Put Path Part V: How To Ladder Your Trades and Choose Optimal Days To Expiration

So, when do we trade? Well, the rhythm that we typically use is to open trades once per week per underlying. We typically use a 28 DTE (Days To Expiration), and sometimes we may stretch out to 32 if we get a favorable set up. The 28 DTE is important because your Gamma benefits really start to kick in quickly as you move toward 0 DTE for trades out of the money (which all of ours are – don’t worry I will define Gamma and other “Greeks” in some of our advanced posts). This is also known as Theta decay (or time decay), so we use 28 days because time extrinsic value starts to more rapidly decay after 21 DTE until it goes to 0 DTE. As the time decays, the option spread becomes less valuable, so when we buy it back for $0.01 or $0.02 it is very cheap for us and we maximize the profit.

We use a concept called “laddering”. The way laddering works is that as one trade rolls off (closes) another trade is opened within the same week. This preserves your capital and smooths out your BPR (Buying Power Reduction), as one option expires it frees up capital to place another 4-week trade. Your trading platform will compute your available capital, also known as Buying Power, when determining if you have enough capital to make a trade. Buying Power Reduction is the amount of capital that a particular trade will eat into your Buying Power. Laddering also helps build in a certain level of protection against sharp market moves down. This is because most of the options move pretty quickly to zero value during the first 2 or 3 weeks, so even a fairly big down move in the underlying after 3 weeks or so should not affect the profitability of your option. This ladder rotation provides a consistent money-making cycle.

We open positions ideally when the underlying’s value is going down. This may feel counter-intuitive, but you want to open sales of Put options into weakness. The contrarian options trader is the one who makes the most money. When everyone else is selling the stock/underlying and has a bearish view, then we take the opposite side of that trade. We open trades to sell Puts, which is a Neutral to Bullish position, and then complete the spread by buying a Put to offer downside protection. Buying the downside Put limits your loss if the trade goes against you, in our case when the underlying drops significantly. This combination trade is known as a Put Credit Spread with these two options. It’s called a Credit Spread because money is credited to your account upon trade execution. If all things go well and it’s a winner, the money remains in your account. If it’s a loser, you have to pay a Debit to buy it back and close it out later (potentially at a loss). You can leave winners on until expiration, but I recommend that you buy them back and close them out with a small debit before expiration to avoid assignment risk. This can prevent massive losses due to after-market moves on expiration day that are out of your control.

When opening a trade from Monday to Thursday, I typically wait for the underlying to drop 1% in a single day. The 1% drops usually correlate to a 5% or more increase in volatility. It’s typically advantageous to sell after the 1% or more move downward in the underlying: as volatility increases (due to market uncertainty or underlying price declines), our option prices increase and therefore our Strike Prices widen comparatively against the same Delta value, which adds safety margin when opening trades. So in practice, you will be able to sell options that are farther out of the money. Don’t forget, when you are selling something (opening the position) you want the price to be as high as possible. So, we may trade anytime during the week, but if I haven’t traded all 12 names by Friday, then I’ll enter the balance of the trades on Friday. I monitor volatility and the 12 underlyings daily to determine what is the best time to trade that week. I also post my real time trades throughout the week, which are available for those with a Put Paradise Membership. If you have a Put Paradise Membership, you can also sign up for Real Time notifications, so you’ll get a ping on your device. If you act quickly enough you should be able to get the same or similar pricing to my trades!