What Is Implied Volatility?

In the world of options trading, understanding implied volatility (IV) is crucial. But what exactly is IV and why does it matter? Let’s explore.

What is Implied Volatility?

In simple terms, implied volatility measures how much the market expects a stock’s price to change in the future. It is implied by the prices of options contracts, which give investors the right to buy or sell a stock at a certain price within a specific period.

In other words, IV reflects the “implied” level of risk and uncertainty in the market. When IV is high, options traders expect significant price movements for the underlying stock. On the other hand, a low IV indicates that the market anticipates relatively stable stock prices.

In options trading, IV is often compared to historical volatility (HV), which reflects the actual price fluctuations of a stock in the past. This comparison can provide insight into whether options are overpriced or underpriced. If IV is higher than HV, it suggests that investors have high expectations for the stock’s future performance.

How to Calculate Implied Volatility?

Calculating implied volatility isn’t a straightforward process, as it’s not a known variable, but is derived from an option’s price. It’s often calculated using iterative numerical methods. The Black-Scholes model is one of the most commonly used methods to indirectly compute IV.

In reality, IV is found by using the actual market price for the call option and solving the equation for IV. This usually involves a numerical method like the Newton-Raphson algorithm or a simpler method like the bisection method. It’s worth noting that these calculations are typically performed by trading software and platforms.

The Importance of Understanding Implied Volatility

As mentioned, IV is a crucial factor in options trading. It can greatly affect the value of an option contract and therefore impact potential profits or losses for traders. Let’s take a look at some key benefits and risks of not understanding IV.


  • Helps identify potentially profitable options contracts: If a trader believes that IV is overstated, they may consider selling options contracts at a higher price and potentially make a profit if the IV decreases.
  • Provides insight into market sentiment: A high IV can indicate an upcoming market event or uncertainty, while a low IV can suggest stability and confidence in the market.

What is Historical Implied Volatility?

In simple terms, historical IV is the actual volatility of an asset’s price over a certain period. It’s calculated by comparing the current market price of an option to its past performance.

For example, let’s say Company ABC stock has had a historical IV of 20%. If the current market price implies an IV of 30%, this means that traders are expecting more volatility in the future compared to the past.

An option trader can chart the historical IV and current IV to gauge the potential profitability of a certain options trade.

What is a Good Implied Volatility for Options Trading?

Implied volatility plays a significant role in options pricing, profoundly influencing the decision to buy or sell options.

High implied volatility often leads to an increase in options prices. This is because the increased risk and uncertainty represented by a high IV increases the chance of the option being profitable, thus driving up its market price.

Traders may find this situation advantageous when they are selling options, as they can command higher premiums.

On the other hand, low implied volatility suggests more stable prices for the underlying stock, reducing the probability of the option moving in the money.

This stability typically results in lower options prices. For option buyers, a low IV environment can be more favorable, allowing them to purchase options at cheaper rates.

However, it’s important to remember that volatility is just one factor among many that influence options prices. Other factors include the price of the underlying asset, the strike price, the time to expiration, and the risk-free interest rate. Therefore, traders should consider all these factors collectively when deciding to buy or sell options.

It’s also important to select the right options strategy to trade rather than solely focusing on implied volatility based on their risk tolerance and investment goals.

What are implied volatility rank and implied volatility percentile?

Implied Volatility Rank, or IV Rank, is a metric used by traders to gauge whether implied volatility is high or low on a relative basis. It measures the current implied volatility against the range it has marked over a particular period, typically the past year. The calculation is a simple percentage of the number of days with lower implied volatility in the past year (or chosen time period), with the current level being the highest, or rank of 100%, and the lowest level being the rank of 0%.

For example, if an option’s implied volatility has ranged from 20% to 50% over the last year and is currently at 35%, the IV Rank would be 50%. This means the current implied volatility is higher than 50% of the readings over the last year. Traders use the IV Rank to determine whether an option is cheap or expensive based on its historical volatility and to make informed decisions about trade strategies.

Remember, a high IV Rank signifies that the current implied volatility is at the higher end of its 12-month range, which might suggest that options are overpriced and it could be a good time to be an options seller. Conversely, a low IV Rank might indicate that options are relatively cheap, potentially favoring an options-buying strategy.

Implied Volatility Percentile, or IV Percentile, is another critical metric for traders. It measures the percentage of days in the past year (or your chosen time period) when the implied volatility was lower than the current level. Unlike the IV Rank, the IV Percentile accounts for the frequency of each IV level rather than just the highest and lowest points.

For instance, let’s assume that over the past year, an option’s implied volatility was lower than its current level of 30% on 180 days. This would equate to an IV Percentile of 50% (180/365), indicating that the current implied volatility is higher than 50% of its readings in the last year.

Though the two terms sound similar, the key difference between IV Rank and IV Percentile is that IV Rank considers the highest and lowest IV levels, while IV Percentile takes into account how many days the IV was below the current level. Understanding these subtle differences can help traders make more informed decisions about when to buy or sell options based on the relative cost of options.

What kind of events could cause Implied Volatility to increase?

Potential factors that can cause IV to increase:

  • Earnings announcements: Companies releasing their quarterly earnings reports can greatly affect the price and volatility of their stock.
  • Market news or events: Major political or economic events such as elections or trade deals can have a significant impact on the sentiment of specific market sectors or companies.
  • Clinical trial results: The announcement of clinical trial results, particularly for pharmaceutical and biotechnology companies, can significantly influence the stock’s price.
  • Product launches: In the tech sector, for instance, the launch of a new product or service can cause a spike in implied volatility.
  • Regulatory decisions: Companies in highly regulated industries like healthcare, finance, or energy can experience changes in implied volatility due to upcoming regulatory decisions or policy changes.
  • Mergers and acquisitions: The announcement of a merger or acquisition can lead to price volatility as investors assess the potential implications of the deal.
  • Major company news: Any significant news related to a company, such as changes in leadership, major lawsuits, or accounting scandals, can cause a shift in implied volatility.

High Implied Volatility Option Strategies

High implied volatility often presents a unique opportunity for traders to capitalize on certain strategies, offering the potential for high returns.

Below are four key options trading strategies ideal for situations when implied volatility is high.

  • Short Straddle
  • Short Strangle
  • Iron Condor
  • Butterfly Spread

Short Straddle

The Short Straddle strategy involves selling both a call and a put option with the same strike price and expiration date. This strategy is profitable when the underlying asset’s price remains relatively stable, and implied volatility decreases.

When initiating a short straddle position during high implied volatility, we are taking advantage of the inflated prices of options contracts due to uncertainty in the market. As time passes and implied volatility decreases, these contracts become less valuable, allowing us to buy them back at a lower price and pocket the difference as profit.

From an options Greek perspective, short straddle positions have a negative vega, meaning they benefit from a decrease in implied volatility. However, it is essential to keep in mind that this strategy also has unlimited risk if the underlying asset’s price moves significantly.

Short Strangle

Similar to the short straddle, a Short Strangle involves selling a call-and-pull option with different strike prices but the same expiration date. This strategy is also profitable when the underlying asset’s price remains stable and implied volatility decreases.

Since this strategy involves selling out-of-the-money options contracts, it has a lower risk compared to the short straddle. However, it also has a lower profit potential due to the lower premiums received from selling the options.

From an options Greek perspective, short strangles have a negative vega and positive theta, meaning they benefit from both a decrease in implied volatility and time passing.

Iron Condor

The Iron Condor strategy is a combination of both a Short Strangle and a Long Strangle. It involves selling an out-of-the-money call and put option while simultaneously buying a further out-of-the-money call and put option with the same expiration date.

As implied volatility decreases, the premiums for these options contracts also decrease, allowing us to buy them back at a lower price and lock in a profit. The risk is limited in this strategy as we have both a short and long position, providing some hedging against potential market moves.

From an options Greek perspective, Iron Condors have negative vega and positive theta, similar to the Short Strangle. However, they also have a positive gamma, meaning they benefit from small price movements in the underlying asset.

Butterfly Spread

The Butterfly Spread strategy involves buying an out-of-the-money call-and-put option while simultaneously selling two at-the-money options with the same expiration date. This creates a profit range where the underlying asset’s price needs to stay within for maximum profit.

When implied volatility decreases, the premiums for these options contracts also decrease, allowing us to buy them back at a lower price and lock in a profit. From an options Greek perspective, Butterfly Spreads have positive theta and negative vega, meaning they benefit from both time passing and a decrease in implied volatility.

Low Implied Volatility Option Strategies

Low implied volatility often presents a unique opportunity for traders to capitalize on certain strategies, offering the potential for high returns.

Below are six key options trading strategies ideal for situations when implied volatility is low.

  • Long Calls or Puts
  • Long Straddle or Strangle
  • Calendar Spread
  • Ratio Spread
  • Diagonal Spread
  • Butterfly Spread


Long Calls and Puts are basic options trading strategies that can be profitable when implied volatility increases.

With a Long Call, the investor purchases the right to buy an underlying stock at a predetermined price within a specified time frame.

On the other hand, a Long Put gives the investor the right to sell an underlying stock at a predetermined price within a specific timeframe.

Disregarding the directional profit and timeframe, increased implied volatility will cause options pricing to rise, thus increasing the value of the option contract.


Long Straddle and Strangle are advanced options trading strategies that can be profitable when implied volatility increases.

Both strategies involve buying a Call and Put position at the same strike price and expiration date.

The difference between a Long Straddle and a Long Strangle is that in a strangle, the strike price for the Put and Call options are different.

The benefit of these strategies is that they profit from a significant change in the underlying stock’s price, regardless of which direction it moves.

When implied volatility increases, options pricing will rise, increasing the value of both Call and Put positions.


A Calendar Spread strategy involves purchasing a longer-term call or put option while simultaneously selling a shorter-term one with the same strike price.

This strategy profits from the difference in time decay between the short and long positions.

When implied volatility increases, longer-term options will experience a more significant increase in pricing compared to shorter-term options.

This results in an increase in the value of the longer-term option position, producing a profit for the trader.


The Ratio Spread strategy involves purchasing a different number of Call or Put options at different strike prices.

For example, a trader may buy two Call options with a lower strike price and sell one Call option with a higher strike price.

This strategy takes advantage of changes in implied volatility, as an increase will lead to a more significant rise in the value of the purchased options, generating a profit for the trader.


A Diagonal Spread strategy involves buying and selling Call or Put options at different strike prices and expiration dates.

This combination allows for flexibility in both time and price movement, which can be advantageous when implied volatility is low.

If implied volatility increases, longer-term options will experience a more significant increase in pricing compared to shorter-term options, generating a profit for the trader.


The Butterfly Spread strategy involves selling two Call or Put options at a specific strike price and buying one option on either side of that strike price.

This strategy is profitable when the underlying stock remains relatively stable, but implied volatility increases.

As the sold options will experience a more significant increase in pricing compared to the bought options, resulting in a profit for the trader.

What Is Selling Put Options?

What are put options?

Put options are a type of financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a predetermined price (known as the strike price) on or before a specific date in the future. In simpler terms, it’s like buying insurance for your stocks – you have the option to sell them at a set price if they drop below that price.

How do put options work?

Let’s consider an example. Suppose you own 100 shares of XYZ Company, currently trading at $50 per share.

However, you’re concerned the price might fall in the next month. So, you decide to buy a put option with a strike price of $45 that expires in a month.

This put option gives you the right to sell your shares for $45 each even if the market price falls below this level.

Now, imagine XYZ Company’s price drops to $40 per share. Because you have the put option, you’re still able to sell your shares for $45 each, thus avoiding a larger loss.

This is the basic principle of putting options: they provide a safety net against potential losses.

How to sell puts?

Selling put options, also known as writing put options, is an ideal strategy for generating recurring income.

When you sell a put option, you collect a premium upfront from the buyer. This premium is yours to keep, no matter what happens in the future. Consider it as income earned for undertaking the obligation to buy the underlying asset at the strike price, should the buyer decide to exercise the option.

Here’s how to do it:

  1. Identify a stock you’re interested in buying. The first step in selling put options is to find a stock that you wouldn’t mind owning if its price dropped. This is crucial because if the stock price falls below the strike price, you will be obligated to buy the shares.
  2. Determine the strike price and expiration date. The strike price is the price at which you’re willing to buy the shares if the option is exercised. You also need to select an expiration date for the option – this is the date when the contract ends.
  3. Sell the put option. When you sell the put, you are paid the premium by the buyer. This premium is your income and is yours to keep, whether or not the option is exercised by the buyer.

By selling put options, you can create a stream of income while potentially buying stocks you like at a price lower than the current market price.

However, this strategy comes with its risks. If the stock price falls significantly below the strike price, you will be obligated to buy the shares at the strike price, which can lead to significant losses.

Selling put is also known as the first step in executing the Wheel Strategy.

how to sell put

Selling Covered Put vs Naked Put

The covered put strategy is typically employed when an investor has a short position in a stock and sells a put option on the same stock.

The ‘covered’ aspect refers to the fact that the investor’s risk is somewhat covered by the short position in the stock. This strategy is used when the investor expects the stock price to decrease.

  • Covered Put Example: Let’s consider a real-world example: Suppose you’ve short-sold 100 shares of XYZ company at $50 per share, expecting that the share price will decrease. To protect your position and generate premium income, you decide to sell a put option (1 contract = 100 shares) with a strike price of $45 and an expiration period of one month. The buyer of the put option pays you a premium of $2 per share ($200 for the contract).
  • Outcome: If the price of XYZ company’s stock drops as you anticipated, the put option will be exercised by the buyer, which means you will have to purchase the stock at $45, and still keep the premium of $200. Your short position in the stock will yield a profit from the decrease in the stock price and offset the further decrease in the stock price from $45 (it’s covered).

As you can see, a covered put almost mimics a covered call strategy except you’re betting on a slight downturn in the security’s price to make a profit.

On the other hand, a naked put is

On the other hand, a naked put is also typically known as cash secured put. It involves selling a put option without having any existing short position in the underlying stock.

The total risk is equivalent to the total amount of the stock price if the stock price decreases to zero.

Risk of selling put options

The main risk is the potential for significant losses if the stock price decreases dramatically. If the stock falls below the strike price, you will have to buy the shares at that price, potentially leading to a loss on your investment.

Other risks to consider:

  • Liquidity Risk: In the event that you need to exit your position, there is a risk that the market for the option you sold may become illiquid. This could potentially result in losses as you may have to sell at unfavorable prices.
  • Early Assignment Risk: While it is generally a rare occurrence, there is a risk that the buyer of the put option may decide to exercise the option before its expiration date.

Is Selling Put Options Safe?

While selling put options can be a lucrative strategy, it is also important to manage your risk. Below is a list of considerations people typically talk about when it comes to managing risks. While the list contains good advice, I am going to add my thoughts based on my experience.

1) Setting Stop-Loss Orders

A stop-loss order is a predetermined exit point that is set when entering the trade. This order automatically sells the option if the price of the underlying stock drops to a certain level, which can help limit potential losses.

My thoughts: 

While this is a useful tactic to mitigate a large loss, I personally do not like setting a stop-loss when it comes to trading options.

Options pricing can be influenced not only by the underlying stock price movements but also by implied volatility. This means even if the underlying stock price did not move much if the market condition is in a high fear state, options pricing could increase significantly and hit the stop-loss price.

2) Diversifying Trades

Traders can diversify their trades across different stocks and sectors to help spread their risk. This can help mitigate the risk of one particular stock declining and causing significant losses.

My thoughts: 

I have tried this before, but it is easier said than done because depending on your trading style, especially if you are using options screeners, it is quite easy to find yourself holding options of underlying stocks in the same sector.

3) Adjusting Trades

If the underlying stock price drops below the strike price, traders may choose to adjust their trade to limit their losses. This could include buying back the option at a loss or rolling the trade to a later expiration date.

My thoughts: 

Ideally, we should have a trading plan laid out before a position is opened. I would do both fundamental and technical analysis to pre-determine at what price point I would just close the position. If the stock price doesn’t hit the price, I would just hold it. Keep it simple.

4) Understanding Margin Requirements

Traders should be aware of the margin requirements for selling put options. Margin is the amount of money required to cover the potential losses from selling put options, and brokers may require traders to deposit additional funds to cover potential losses if the stock price drops significantly.

My thoughts: 

If you are trading with a cash-secured account, the margin is not an issue because the short put position is covered by the amount of cash you have in the account.

If you are trading with a margin account, then understanding how the movement of the underlying stock price could affect the margin requirement is important.

For example, a larger margin is required for more volatile stocks and from time to time, brokers would decide to change the margin requirement to full cash secured. I have come across this situation from time to time and the learning from that is to keep the position small and leave enough trading power in the account. NEVER use 100% of the trading power.

5) Analyzing Technical Indicators

Traders can use technical analysis to help identify potential risks and opportunities. This could include evaluating the implied volatility of the option, the option price, and the overall trend of the underlying stock.

My thoughts: 

This is probably the best advice on the list. Especially if you are trading options and not using options as a part of your investment strategy. (Note: Investing and trading are two different things in my opinion).

I strongly recommend learning about technical analysis if you have not done so.

Selling puts for income

One of the most commonly asked questions when it comes to trading options for income is whether selling put options could be a viable strategy.

The answer is yes, but it’s important to understand the potential risks and rewards.

By selling put options, you are essentially agreeing to buy a stock at a predetermined price (the strike price) if it falls below that level by the option’s expiration date. In exchange, you receive a premium from the buyer of the option.

This strategy can be profitable as long as the stock price remains above the strike price, you keep the premium and do not have to buy any shares.

It’s also beneficial to know selling puts is a part of a popular strategy among options traders called “wheel strategy,” also known as the “triple income strategy.”

It’s a cyclical process that starts with selling a put. If the option is exercised and the trader ends up owning the stock, they then sell a covered call option on that stock, again earning a premium. If the call option is exercised, they sell the stock at a profit. The cycle repeats from there, hence the name “wheel strategy.”

The wheel strategy is favored due to its potential to generate income in three ways: through the initial premium from the put, the second premium from the call, and potential capital gains from selling the stock.

Best Stocks to Sell Put Options

If you are a beginner at trading options, I would recommend selecting stocks that you do not mind owning by selling put options. Avoid picking stocks (or companies ) that are way too uncertain and instead pick stocks from the major indexes such as the S&P 500.

Selling the SPX (or SPY) put option is also a good idea because what you are doing is essentially buying the S&P 500 if you get assigned. If you don’t trade options for living income you could just hold SPX and wait until it goes beyond your entry point to sell it for a profit.


Selling put options can be a profitable strategy for experienced investors and traders, but it’s important to understand the risks and manage them carefully. By identifying profitable trades, managing risk, and using technical analysis, you can take advantage of market volatility and generate income.

I would also recommend learning about the Wheel Strategy as it is a powerful strategy if you want to hold a stock for the long term.

What Is A Covered Call?

A Covered Call is a popular financial strategy, but what exactly does it entail?

A Covered Call is often used by investors seeking to generate a consistent income stream. It involves owning or buying shares of a stock, and then selling call options on those shares.

Think of it this way: you own a house (the stock), then rent it out to a tenant (the buyer of the option) for a specified period. Your rental income is akin to the premium received from selling the call option.

Sounds simple, doesn’t it? But there’s more to the strategy than just that – because it could also be a part of the Wheel Strategy.

How Does a Covered Call Work?

To understand the core principles of a Covered Call, let’s look at an example. Say you own 100 shares of XYZ Corporation, currently trading at $50 per share. You decide to sell one covered call option with a strike price of $55 and an expiration date of three months. In return, you receive a premium (income) of $200.

Now, there are three possible scenarios:

  • How and When to Buy a Covered Call to Close the Position?

    There are several reasons why you might want to close a covered call by buying it back.

    • To protect profits: If your stock has risen significantly and you foresee it continuing to rise beyond the option strike price, you might want to buy back your call option to prevent the stock from being called away, thus protecting your upside potential profits.
    • To avoid further Loss: If the stock’s price has significantly dropped and you believe it may continue to fall, it could be beneficial to buy back the call and sell the stock to avoid further losses.
    • To avoid assignment: If you want to keep your stock and you’re worried that it might be called away due to an approaching expiration date, buying back the option can prevent this from happening.
    • Free up the stock for another covered call trade: if the call is nearing its expiration date and is out of the money, you might decide to buy it back to close out the position and free up the stock to open for another covered call trade with a different expiration.

    Covered Calls for Short-Term Traders and Long-Term Investors

    Covered calls can be a useful strategy for both short-term traders and long-term investors.

    For short-term traders, covered calls provide an opportunity to generate income from their existing stock investments while also taking advantage of potential price movements through selling short-term calls.

    For long-term investors, covered calls can help enhance their overall returns by generating additional income from their stock holdings without having to sell the underlying shares. Additionally, if the stock price does not increase significantly, the investor retains ownership of the stock and can continue to earn dividends.

    In an article by First Trust Portfolios, it is stated that covered call writing tends to outperform the S&P 500 unless the stock market returns are above 10%.

    The data clearly shows that incorporating covered calls into your trading and investing strategy can be beneficial for both short-term traders and long-term investors.

    What are the Benefits and Risks of a Covered Call?

    Like any investment strategy, covered calls come with their own set of benefits and risks.

    Benefits of a Covered Call:

    1. Income Generation: Selling covered calls is an excellent way of generating additional income, especially when the stock market is moving sideways. You could continue to write covered calls without having your stock getting called away.
    2. Downward Protection: The premium received from selling the call option can help offset a decline in the stock’s price. This provides some level of protection against a downward move in the stock.
    3. Potential for Profit: If the stock’s price stays below the strike price of the call option, you get to keep both the premium from selling the call and the stock price appreciation. This can lead to a higher overall return compared to just owning the stock.

    Risks of a Covered Call:

    1. Limited Upside Potential: If the stock’s price rises above the strike price of the call option, your profit is limited to the strike price minus the stock’s purchase price plus the premium received.
    2. Potential for Loss: If the stock’s price drops substantially, the premium received from selling the call option may not be enough to offset the loss from owning the stock.
    3. Overwriting Risk: There is a risk that you may have to sell your stock if the call option is exercised. If the stock’s price is above the strike price at expiration, the call option will likely be exercised, forcing you to sell your stock at the strike price.

    What is Poor Man’s Covered Call?

    The Poor Man’s Covered Call is a variation of the basic covered call strategy, but instead of buying the underlying stock, you buy a long-term call option. This allows traders with smaller accounts to take advantage of the benefits of a covered call without having to purchase 100 shares of the underlying stock.

    In this strategy, you would typically buy an in-the-money LEAPS (Long-term Equity AnticiPation Securities) call option with a strike price below the current stock price. Then, you would sell short-term out-of-the-money calls against it to generate income.

    For example, let’s say XYZ stock is currently trading at $50 per share. Using the Poor Man’s Covered Call strategy, you might buy an in-the-money LEAPS call option with a strike price of $45 and an expiration date one year in the future. Then, you would sell monthly out-of-the-money calls with a strike price of $55.

    This strategy can be particularly useful for those who want to participate in covered calls but don’t have enough capital to buy 100 shares of the underlying stock. It also allows traders to take advantage of the leverage provided by options, as LEAPS contracts are typically cheaper than buying the underlying stock.

    Benefits and Risks of Poor Man’s Covered Call

    As with any trading strategy, there are both benefits and risks associated with the Poor Man’s Covered Call.


    • Limited downside risk: because you own a long-term call option, your risk is limited to the amount you paid for the option.
    • Income opportunities: by selling short-term calls against your long-term call, you can generate recurring income.
    • Leverage and lower capital requirements: as mentioned, using LEAPS contracts provides leverage and allows traders with smaller accounts to participate in covered calls.


    • Potential loss of opportunity: if the stock price rises significantly, you may miss out on potential gains as your short-term calls will likely be exercised.
    • Limited upside potential: while you can still profit from the underlying stock’s increase in value, it will be limited to the strike price of your long-term call option.
    • Time decay: since you don’t own the underlying stock, you are exposed to time decay on your long-term call option.
    • Dividend risk: if the underlying stock pays dividends, you could miss out on potential income as your short-term calls may be exercised before the ex-dividend date.

    Best Stocks for Covered Call

    When selecting stocks for covered call strategies, it is important to consider the following factors:

    • Highly liquid stocks: choose stocks with high trading volume and open interest in their options contracts to ensure ease of buying and selling.
    • Low volatility: select stocks that have stable price movements rather than high volatility to reduce the risk of large losses. Even though high volatility could mean higher premium prices for short-term calls, it also increases the likelihood of them being exercised and potentially missing out on further gains. Or the stock price could plummet, leading to significant losses.
    • Dividend-paying stocks: stocks that pay regular dividends can provide additional income through covered calls, but be aware of potential dividend risks as mentioned above.
    • Undervalued stocks with upside potential: selecting undervalued stocks can increase the chances of prof
    • Strong fundamentals: look for companies with solid financials, a history of consistent earnings and dividends, and positive market sentiment.
    • Diversification: consider diversifying your portfolio by choosing stocks from different industries or sectors to reduce overall risk.

    Here are some example stocks that may be suitable for implementing a covered call strategy:

    1. Apple Inc. (AAPL): Known for its high liquidity and stable dividends, Apple can be a good choice for a covered call strategy.
    2. Microsoft Corporation (MSFT): Microsoft’s steady price movements and robust financials make it another favorable candidate.
    3. Johnson & Johnson (JNJ): This company’s strong fundamentals and consistent dividend payouts can be beneficial for covered call traders.
    4. Procter & Gamble Co. (PG): With its low volatility and stable dividends, Procter & Gamble can be an apt selection.
    5. The Coca-Cola Company (KO): Coca-Cola, with its global market presence and consistent dividends, can be an attractive choice.

    Please note: These are just examples and not recommendations. Always conduct thorough research before making any investment decisions.

    The Wheel Strategy

    If you’re already convinced of the efficacy of the covered call strategy as a tool for income generation, then prepare to be further amazed.

    Let me introduce you to another income-generating options strategy – the Wheel Strategy. This strategy is akin to an upgraded version of a covered call, providing traders with additional avenues to accumulate profits.

    With the Wheel Strategy, not only are the benefits of a covered call strategy preserved but the potential for income generation is also enhanced. Intrigued? Check this blog post about the Wheel Strategy.

What Is VXX And How To Trade It?

In recent years, more and more traders have turned to VXX as a strategy for earning recurring income. But what is VXX exactly?

VXX is an exchange-traded note (ETN) that tracks the Volatility Index, also known as the VIX or “fear index.” This index measures expected market volatility over the next 30 days using S&P 500 index options. Essentially, VXX is a way for traders to bet on the market’s volatility levels.

In practice, this means that when the stock market is experiencing higher levels of volatility (i.e. big swings in prices), VXX will typically rise in value. Conversely, when the market calms down and volatility decreases, VXX generally declines.

How Does VXX Track VIX Futures?

So how exactly does VXX track the VIX index using VIX Futures? Well, it’s quite fascinating! VXX doesn’t directly invest in the VIX but instead utilizes the VIX futures market.

The ETN holds a rolling portfolio of the two nearest-to-expiration VIX futures contracts. Each day, a portion of the near-term contract is sold and the next-term contract is bought to maintain the one-month maturity exposure.

This daily rebalancing act is what allows VXX to mimic the performance of VIX futures, giving traders exposure to volatility without having to navigate the complexities of the futures market directly.

But here’s something to ponder over – what happens when the longer-dated VIX futures are more expensive than the shorter-dated ones? Keep this question in mind as we’ll delve into it in the next section.

The Contango Effect of VXX

The phenomenon we mentioned earlier is known as ‘contango.’

What does contango mean for traders who buy VXX? And why does it make buying VXX less than ideal?

Contango occurs when the futures prices are higher than the spot price. In the case of VIX futures, it means the longer-dated VIX futures are more expensive than the shorter-dated ones.

Because VXX holds and rebalances a mix of these futures contracts daily, when the market is in contango, it’s forced to sell the cheaper near-term contracts to buy the pricier next-term contracts. Imagine consistently selling low and buying high every day.

Sounds like a tough way to make a profit, right? This persistent roll-over cost can cause a significant drag on VXX’s performance over time, making it a less desirable long-term hold. Therefore, while VXX can be a handy tool for betting on short-term market volatilities, its susceptibility to the contango effect can make it a tricky play for long-term investments.

So, does it mean you should steer clear of VXX completely? Not necessarily – but we’ll discuss that in the next section!

Shorting VXX for Recurring Profit

Here’s where it gets interesting. Although the contango effect makes VXX a questionable choice for long-term investments, it presents a golden opportunity for traders to profit by shorting VXX.

Let’s take a hypothetical scenario to understand how shorting VXX could be profitable, especially in a contango market condition:

  1. Start of the Trade: Let’s say Mike shorts VXX when it’s at $50, believing the market is in contango and VXX will decline over time due to roll-over costs. Essentially, Mike borrows shares of VXX and immediately sells them in the open market at the current price.
  2. Market in Contango: As predicted, the market stays in Contango for the next several weeks. The VIX futures that VXX holds are continually bought at higher prices and sold at lower ones, causing a decline in VXX’s value.
  3. VXX Price Drops: After a few months, let’s say VXX’s price has dropped to $45 due to the contango effect.
  4. Closing the Short Position: Mike decides to close his short position. To do that, he buys back the VXX shares at the lower price of $40 in the open market and returns them to the lender.
  5. Profit from the Trade: The difference between the price at which Joe initially sold the borrowed shares ($50) and the price he later bought them back at ($45) is his profit. In this case, Joe made a profit of $5 per share by shorting VXX.

While this might sound like a dream come true, remember, this is a simplified example and actual market conditions can be far more volatile and unpredictable.

Shorting VXX could be very risky thus trading VXX options would be a more sensible approach for traders who believe in the market’s volatility to decrease over time.

High Negative Correlation between VXX and S&P 500

One way to predict VXX is to monitor the S&P 500.

VXX tracks the performance of the S&P 500 VIX Short-Term Futures Index, which essentially measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices.

When the market is calm and stable, the S&P 500 typically goes up while the VIX goes down and hence VXX also goes down.

However, in times of market fear and uncertainty, the S&P 500 usually drops, while the VIX and VXX rise.

This inverse relationship is what creates a strong negative correlation between the S&P 500 and VXX. It’s like a see-saw; when one side goes up, the other must go down.

What Options Strategy to Use for Trading VXX Options?

When it comes to trading VXX options, a variety of strategies can be employed based on your risk appetite, market outlook, and investment goals.

Here are a few examples to consider:

  1. Buy Calls: Betting on an increase in volatility, you could buy VXX call options. This strategy allows you to profit from surges in VXX without having to own the underlying asset.
  2. Buy Puts: If you anticipate a decrease in volatility, buying VXX put options can be a smart move. It gives you the right to sell VXX at a predetermined price, allowing you to profit if VXX declines.
  3. Protective Puts: This strategy involves buying VXX shares and simultaneously purchasing put options as an insurance policy. It limits your downside risk if volatility suddenly spikes.
  4. Iron Condor: For those anticipating a range-bound VXX, an iron condor strategy could be ideal. It involves selling a call spread and a put spread on VXX, limiting your risk and profiting from low volatility.

Please note these are provided as examples and do not necessarily represent how I trade VIX and VXX options.

Compare VIX and VXX Options

  VIX Options VXX Options
Name CBOE VIX Options iPath Series B S&P 500 VIX Short-Term Futures ETN Options
Underlying Index CBOE Volatility Index (VIX) S&P 500 VIX Short-Term Futures Index
Structure Options on VIX futures Options on VXX ETN
Tradeable Underlying No Yes
Options Style European American
Options Settlement Type Cash Shares of underlying ETN
Time Decay Effect Yes, due to options time decay Yes, due to options time decay and rolling futures contracts
Leverage Yes, inherent in options trading Yes, inherent in options trading
Liquidity High Moderate to high
Contango Effect Relatively little to no direct effect Significant effect; contango can cause loss of value over time

How to Trade VXX with Options?

VXX can be bought and sold just like a stock. It also has options that we could trade. I typically do not trade VXX in anticipation of its price going up (only once in a while). Some people use VXX to hedge a market downturn, but this must be done with very accurate timing. As mentioned earlier, holding on to VXX is a guaranteed way to lose money due to the contango effect.

Below is a list of ways to trade VXX options to profit from its price decline. Obviously, there are pros and cons for each, so let me explain and add a bit of my experience for the ones that I have traded with VXX options.

  • Buy Put Options
  • Buy Put Spread
  • Sell Naked Call Options
  • Sell Call Spread
  • Sell Call Back Ratio Spread
  • Buy Call or Put Calendar / Diagonal Spread
  • Buy Call or Put Butterfly / Broken Butterfly Spread

1)    Buy Put Options

My Personal Take on Buying Put Options

This is as simple as it gets. Buy put options to profit when the VXX price drops below the strike price.

However, Implied Volatility (IV) is typically very high when VXX price spikes so you would be buying additional premium and loss that when IV drops, which happens as VXX price drops.

buy put options vxx

Put Options

Pros of Trading Put Options to Profit from VXX Price Decline

  • Limited risk: The maximum risk when buying put options is limited to the premium paid for the options contract. This means that even if the VXX price does not decline as expected, your potential loss is limited to the initial investment.
  • Leveraged returns: Options contracts provide leverage, allowing you to control a larger amount of VXX for a fraction of the cost. This amplifies the potential returns if VXX declines as anticipated.

Cons of Trading Put Options to Profit from VXX Price Decline

  • Time sensitivity: The VXX price needs to decline sufficiently and within a specific timeframe for the put options to be profitable. If the decline does not occur within the expected timeframe, the options may lose value or become worthless, resulting in a loss. There are other options strategies that could profit from time decay even if VXX price doesn’t move much.
  • Higher cost: Compared to other options trading strategies, buying put options involves the upfront payment of the premium. The cost of purchasing options can be higher compared to alternative strategies, such as selling options or employing more complex strategies, which will be discussed later.
  • Volatility impact: When VXX spikes, typically IV is very high. Changes in IV can affect the value of options. The decline in the VXX price is accompanied by a decrease in volatility generally speaking, so the value of the put options may not increase as expected, potentially reducing profitability.

2)    Buy Put Spread

My Personal Take on Buying Put Spread

While this strategy will help cancel most of the IV premium issues that we saw with buying Put options, one of the reasons I don’t trade this strategy very often with VXX is that the profit curve is not as sensitive compared to some other strategies.

buy put spread vxx

Put Spread

Pros of Trading Put Spread to Profit from VXX Price Decline

  • Limited risk: Buying a put spread limits your potential loss to the premium paid for the spread. This defined risk can provide a level of protection compared to simply buying a single put option.
  • Lower cost: Buying a put spread involves simultaneously buying and selling put options with different strike prices. This helps offset the cost of the trade by collecting a premium from the sale of the higher strike put option.
  • Lower sensitivity to volatility changes: Compared to a single long put option, a put spread is less sensitive to changes in implied volatility. This can be advantageous if volatility levels fluctuate during the trade.

Cons of Trading Put Spread to Profit from VXX Price Decline

  • Limited profit potential: Buying a put spread limits your potential profit compared to owning a single put option. The profit potential is capped at the difference between the strike prices minus the net premium paid. This means that if the stock price declines significantly beyond the lower strike price, your potential profits may be limited.
  • Breakeven point: The breakeven point for a put spread is higher compared to owning a single put option. To start profiting from the trade, the underlying asset price needs to decline beyond the breakeven point, which is the lower strike price minus the net premium paid. This may require a more substantial move in the stock price compared to a single-put option.
  • Higher transaction costs: Buying a put spread involves both buying and selling options contracts. This can lead to higher transaction costs compared to purchasing a single-put option. It’s essential to consider the impact of commissions and fees on the overall profitability of the trade.

3)    Sell Naked Call Options

My Personal Take on Selling naked call options

I used to love this strategy because I could open very small positions with great profit potential. However, after getting assigned several times way before expiration (even though it was still a few weeks until the expiration because VXX was deep in the Call strike price, the call options holder decided to execute), and got margin calls when VXX price spiked up against my positions, I vowed not to trade naked call options again. EVER!

sell naked call options vxx

Naked Call

Pros of Trading Naked Call Options

  • Income generation: Selling naked call options allows you to collect premium income upfront. As the seller, you receive the premium from the buyer of the call option. If the option expires out of the money (OTM) and is not exercised, you keep the premium as profit.
  • Time decay advantage: As time passes, the value of options tends to decrease due to time decay. When you sell naked call options, you benefit from time decay working in your favor. If the underlying stock price remains below the strike price of the call option, the option may expire worthless, allowing you to retain the premium received.
  • Volatility impact: When VXX spikes, typically IV is very high. Selling Call options also means selling volatility premium, which typically collapses as VXX drops in price.

Cons of Trading Naked Call Options

  • Unlimited risk: Selling naked call options exposes you to unlimited risk. If the VXX price rises significantly above the strike price of the call option, you may incur substantial losses. The potential loss is theoretically unlimited since the VXX price can continue to rise indefinitely.
  • Margin requirements: Selling naked call options may require you to maintain a margin account with your broker. Depending on the specific requirements and regulations, you may need to maintain a certain level of margin or collateral to cover potential losses. This can tie up capital and increase leverage, which may not be suitable for all traders.
  • Obligation for potential assignment: When you sell naked call options, there is a possibility of being assigned if the buyer decides to exercise the options. This means you would be shorting VXX after getting assigned and could cause a margin call if you have a small account. It’s important to be prepared for potential assignments and have sufficient capital or a plan to handle the obligation.

4)    Sell Call Spread

My Personal Take on Selling Naked Call Spread

While this is much safer than selling naked call options, I don’t like the possibility of getting assigned on my short call option. It’s protected by the long call option, but I just don’t like the feeling.  I could achieve the same profit profile by buying Put Spread instead, which is much safer in my opinion.

sell call spread vxx

Call Spread

Pros of Trading Call Spread

  • Limited risk: Selling a call spread involves simultaneously selling a call option with a lower strike price and buying a call option with a higher strike price. This strategy limits your risk to the difference between the two strike prices minus the net premium received. The defined risk allows for better risk management compared to selling a naked call option.
  • Income generation: By selling a call spread, you receive a premium upfront from the buyer of the options. This premium is yours to keep as profit if the options expire out of the money (OTM) and are not exercised. The income generated from selling the spread can be used to offset other trading costs or as additional income.
  • Time decay advantage: As time passes, the value of options tends to decrease due to time decay. When you sell a call spread, you benefit from time decay working in your favor. If the underlying stock price remains below the lower strike price, both options can expire worthless, allowing you to keep the full premium received.

Cons of Trading Call Spread

  • Limited profit potential: Selling a call spread comes with a limited profit potential. The maximum profit occurs when the underlying stock price remains below the lower strike price at expiration. As the stock price approaches or goes above the higher strike price, the potential profit decreases.
  • Potential for assignment: Although less likely compared to selling naked call options, there is still a possibility of being assigned if the buyer decides to exercise the options. If the short-call option is assigned, you would be obligated to sell the underlying stock at the strike price, even if it is lower than the current market price. It’s important to be prepared for potential assignments and have sufficient capital or a plan to handle the obligation.
  • Limited upside potential: When you sell a call spread, you cap your potential profit and give up the opportunity to fully participate in any substantial upside movement of the underlying stock. If the stock price rises significantly above the higher strike price, your potential profit is limited to the premium received.

5)    Sell Call Back Ratio

My Personal Take on Selling Back Ratio

The most basic form of this is a 2:1 ratio of selling two naked call options and buying one call option.  It can be modified to a 3:2 ratio, 5:3 ratio, etc. Compared to just selling naked call options, it adds protection by buying call options. As a result, the margin requirement is a little lower compared to just selling naked call options, and depending on the strike prices, the velocity of loss could be slowed up until a chosen price point. However, it is still an unlimited loss strategy.

sell call back ratio vxx

Call Back Ratio

Pros of Trading Call Back Ratio

  • Transaction Cost: You can potentially achieve the same profit target by trading with a smaller position size compared to some of the other strategies. However, that does not mean you are risking less because this strategy is practically the same as selling naked call options.

Cons of Trading Call Back Ratio

  • Unlimited risk on the upside: Like selling Naked call options, there is an unlimited risk if VXX price goes up.
  • Margin requirements: Like Selling naked call options, depending on the specific requirements and regulations, you may need to maintain a certain level of margin or collateral to cover potential losses. This can tie up capital and increase leverage, which may not be suitable for all investors.

6)    Buy Call Diagonal Spread

My Personal Take on Buying Call Diagonal Spread

This could be a strategy to profit from underlying asset price drop but ideally, the position should be opened when implied volatility is relatively low because IV of the back month options tends to be higher than the front month (Higher Vega). So for example, trading this strategy with SPX or NDX could be profitable because when their price drops, IV tends to increase.

However, opening this spread when the VXX price spikes up is not ideal because the IV of VXX options tends to spike when the VXX price spikes so you are essentially buying the high IV, then losing that IV value as the VXX price drops. I am listing this just as one of the trading strategies to consider but do not recommend it personally.

buy call diagonal spread vxx

Call Diagonal Spread

7)    Buy Call or Put Butterfly Spread / Broken Butterfly

My Personal Take on Buying Call or Put Butterfly Spread / Broken Butterfly

For a butterfly spread, while it requires very little capital to open with huge upside potential, you would need to know exactly where the price will end up at expiration. The real profit will not kick in until the week of expiration so almost no profit can be made when the position is closed earlier than the expiration date.

A broken butterfly spread, on the other hand, can be structured to profit even if the price at expiration does not fall exactly where it was predicted. It is also a limited loss strategy so unlike naked options strategies, this is a much safer way to speculate.

The downside is a much larger transaction cost because we are essentially opening multiple legs of Call spreads or Put spreads to create the butterfly structure.

I personally prefer to trade Put Broken Butterfly rather than Call Broken Butterfly because of the potential for assignment if the short-call leg happens to be in the money.

buy butterfly vxx

Butterfly Spread

buy broken butterfly vxx

Broken Butterfly Spread

Pros of Trading Call or Put Butterfly Spread

Limited risk: The risk in a Buy Put Broken Butterfly Spread is limited to the net premium paid for the spread. This predefined risk allows for better risk management and protects against substantial losses in the event of adverse price movements.

Cost-effective strategy: Compared to buying a single put option, the Buy Put Butterfly Spread can be a more cost-effective strategy. It involves purchasing and selling multiple put options with different strike prices, which can help reduce the overall cost of the trade.

Versatility in market scenarios: The Buy Put Broken Butterfly Spread can be a versatile strategy that offers profit potential in different market scenarios. It can be profitable if the stock price remains close to the middle strike price at expiration, providing an opportunity for profit in a range-bound market.

Potential for limited loss or breakeven: Even if the trade does not result in a significant profit, the Buy Put Butterfly Spread has the potential for limited loss or even a breakeven outcome. This can be advantageous compared to other strategies that may incur larger losses in unfavorable market conditions.

Cons of Trading Call or Put Butterfly Spread

Higher transaction costs: Implementing a Put Broken Butterfly Spread involves buying and selling multiple options contracts, which can lead to higher transaction costs compared to simpler options strategies. These costs can eat into potential profits.

Narrow profit zone: The profit zone for a Call / Put Butterfly Spread is relatively narrow. The stock price needs to be within a specific range around the middle strike price at expiration for the strategy to be profitable. If the stock price moves significantly beyond this range, the profitability of the trade may be limited. However, this does not always apply to Broken Butterfly spreads.

Sensitivity to volatility changes: Changes in IV can affect the value of options in a Call or Put Butterfly Spread. If there is a significant change in volatility levels, it can impact the profitability of the strategy, notably if the volatility decreases. While this is a significant downside, it is not a large enough deal in my opinion based on the way I trade VXX options.

4 Reasons Why Technical Analysis Doesn’t Work For Most People

Reason 1: Technical Analysis cannot predict the future

People who say Technical Analysis does not work think TA is a tool to predict the future. I must admit I was one of them.

Obviously, no one can predict the future.

What people misunderstand is that TA is a tool to provide “actionable points” in the future and not to predict the future. Let me explain by using a TA that I did recently.

The chart below is an SPX daily chart. There is a red “Daily uptrend line” drawn using the daily chart. As you can see the uptrend is not perfect because two bars on July 13th and July 14th went below the trend line.

However, for some mysterious reasons, the market decided to follow the trend again and jumped up on July 15th. So in the end, the uptrend did not break.

For TA naysayers, this is a big no no. The trend was broken. TA is hindsight bias. TA did not work.

TA spx 7.22.2022

Based on my observations, TA tends to work better when there are no major events because the market is primarily driven by people who use TA in the short term (day traders, swing traders). When enough people look at the same thing thinking the same way, the market would move that way. But when additional data (an event) is fed into it, everything could change.

In fact, there are so much data getting fed into the market, and people who use TA to trade are only a portion of it. When it went below the trend line on those couple of days were due to CPI data and bad earning reports. Obviously, those events caused a large market reaction.

If one did a TA analysis on those couple of days at that time, one would say the trend was broken due to the events at that point in time. Then for some miracle reasons, the market decided to continue the trend. Sometimes, looking at a shorter timeframe could answer that question but again, a lot of times the market just does what it wants.

What’s important is what actions were taken based on what TA was telling us when the trend was broken and when the market went back to the trend. Not how accurate TA was or is.

So what does that mean? It means you could scale back your positions or adjust the portfolio based on that market-generated information on those days when the trend was broken. Then when the market went back to follow the trend again, adjust the positions again based on that new market-generated information.

Reason 2: Technical Analysis is too complicated

There are so many technical studies and indicators available for Technical Analysis. For example, the Thinkorswim platform offers more than 400 technical studies (image below).

TOS number of studies available

One of the most commonly misunderstood ideas for beginners that I noticed is that, when it comes to tools used for TA, one has to use as many of them as possible to get the most accurate result.

This is obviously not true.

It does not matter how many studies or indicators you use, the market just does what it does, it will disregard the trendlines or support/resistance lines.

After testing out a lot of indicators and different technical analysis methods, I came to realize keeping it simple is the best. At the end of the day, these tools all tell the same thing but just in different ways.

It is true that some tell it better than others, but the message is the same at the end of the day.

I now keep it very simple by primarily only using trendlines, Simple Moving Average, and support and resistance lines.

Reason 3: Technical Analysis doesn’t work on the stocks I picked

There are a couple of explanations for this.

It’s all about the market! Not individual stocks.

Most beginners don’t understand that they need to monitor the market indices rather than just trade and focus on individual stocks. If it’s a bull market, the stock you picked will go up and if it’s a bear market, the stock will go down. No matter how good or bad technically or fundamentally the stock is, it will be moved by the overall market conditions.

Thinly traded stocks are the worst

If a stock is thinly traded, especially stocks that are not listed on one of the major indices, technical analysis doesn’t work very well. The stock price is moved by people (or machines controlled by people) who trade it. So if not too many people are trading it, there won’t be any obvious moves or patterns created by the trading activities in the first place.

Reason 4: Using the wrong timeframe with the wrong studies/indicators

Some Technical analysis studies and indicators are better for shorter timeframes than longer ones and vice versa.

For example, I personally don’t do day trade or short-term swing trades so I don’t use an indicator such as VWAP that considers the volume of the stock traded for the day.

I don’t draw trendlines or support/resistance lines on the 1-minute or 5 minutes chart regularly because I don’t trade in those timeframes.

It’s important to know what your trading style is. Once you figure it out, everything else will just fall into place.

Any Other Reasons?

What do you think? Are there other reasons that I am missing? Let me know in the comment below.

How To Ready The VIX? – Weekend Effect And Monday Effect

Do you want to read the VIX? A quick answer is to watch the S&P 500 movement and its options. They have a strong inverse correlation.

However, VIX also exhibits an interesting weekly pattern.

Have you ever noticed that VIX seems to go lower on Fridays (VIX Weekend effect) and jump back higher on Mondays (VIX Monday effect)?

This is not really something new, especially for traders like us who trade VIX options. This has been discussed by other VIX-related blogs such as this one and this one.

The concept makes sense because VIX is calculated with SPX options so the Weekend effect and the Monday effect likely are due to a combination of the following reasons.

  • The market closes down SPX options positions before the weekend (avoid time decay, avoid unexpected news, etc.)
  • The market opens new SPX positions on Monday (to continue the position that was taken off on Friday)
  • Many Weekly and Monthly options expiry occur on Friday

While there are some in-depth analyses or explanations on this topic out there, I was looking for a simpler data visualization to see the relationship between VIX and SPX.

As mentioned earlier, it is known that VIX and SPX have an inverse relationship, but I wanted to see how that plays out with the Weekend effect and the Monday effect.

Since I couldn’t find one, I decided to do a quick analysis myself.

VIX & SPX Data Analysis

Looking at only VIX data, it shows clearly that Monday does indeed have a higher percentage of VIX going up, while Friday has a higher percentage of VIX going down (yellow cells) when compared to the prior day.

Date range: 10 years (8/6/2012 – 8/5/2022)

VIX up and down data

When aligning VIX with SPX data, something really interesting pops up.

Since VIX and SPX have an inverse relationship, (VIX goes up when SPX goes down and vice versa), it makes sense that the majority of the data would fall in the cells of VIX and SPX are “Up & Down” or “Down & Up”.

On the other hand, it’s rarer to see both VIX and SPX are “Up & Up” or “Down & Down” in general.

So it is interesting to see Monday has more “Up & Up” while Friday has more “Down & Down” days (yellow cells) indicating there are Monday and Friday effects.

VIX and SPX going up and down

When expressing these numbers in percentages, we can clearly see the presence of the Weekend effect and the Monday effect on these “Up & Up” or “Down & Down” days.

Vix and SPX “Up & Up” Monday is 16%, and “Down & Down” Friday is 15%, which are both higher than the Total average of 10%.

VIX SPX up and down in percentage

In other words, VIX on Mondays and Fridays tend to move up and down respectively disregarding which way the SPX moves.


Based on this data, if you are shorting VIX options for income generation, it is better to close it on Fridays and open it on Mondays.

If you are opening VIX options for hedging, it’s better to open it on Fridays when VIX is lower and close it on Mondays when VIX tends to be higher.

Of course, the above statements assume the market condition is aligned with those days (Monday or Friday) at the time to execute such trades.

Worried About A Market Crash? Check VIX, VIX9D, VIX3M, And VIX6M!

I bet you probably thought this was going to be another “buy VIX future or options to prepare for a market crash” article.

Sorry to disappoint you but I am not going to recommend that in this article. What I will discuss though, is provide some examples of how using VIX, VIX9D, VIX3M, and VIX6M could help you foresee a market crash.

What are VIX, VIX9D, VIX3M, and VIX6M?

VIX as you might know is the 30-day forward projection of volatility by calculating the changes in SPX index options.

The other three as their name suggests, VIX9D is the 9-day forward projection, VIX3M is the 3-month forward projection, and VIX6M is the 6-month forward projection.

The reason to monitor these other VIX-related indices in addition to VIX itself is to gain insights into what the market is expecting to happen in those time frames.

A lot of times, VIX would jump substantially but it reverses immediately because the nature of the volatility is not long-lasting. In other words, watching VIX only is very difficult to tell if there are larger concerns that are boiling beneath the surface.

If an event is likely to be long-lasting, that potential volatility will more likely be present in VIX3M and VIX6M.

Why Use Ratio and Percentile Rank (PR) to Monitor these VIX Indices?

Why use ratio (relative strength)?

To make the changes that are taking place in these indices really stand out, it is better to monitor the ratio between VIX and these VIX-related indices rather than just the value of these indices themselves.

This idea is not new as there are websites (website 1, website 2) that have already discussed the concept of using the VIX/VIX3M relative strength chart.

Essentially, the idea is similar to commonly used valuation tools such as Price to Earnings ratio.

One company might have a Price of 100 and Earnings of 10 (=PE 10), whereas another might have a Price of 50 and Earnings of 5 (=PE 10).

The ratio will essentially allow us to compare them side by side.

Why use Percentile Rank?

Depending on the market conditions, the value of these VIX-related indices varies substantially.

For example, the first 2 months of the year could have a super calm market condition, then the market tanks, then recover significantly by the end of the year (something similar to 2020 when COVID-19 happened).

In such a condition, it would be difficult to tell if the VIX 25 that we see at the end of the year is relatively high or low based on the recent market condition.

In case you are not familiar with VIX, historically speaking, VIX 25 is pretty high.

So to make the comparisons easier, calculating the Percentile Rank using the previous 252 trading days’ data, will allow us to see if the current value that we see is relatively high or low when compared to a one-year data set (252 trading days).

How VIX Indices Could Provide Market Insights?

Example 1: January 2020, COVID-19 early warning #1

Before the large drop that took place in late February 2020 (red arrow in the graph below), there was a small dip that started on January 27 (yellow arrow).

Percentile Rank for VIX/VIX3M (59%) and VIX/VIX6M (61%) were giving early warning signs on January 24th (first red box in the table below).

Both jumped from around PR 30% the day prior (an almost 100% increase), whereas looking at the value of VIX3M (16.07) and VIX 6M (16.78), the increase was not as significant as the Percentile Rank.

This is why combining the ratio of VIX and VIX-related indices plus the Percentage Rank calculation can really make it easier to spot the warning signs.

Takeaway: The Percentile Rank for VIX/VIX3M (59%) and VIX/VIX6M (61%) were giving early warning signs

Example 2: Early February 2020, COVID-19 early warning #2

After the small dip in January 2020, SPX continued to climb and reached an all-time high at the time.

While SPX continued its climb, the Percentile Rank for VIX/VIX3M and VIX/VIX6M stayed at around PR 50% (the small red box on the right in the table below).

It would be very difficult to just look at VIX3M and VIX6M values to see this warning sign (the small red box on the left in the table below).

When looking at these values, one should ask if the market is continuing to climb, yet, why people are hedging and worrying about something in 3 months and 6 months’ time?

Takeaway: While SPX continued its climb, the Percentile Rank for VIX/VIX3M and VIX/VIX6M stayed at around PR 50%. Something big might be coming.

VIX related indicators early 2020

SPX Feb 2020

Example 3: Thanksgiving November 2021, Omicron News

Let’s use the Omicron news that broke out back in November 2021 as an example of how VIX indices were giving some early warning signs.

  1. The news came out on the night of Thanksgiving day (November 25th) and the market tanked the day after (November 26th).
  2. Looking at the PR of VIX/VIX3M, it was already spiking up to PR 50% a few days earlier since November 22nd. (Red box in the 1st image below)
  3. The market would recover but started to go down again on December 16, ultimately reaching the bottom on December 20th. (2nd image below)
  4. While SPX was going down starting on December 16th, only the PR of VIX9D/VIX increased significantly. The other three, especially VIX/VVIX did not move much even though SPX dropped significantly on December 20th.

As you can see, using these PR values could be very useful in understanding what the market is thinking. The market, after all, is consist of people.

Takeaway: The Percentile Rank of VIX/VIX3M was already spiking up to PR 50% a few days earlier from PR 28%. 

vix value in end of nov 2021

SPX chart in nov 2021

Example 4: January 2022, Inflation Fear

The tone of the stock market changed substantially in early January 2022. While SPX was still hovering close to the all-time high of 4800 level (red arrow in the SPX graph below), the VIX-related indices were showing some early warning signs (the small red box in the table below).

Both VIX/VIX3M and VIX/VIX6M jumped close to PR 50%, indicating people are hedging and worried about something long-term.

Takeaway: Both VIX/VIX3M and VIX/VIX6M jumped close to PR 50% from PR 12% and PR 11% respectively the day before. 

Example 5: January 2022, Short-Lived Counter Rally

A counter rally that happened at the end of January never took the market back to the all-time high (the yellow arrow and the yellow box in the graph below).

Looking at the PR of VIX / VIX-related indices, all remained above PR 80% despite the fact that SPX rallied close to 400 pints in 4 days.

It’s also interesting to see VIX itself dropped from 27.66 to around 22 in 4 days, which might have given a wrong indication of this market rally might be sustainable (the small yellow box in the table below).

Takeaway: The Percentile Rank of VIX / VIX-related indices, all remained above PR 80% despite the fact that SPX rallied close to 400 pints in 4 days.

VIX indicators early 2022

SPX early 2022


I have been trading volatility-related products (VXX, UVXY, etc) for a while and was familiar with some of the VIX-related indices. However, I have never really incorporated them into my day-to-day trades until I started calculating Percentile Rank and realized how powerful this tool could be.

By coupling this tool with simple technical analysis, I could now tell which way the market might move in the short term with higher accuracy, which allows me to set up profitable trades.

I have previously relied on trading strategies that incorporate probability such as selling Iron Condor, Selling Strangle, the Wheel Strategy, etc. These kinds of trade strategies tend to work well only in certain market conditions and not others. While just keep trading in all market conditions the same way and the probability might work itself out, it’s really hard to continue the same trade strategy when it clearly is not working for a prolonged time.

I now understand that the key to becoming successful in trading is not finding the right trading strategy, but rather acquiring the ability to read the market.

My plan is to share more of what I have learned in the coming months so if you are interested, make sure to subscribe to the email newsletter.

Stock Market Sentiment Analysis – Why Care About It?

It’s that time of the year again when stocks typically underperform. The end of Summer and the beginning of Fall. Don’t ask me why but that’s what the data tells us (see graphs below).

There are multiple theories as to why this happens every year and as a human, we like to attach a simple reason to the outcome that we see, even though a lot of time the actual reasons are much more complicated than that.



Studying market sentiment is like reading someone’s face and trying to understand what they are thinking and feeling. It’s not always 100% accurate, but at least we could get a sense of whether the person is happy or sad based on the facial expression, then act accordingly.

I started looking into Market Sentiment Analysis because I knew the winning streak of my Wheel Strategy tradings would not last and I needed more tools to guide me on how aggressively I should (or should not) participate in the market.

One of the places I looked for obviously was the typical Chart Technical Analysis as it could tell us what people are thinking and doing. For example, when a clear divergence is observed between the price movement and a technical indicator (in this case Money Flow Index), it tells us that even though the price is going down overall, there is a positive (buying) money flow for whatever reason.

ptra money flow divergence

While this is very useful and can be applied to Stock Indices to get a sense of what’s going on in a broader market, the amount of data is somewhat limited as we are primarily looking at only the price and volume. It is good for making short term trading decisions but doesn’t give me a broader perspective of what’s going on in the market and answer some of my questions such as

  • How confident people are about the market?
  • Is the market environment changing?
  • What is the current market environment compared to previously? Say right before a large recession drop?
  • Is there a way to predict the next market downturn?

What is Stock Market Sentiment Analysis?

Stock market sentiment analysis is the process of analyzing and interpreting investors’ emotions, opinions, and attitudes toward a particular stock or the overall market. It involves using various techniques and data sources to determine whether investors are bullish (optimistic) or bearish (pessimistic) about a stock’s future performance.

Technical analysis focuses on studying past price movements and patterns to predict future price changes. It relies on charts, indicators, and other technical tools to identify trends and make trading decisions.

On the other hand, stock market sentiment analysis takes into account the opinions and emotions of investors towards a particular stock or market. It considers factors such as news headlines, social media activity, and surveys to gauge investor sentiment.

Introducing Sentimentrader.com

I came across Sentimentrader.com while watching a YouTube video dissecting an SPX chart. The video showed a graph of the % of stocks that are above 50 days Moving Average (MA) similar to the one shown below.

The message of the video was that there is a clear divergence between “SPX price” and “Stocks > 50% MA”. This is not a definitive sign of a market collapse, but an indication that a lot of the stocks are now moving sideways or start to decline.

The data below is only up to June 4th, 2021 and interestingly enough, SPX has since climbed even higher with only two minor dips in June and July.

However, my Wheel Strategy profitability has declined substantially in the last couple of months, which tells me that the market condition is definitely shifting in some ways. To find out more, I decided to signup and dig a little deeper to see what the site has to offer.

As it turned out, there are several indicators that could be pretty useful.

Industry Breadth (% _ 50 Day Avg)

1) Smart Money / Dumb Money Confidence

These data show the correlation between Smart Money (Blue) and Dumb Money (Brown) in regards to the market.

When the Dumb Money Confidence is dominating (the red boxes), the market seems to continue on an uptrend overall with some minor sideways move. This could be the time to go big, deploy more capital without worrying about hedging.

When the Dumb Money line is crossing over with Smart Money, it’s time to be cautious and it could lead to a large decline (red arrows).

Obviously, this is only one of the many data points we need to look at and decide how to trade but this could also be useful at confirming what is going in the market.

For example, both Dumb and Smart Money lines have crossed each other a couple of times in the last couple of months, which indicates it’s time to be cautious. My declined trading profit in the last couple of months indicates that I am getting assigned more with the Wheel Strategy, in other words, more stocks are declining in price. The Wheel Strategy is a positive Beta strategy so clearly, the market condition is changing despite the fact that SPX continues to climb higher.

Smart Dumb Money Confidence

2) ROBO Put/Call Ratio

ROBO stands for Retail-Only, Buy-to-Open. It looks at transactions that are buy-to-open only for trades that are under 10 contracts of Put and Call options.

In theory, this ratio focuses on small traders to get a better feel for what they are trying to do. Put is generally used to speculate price decline for small traders so the Put/Call ratio generally goes up when the market is in decline.

The ROBO Put/Call ratio is right now below 0.5 and the last time it was hovering around this level, was between 2004 – 2008 before the financial crisis (red boxes).

This doesn’t mean we are going to have another market decline like in 2008 but, it certainly shows how confident the small traders are with the current market.

Robo Put Call Ratio

3) NYSE Net High-Low %

Similar to the graph of the % of stocks that are above 50 days Moving Average (MA) described earlier, this data shows the net percentage of NYSE securities trading at a 52-week high minus the percentage trading at a 52-week low (blue line).

When there is a divergence between the SPX price and the NYSE Net High-Low ratio (red arrows), a market dip occurred sometime after it (yellow arrows). Obviously, there have been divergences that did not follow with a market dip, but it certainly is one of the signs to watch out for.

I overlayed the Smart Money / Dumb Money Confidence Spread (brown line) and there is a clear correlation that can be seen.

NYSE Net High-Low %

4) Sector and Country Sentiment Overview

China recently started regulating its tech industry BIG TIME. As a result, many of the Chinese stocks started to decline, including non-tech-related ones. Probably not a good time to open any Chinese stock-related positions, or it could also be a great opportunity if you are a contrarian.

China Optix

The Delta variant COVID-19 is causing yet another surge in infection cases and after moving sideways in May and June, the Health Care sector has started moving up again.

XLV Optix

It’s not always as clear-cut or as easy to explain why the changes in sentiment for certain sectors or countries, but keeping an eye on these data could provide an early warning sign or potential trade opportunities.

What is the Takeaway?

When I just started trading stocks and options, I always wondered how experienced stock/options traders could tell when to buy and sell, and stay calm even when the market was dropping like a sharp knife.

As I gained more experience and studied more, I came to learn that there are tools that could help us understand what is going on in the market and make educated decisions.

One of the challenges that we have as a trader is to truly understand how each of the trading strategies would perform under different market conditions.

For example, the Wheel Strategy is a Beta positive strategy so it is more profitable when the market goes up, and less when the market goes down.

I managed to get a 10% one-month return several times earlier this year and looking at the sentiment data that we discussed earlier, it becomes clear that there was a perfect uptrend market condition for this to happen. In other words, this would not have happened in other market conditions. This means I need to act more cautiously and be more defensive during non-uptrend market conditions.

By learning how to read the market sentiment, I am now able to not panic when the Wheel Strategy is not performing, knowing that the underperformance is because of the changes in market condition and not because of my trading errors.

My technical and fundamental analysis could still be correct, but if the market is in a phase that nobody cares about the usual technical or fundamental data, then of course no matter how correct I am, I would not be able to get the results that I hoped for.

Under such poor market conditions, the best I could do is to control what I can (be more conservative with position sizing and risk-taking) and hope for the best.

What To Do When Stock Market Goes Down?

After the recent minor market corrections largely due to inflation fear, I have seen so many people discussing and asking what they should do with their losing positions on various online forums. I feel for them because I used to be one of them.

This doesn’t mean I don’t hesitate any more and just close my positions whenever they reached a pre-determined exit point. I still do hesitate, but now I have various reference points to help my decision-making easier.

Stock market corrections happen more often than we think. A quick Google search shows that a market correction that is at least a 10% decline happens every 1.87 years and smaller ones occur much more often. This is why most people just want to buy and hold because it is just too much to stomach such market ups and downs this often.


stock market correction how often

For options traders like us, we don’t have the luxury of closing our eyes, look away and just stay put for the long term. This is why the tools discussed in the following could give us reference points as to how much further the market is likely to fall.

What To do When Stock Market Goes Down?

There are four tools that I use to calm myself down and look for signs of the market hitting the bottom.

Video Demonstrating These Four Tools

Tool #1 S&P 500 Chart

Nothing special about this one. Just a simple chart reading to check on the trend, where the support/resistance lines are, and any short-term chart pattern that could give some indications on how much further it is likely to fall.

Tool #2 VIX Chart

VIX is derived from S&P 500 index options and it provides 30 days forward volatility projection of the market. VIX9D looks at 9 days volatility projection and VIX3M looks at 3 months volatility projection.

VIX is generally negatively correlated to S&P 500 so by observing the IV & HV of the VIX and ratios between VIX and these volatility indexes, we could get a sense of how long the storm is going to last and when it is likely to turn around.

Another reason that I observe VIX closely is that I trade VIX-derived ENPs such as VXX and UVXY.

Link to download the TOS Chart File >>

VIX chart

Tool #3 VIX, VIX9D, VIX3M, & VVIX Chart

By doing a simple subtraction between VIX with VIX9D, VIX3M, and VVIX, we could get a sense of how bad the volatility spike is. By comparing the current spike against historical spikes, we could get a sense of the velocity of the spike to gauge if the current market downturn is likely going to be a large one, or just a “blip”.

Link to download the TOS Grid File >>


Tool #4 $VOLD, $ADD, $TICK

Market internals gives us insights into the volume and price movement of stocks that are listed on NYSE.

$VOLD: The sum of buying vs selling volume. If the overall volume is green, it indicates there is more volume for buying stocks rather than selling and vice versa.

$ADD: The number of stocks that had higher or lower prices compared to the prior market day.

$TICK: The sum of the number of stocks rising vs the number of stocks falling.

Link to download the TOS Grid File >>


Any Thoughts or Suggestions?

Obviously, it is not possible for us to predict the future but using these four tools could give us a “sense” of which way the market is going to move next. We could scale back our positions if the tools indicate that the market downturn is likely to be a large prolonged one, or jump back in if the tools are telling us otherwise.

Do you have a tool that you use to monitor the market or to help you calm down during a market crash? I would like to hear them. Please share them in the comment.

How To Find The Best Stocks For The Wheel Strategy With Volatility In Mind?

Are you a trader looking for a strategy that can provide recurring income? Then the options wheel strategy might be just what you need. This popular trading technique involves using option contracts to generate consistent profits from underlying stocks.

Understanding the Wheel Strategy

  • Step 1: Sell a Put Option – The first step in the wheel strategy is selling a put option on a stock that you are interested in purchasing at a lower price.
  • Step 2: Receive Premium – By selling the put option, you receive a premium from the buyer. This premium acts as an income for you, regardless of whether the option is exercised or not.
  • Step 3: Await Assignment – If the stock price drops below the strike price of your put option, you may be assigned to buy the stock at that lower price. This is where the wheel strategy gets its name from, as it “wheels” around in a cycle.
  • Step 4: Sell Covered Calls – If you are assigned the stock, you can then sell covered call options on it to generate additional income.
  • Step 5: Repeat the Cycle – If the stock is not assigned, you can continue repeating this cycle of selling put options and covered calls to earn recurring income.

Let’s visualize this Wheel Strategy with an example

  • Step 1: You sell a put option with a strike price of $48 and receive a premium of $2 per share.
  • Step 2: You pocket the premium which acts as your income – that’s $200 (since one option contract represents 100 shares).
  • Step 3: The stock price dips to $47 at expiration. You are now obligated to buy 100 shares of Company X at your strike price of $48, even though it’s trading at $47.

But don’t worry – remember that $2 per share premium you collected? That effectively reduces your cost basis to $46, so you’re still in a profitable position.

  • Step 4: Now that you own the shares, you decide to sell a covered call with a strike price of $52, receiving another premium, say $1.50 per share.
  • Step 5: If the stock price rallies past your strike price, the shares will be called away. But, you’ve made a profit from the $4 increase per share, plus the premiums collected from the put and call options. If the stock price doesn’t reach $52, you keep the shares, retain the premium, and can sell another covered call.

The Wheel Strategy Outline

Two Ways to Trade the Wheel Strategy

When it comes to trading options, you’ve got two main types of traders utilizing the Wheel Strategy – those eager to own the underlying asset, and those who’d rather not.

Long-term holders

Options traders with long-term time horizons in mind are essentially looking for a price discount on a stock they’ve been eyeing for a while. They view any assignment of shares as a golden opportunity instead of a setback. They sell a Put option with a strike price close to, or even below the current market price, eager to get assigned.

Once they own the stock, they proceed to sell Covered Calls at a higher strike price, securing premium income while they wait for the stock to appreciate. And if their shares get called away? They simply rinse and repeat the process, always content in the knowledge that they are buying stocks they want to own at a discount, and making money while they wait for the right price to sell.

Short-term traders

They’re not looking for ownership; they’re in the game for the premium income. Their focus is on selling Puts on high-quality stocks they wouldn’t mind owning momentarily, but their goal is to avoid assignment by choosing options that are likely to expire worthless. If they do get assigned, they sell Covered Calls at the same price they bought the stock, or slightly higher, aiming for the shares to get called away quickly. Their objective is to keep their capital rotating through new rounds of Put selling, without getting tied down to any particular stock.

How to Find the Best Stocks for the Wheel Strategy

Selecting the best stocks for the Wheel Strategy is an art in itself (almost), depending on whether you’re a long-term holder or a short-term trader.

Long-term holders

For long-term holders, stability is king. You should choose high-quality, fundamentally sound stocks that you wouldn’t mind adding to your portfolio. Here’s where you take the time to evaluate companies’ financials, their growth prospects, and industry trends.

Stocks like Apple (AAPL), Microsoft (MSFT), or Johnson & Johnson (JNJ) could be worthy contenders. You’d be happy to own these stocks at a discount, and while you wait, you’re earning premiums from selling Put and Covered Call options. It’s a win-win, isn’t it?

Short-term traders

Short-term traders would want to aim for stocks with high options liquidity and volatility. The higher the volatility, the higher the premiums you can command. Stocks in fast-paced sectors like technology or biotech, such as Tesla (TSLA) or Moderna (MRNA), might fit this bill.

However, remember that with higher rewards come higher risks. The key is to choose stocks you wouldn’t mind owning temporarily if assigned, and always have an exit strategy in place to manage the risk.

In both scenarios, an essential part of the Wheel Strategy is to sell options on stocks you’re confident about. Why? Because confidence breeds patience, and patience often leads to profit in the world of options trading.

How to Leverage Volatility to Trade the Wheel Strategy?

Now that we have established different mindsets on how to trade the Wheel strategy, let’s dive in deeper with the Short-term trader mindset.

The cool thing about trading options lies in the ability to sell “Volatility” and “Time value”. Combining the two will allow us to generate consistent income disregarding how the underlying stock performs. This is why the emphasis should be held on how Put options are sold in the first place.

Why Focus on Selling Put Options?

This is the part of the Wheel strategy in which we have the most power of control because we get to decide which strike to jump in.

Just like the real estate investment analogy “you make money when you buy a property”, for the Wheel strategy, “you make money when you sell Put”.

We can find underlying stocks with high IV percentile and options with enough time value for us to get a consistent return of 5% to 10% a month. The underlying does not necessarily need to be something you want to own, because the key focus is to NOT GET ASSIGNED and focus on profiting from the premium gained selling Put options.

Most people look for stocks that are trending and most talked about without thinking about IV percentile or time value. What they are doing is essentially the same as buying a promising stock but using the Wheel strategy to get a cheaper entry point, or selling Covered Call until the stock price rises to a point that they can make a huge profit.

As you can see, for people who focus on short-term options trading, selling Covered Call is an afterthought and should not be the main focus of the Wheel strategy. We sell Covered Calls because it will let us keep making money until the stock price recovers to the strike that we got assigned, and allows us to get out breakeven or even profit more when the stock price recovers.

How to Find Stocks with High Implied Volatility (IV) for The Wheel Strategy?

The Concept

1) Find High IV Percentile Underlying Stocks

IV changes all the time based on what is going on in the market. News (good or bad) could change IV. IV also tends to spike before earning calls.

2) Choose the Right Expiration (Time Value)

Some expiration date is better than others. Maybe there is a product launch in 60 days. A phase 2 drug trial completing in 45 days. Check options close to 30 DTE (Day to Expiration) as a benchmark or even weeklies if there is one and calculate the “Monthly ROI”. Calculate the ROI for the shorter DTE Put option vs the longer DTE Put option. Choose the one that would allow you to get a 5% to 10% monthly return.

For example, ROI for a Put option strike price of $5 with 0.5 premium and 30 DTE is approximately 10% ROI per month using Cash Secured Put. Calculation based on 30 days = 1 month.

How to Set Up Options Scanner to Find High IV Underlying?

I use Thinkorswim and it comes with a powerful scanning tool. It allows me to combine multiple criteria for Stock, Option, and various Studies (image below). The setup I am sharing here focuses on low-priced underlying because even though I have a margin account, I still like to focus on what it would cost to hold the entire position. This forces me to not take way too many risks and keeps me grounded, which means I cannot open a large position for high-priced underlying.

In other words, if I want to aim for a 10% return per month, I need to find a lower-priced underlying to get higher returns.

I must point out that carrying out fundamental analysis is recommended to make sure the company isn’t going bankrupt in the near future or the stock isn’t having a reverse split soon. Technical analysis (such as Trade Apgar Score) is also recommended.

scan for wheel strategy

Open interests (Option)

This is essentially equivalent to “volume” for options. If there are more open interests, likely less slippage and easier to buy and sell options.

I set it to 500.

Last (Option Last Traded Price)

This is set to 0.4 because I am looking for a very low strike price option with a high return.

For example, a strike price of $5 with 0.4 is equivalent to putting $500 down to get $40 in return, which is 8%. If you use a margin account, that ROI will go even higher.

As an example, BCLI fits very well with these criteria. Thanks to its really high IV, $500 down to get $195 profit in about 60 days (image below). That is about 19.5% ROI per month.

bcli iV for Dec

Option type (Option)

Set this to Put only, since we are looking for Put options.

Days to Expiration (Option)

Set to 69 days. The longer the DTE, the higher the premium. This is why it’s set to about 2 months since we want to look for opportunities that would provide 10% per month ROI.

Strike (Option strike price)

Below 7. Could be a little higher but if it’s set too high, it will not give enough ROI.

Example: Stike 8 with 0.4 = $800 down to get $40 in return. That is a 5% ROI.

Volume (Stock volume)

Set to 130,000. Underlying with high liquidity (popular stock) also likely means options with high open interests.

Last (Stock price)

At least $1. If you are a risk-taker, stock hovering around $1 tends to have a pretty high IV.

IV Percentile (Study filter)

Between 49-100%.

Stocks for the Wheel Strategy Scan Result

Based on the day this scan took place (10/24/2020), 12 stocks match the criteria.

NOTE: While the setup above does not contain an Implied Volatility (IV) filter, all the stocks found by the scan happened to have an ImpVolatility higher than 1 in this example. In case the scan result contains low IV stocks as well, I would just use the sort function to look for high IV stocks.

Alternatively, you could add an IV filter to the setup above so the result would only contain the IV level you specify.

wheel scan result

Wheel Strategy Returns

The Wheel Strategy’s performance varies based on certain factors:

  • The total premium collection: The total amount of premium collected as options expire worthless plays a significant role.
  • Predicting price fluctuations: The ability to anticipate trends in the underlying price can significantly enhance profitability. The strategy hinges on the adage “buy low and sell high.” Consequently, selling puts when prices are at the lower end of the range and calls when prices are at the high end can dramatically improve returns. Technical analysis could help improve the odds.
  • Timing implied volatility: The timing of selling options is crucial, especially when the implied volatility is high by historical standards. Selling options in such scenarios can yield significant profits.

How To Manage Losing Trades For The Wheel Strategy?

Video Notes

  • Define When You Plan to Get Out
    • Price / Time Frame
      • Technical Analysis / Fundamental Analysis
  • Define what you will do
    • Selling Put
      • Let it get assigned. (Under Valued)
      • Roll it out? (Under Valued)
      • Close the Trade? (IV Play)
    • Selling Covered Call
      • Let it get assigned. (Under Valued)
      • Roll it out? (Under Valued)
      • Close the Trade? (IV Play)
  • Define Market Conditions
    • Closeout everything?
  • Follow Money Management (only risk x% per trade)
    • Look for underlying that you can afford based on your account size
  • Understand Your Win / Loss Ratio
    • Helps you to think logically

My Personal Experience with the Wheel Strategy

When it comes to trading styles and strategies, they can be grouped in so many different ways. Day trading, Swing trading, Momentum trading, Scalping, etc.

To me, all of these types of trading sound hectic. They all require active monitoring of stock price, stock movement, stock news, etc. I have personally tried a few of these and they have never really worked out for me. Don’t get me wrong, they work for some people but are not a good match for my personality.

I started out trading penny stocks and eventually made my way to Indexes and ended up trading options.

Over the years, I have tried many different types of options trading. Some required more work than others. Some have a higher probability of success than others. Some are premium selling and some are premium buying.

As you can see it was not a straight path for me to get to the Wheel strategy. It was a lot of trial and error before I ended up realizing the Wheel strategy is one of the most profitable ways to trade.

5 Reasons Why I Love the Wheel Strategy

1) It doesn’t require me to sit in front of the computer all day long

For some people, trading is just another job. They want to make a lot of money FAST. They looked for ways to trade as much as they could and most of them ended up day trading. I am not looking to have another job. I am looking for ways to NOT have a job. The wheel strategy allows me to do just that. Place the trade and I can walk away for a while.

2) It doesn’t require my attention all the time

Trading the Wheel strategy is relatively simple. Find good stocks that you wouldn’t mind owning for a while and make sure to choose ones that are unlikely to go bankrupt or reverse split in the near future. Once you have done your homework and placed the trade, that’s it. Just monitor the price once in a while until expiration.

3) It doesn’t make me stressed out or drenched in adrenaline all day

Trading should not be exciting. If you are looking for excitement, go do something else. We trade to make money, that’s it. There is no need to get stressed or drenched in adrenaline. Do the homework, place the trade, then close the position when the time comes. That’s it.

When placing trades for the Wheel strategy, I already know when I want to get out. If I get assigned, I would just calmly place a Covered call order and wait for it to get assigned. Yes, the stock price might go beyond the strike price. Yes, the stock might go much lower than I anticipated. I am okay with that because I have already taken those factors into consideration/calculation before I placed the trade.

4) It has a high win rate

The term “win rate” might be different from person to person because some people might count on getting assigned a “loss”. The way I count it is based on PNL. Even if my positions get assigned, as long as I manage to sell the stock above the entry point I consider it a win, because the overall PNL (sold PUT, sold Call) is positive.

Based on my trading record in 2020, the win rate is 89% for the Wheel strategy.

Having said that, it became a bull market in late 2020 after a significant dip at the beginning of the year due to Covid-19 so this was not surprising (the Wheel Strategy typically is highly correlated to how the market performs).

5) It’s easy to understand and manage

Have you ever tried to roll up or down an Iron Condor or a Double Diagonal Calendar spread? So many legs we have to figure out what to do with those. I was into trading those at one point because Iron Condor is ideal for high volatility trades and Calendar spread is ideal for low volatility trades.

Does VIX Always Decline In December?

December typically is when everybody slows down and celebrates holidays. So naturally one would think the market volatility should also decline in December.

I decided to do a quick calculation with VIX historical data (2004 – 2017) to find out if VIX has always gone down in December from November.

While the calculation methods I used were rather simple and may not be scientifically acceptable, there is a higher probability that VIX is lower in December compared to November.

VIX Historical Data 2004 – 2017

Historically, VIX is known to go down in December because the market is not as active so the hedging effect is not as high. To find out how significant the drop is, I did a quick analysis of the historical VIX data shown in the following video.

The reason I am particularly interested in this topic is that I hold open positions for December 2018 expiration options shorting VXX and UVXY, so my hope is for the VIX to go down at least closer to 15 or even lower.

In addition to playing around with the VIX historical data, I have also found this article and this article from Finomgroup.com to be very helpful.

In which they talk about the SKEW index and VVIX along with other facts that indicate VIX will likely go lower in the near future.

According to the CBOE website, the SKEW index definition is as follows. It is also known as a “Black Swan index”.

The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500® returns. Investors now realize that S&P 500 tail risk – the risk of outlier returns two or more standard deviations below the mean – is significantly greater than under a lognormal distribution. The Cboe SKEW Index (“SKEW”) is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the “skew”.

VVIX is essentially the volatility of VIX, so we can use it to gauge which way VIX is likely to move.

In addition to these two, I have also found VIX9D (9-day volatility index) to be a useful indicator. Based on my observation, a lot of time Backwardation happens when VIX9D is higher than VIX.

When plotted VIX, VVIX, and VIX9D together, they do correlate together and the baseline of VVIX could potentially be used as an early indicator of which ways VIX will likely move. In fact, the articles by Finomgroup.com mentioned earlier show that the recent spike in VIX (November) was not the same as the one in October because of the VVIX level.

I have also plotted the chart below showing the level of VVIX (blue) in November is substantially lower comparing the two previous VIX peaks in October.

VIX and VVIX in Oct-Nov 2018


Based on the VIX historical data from 2004 – 2017, there is a higher probability that VIX is lower in December compared to November.

Is Selling VXX PUT Options A Good Strategy?

Short-selling PUT is done when one is expecting the underlying equity would go up. I know open positions in anticipation of VXX going up is not a good strategy in the long run. VIX and VIX ETPs are most of the time in contango, so a question I had was “Would option time decay be able to offset the contango effect?”.

Can Theta Value Off Set Contango Effects for VXX Options?

I decided to do some research and ended up on this blog post at sixfigureinvesting.com which is run by Vance Harwood. I had been following him since I started learning about VIX trading so this was not a surprise.

Below is a question I posted in the comment, and he was kind enough to give me some pointers. Apparently, he developed a solution to predict VIX ETPs’ prices.

Here is a post that he explains the overview of how it’s done – https://sixfigureinvesting.com/2018/08/projecting-svxy-vxx-uvxy-tvix-prices-with-vix-term-structure/ 

Here is a post about the service he is providing – https://sixfigureinvesting.com/2018/08/volatility-etp-projection-from-stable-vix-future-term-structure/ 

Question for Vance Harwood about short sell PUT VXX

Predicting VXX contango effect

Based on Vance’s explanation, the prediction model he came up with is based on the previous 40 trading days data. Using the prediction model, starting on Nov 28th, 2017, VXX at around 32 initially would be at around 28 by Dec 28th, 2017. This is about 12.5% drop in one month.


A similar result can also be obtained by using the contango value found on Vixcentral.

The contango effect was 12.86% on Nov 28, 2017 and VXX was around 32. (NOTE: the contango effect is similar to Vance’s model).

32 x 12.86% = 4.12 (it would drop 4.12 in one month assuming contango effect doesn’t change for the next 30 days).

Subtracting 32 – 4.12 = 27.88. Which means in one month (around Dec 28th, 2017), the VXX price would be around 27.88.

11.28.2017 contango

How to use these data?

Now that we know 27.88 would be the lowest VXX price if the VIX price remains steady in the next 30 days.

In other words, the pure contango effect would bring the price of VXX down to 27.88.

This means if we sell VXX 27 PUT on Nov 28, 2017, in theory, we should be able to profit from time value decay or even get out earlier if there is a spike in VIX.

Assuming VIX would not go down further at expiration or contango would not accelerate more than 12.86%, short selling VXX 27 PUT should be a solid profitable trade.

What do you think? Am I thinking this correctly?