graph you can easily select your strikes, the amount of risk you take and the probability of success. In this way you will be able to to select the right kind of options for consistent income.
I trust that you learned how to make trade options for consistent income. That we sell option premium as a overall strategy. Read more about this kind of topics as How to make money with trading or Profiting from weekly options.