Underlying Selection is the Most Important Aspect of Trading
What you trade matters just as much as how you trade it. An options strategy can look attractive on paper, but if it is applied to an illiquid stock, or an asset that is highly exposed to a binary event, the strategy can become much more difficult to execute consistently. This is one of the reasons the Put Path Options Trading System takes a different approach. Instead of searching through thousands of individual stocks every week trying to find the highest IV or the next perfect opportunity, we trade a pre-screened universe of 12 underlyings selected for liquidity, diversification, weekly options availability, and some uncorrelation benefits. The objective is not to predict which asset will be the next big winner. The objective is to create a trading environment where the probabilities, defined risk, and diversification work together. Put Paradise was built around this philosophy: simplify the decision making process, reduce unnecessary complexity, and create a repeatable process that can fit into a busy life. The Put Path framework currently uses 12 diversified ETFs, commodities, and some uncorrelated underlyings: QQQ, GLD, IWM, IBIT, SPY, USO, DIA, IYR, SMH, TLT, XBI, and VIX as part of the strategy.
Stop Looking for the Perfect Opportunity
The traditional approach to options trading often begins with a question that sounds reasonable: “What stock should I trade?” Traders can spend hours looking for opportunities on unusual options activity, trade discords, charts, earnings reports, analyst ratings, technical indicators, news stories, and social media. The problem is that this creates an enormous number of decisions before the options trade is executed. More importantly, individual stocks can be exposed to binary events. An earnings announcement, lawsuit, product announcement, analyst downgrade, regulatory decision, or unexpected news event can cause a stock to move dramatically in either direction. When you are selling premium, a dramatic move outside the expected move can overwhelm an otherwise carefully constructed position. The Put Path Options Trading System tries to reduce this single stock exposure by focusing primarily on ETFs and other diversified sectors or asset classes. An ETF allows you to trade an entire basket of securities through one vehicle. QQQ, for example, provides exposure to the Nasdaq-100 rather than relying on the performance of one company. SPY provides exposure to the S&P 500, while IWM provides exposure to the Russell 2000. That distinction is crucial because diversification changes the nature of the risk. If one company inside an ETF has a bad day, the other holdings can offset some of that impact. You are no longer depending entirely on one company’s next earnings report or next headline. This does not eliminate risk, nothing does, but it can make the underlying more stable to stay inside the expected move (note: the expected move represents a one standard deviation range (±1σ), meaning there is roughly a 68% statistical probability the asset’s price will land within the bounds at expiration). The goal is to avoid unnecessary risks that do not contribute anything to the strategy. That is a major distinction. We are not trying to predict the market, but rather we are trying to create better conditions for executing the same process repeatedly.
Diversification Means More Than Owning Different Stocks
When most investors hear the word diversification, they think about owning different stocks. But for this options strategy, I believe diversification needs to go further: we diversify by stock, underlying type, sector, asset class, and expiration date. Diversification by stocks means that if you own 20 technology stocks, you own 20 different securities. Even so, you may still have a tremendous amount of exposure to the same underlying economic factor. If technology stocks decline together, your 20 positions may behave like one very large position. The Put Path system therefore attempts to diversify additionally across underlying type, sectors, asset classes, and expiration dates. The six stock-oriented underlyings: QQQ, IWM, SPY, DIA, SMH, and XBI provide exposure to different slices of the equity markets among different sectors. QQQ emphasizes large growth and technology-oriented companies. IWM focuses on smaller U.S. companies. SPY represents the broad large-cap U.S. market. DIA focuses on the 30 companies in the Dow Jones Industrial Average. SMH provides semiconductor exposure, while XBI focuses on biotechnology. These assets are not perfectly independent of one another, but they do not all behave slightly differently. The second type of alternative underlyings is where the diversification becomes especially interesting, particularly with the additional asset classes outside of stocks. GLD provides exposure to gold, IBIT tracks Bitcoin, USO provides exposure to oil, IYR represents real estate, TLT represents longer-duration U.S. Treasury bonds, and VIX provides exposure to market volatility. These assets introduce different economic drivers into the portfolio. Gold and bonds typically behave differently from equities when investors flee to safety. Oil can respond to independent geopolitical events and supply-and-demand factors. Volatility typically rises when investors become fearful and equity markets decline, showing its negative correlation to stocks. That does not mean these relationships will always work exactly as expected. Correlations are loose and they are historical viewpoints. Markets are always full of surprises, but the philosophy is important: don’t put every trade in the same category. By spreading trades across different types of underlyings, the system attempts to reduce concentration risk while increasing the number of independent trading opportunities available each week. Lastly, we diversify our expiration dates so that we aren’t subject to the same market forces at the same time. We choose to ladder across four weeks, so our positions behave differently when they are closer to the beginning or end of the expiration cycle, which allows us to benefit from expiration diversification.
Liquidity Is a Risk Management Tool
Diversification sounds good, but it is not enough by itself. An underlying can be diversified and still be a terrible vehicle for options trading (I’m looking at you XLU). That is why liquidity is one of the most important filters used in the Put Path system. Liquidity determines how easily buyers and sellers can transact, and one of the easiest ways to see this in an options chain is by looking at the bid-ask spread. The bid represents what a buyer is currently willing to pay, while the ask represents what a seller is currently willing to accept. The difference between those prices is the spread and we try to execute at mid price. When the spread is narrow, there is generally more competition between buyers and sellers, which typically makes execution easier and less expensive. When the spread is wide, you can lose part of your expected return simply by entering and exiting the position inefficiently (too far from mid price). This becomes particularly important since our strategy is designed around relatively small, repeatable credits. If you are targeting a modest premium on a trade, giving away a large portion of that premium through poor execution defeats the purpose. This is also why the Put Path system requires weekly options. The strategy uses a laddered approach in which positions are opened on different underlyings and different weeks rather than putting the entire account into one expiration date. Weekly options create the frequency necessary to maintain that structure, but not every underlying qualifies because some securities do not have weekly options. Others have insufficient trading volume. Some have bid-ask spreads that are simply too wide. Others may fall outside the price range that makes the standard $5-wide spread practical (around $50 to $750 underlying price). This is why the Put Path’s 12 underlyings are not simply a list of popular investments. They are a trading universe designed around the requirements of this strategy. We are not selecting an underlying because we believe it will rise, in fact, this is a 100% neutral strategy. We don’t have an opinion or assumption on the underlying and we don’t need it to do anything. We are selecting it because it provides the combination of liquidity, option availability, diversification, pricing, and risk characteristics that we want for our systematic Put Credit Spread strategy. The result is a process that can be much simpler than searching the entire market every week. Instead of asking, “What should I trade today?” you begin with a much better question: “Which of my approved underlyings currently provides the best setup?”
Understand the Set Up Before You Place the Trade
Do you remember the BASIC acronym? BASIC stands for Brokerage, Apply, Set Up, Initiate and Close. This is where the Put Path philosophy really begins to come together. The Set Up is always the same and should become second nature to you over time. The strategy is not simply to sell random Put Credit Spreads: all these pieces need to work together to provide you with the maximum profit potential with the minimal risk. The Set Up strategy can be remembered as UDDSS…say it with me “UDDSS” (Underlyings, Delta, DTE, Spread Width, Size). The actual Initiation of the trade itself is easy because you’ve already figured out the Set Up. The underlying is the foundation. Once the foundation is established, the remaining variables, Delta, Days To Expiration, Spread Width, and position Size, can be applied quickly. That is the reason the Put Path system uses a defined universe instead of constantly searching for new opportunities. It reduces decision fatigue, limits unnecessary exposure to individual stocks, and creates a repeatable framework that can be evaluated over time. It also creates a path for scaling. A trader with a smaller account (around $2,000) does not need to trade all 12 underlyings immediately. The system is structured so that you can begin with the highest priority underlyings and expand as your account grows. Start with QQQ, followed by GLD, IWM, IBIT, SPY, USO, DIA, IYR, SMH, TLT, XBI, and eventually VIX…In That Order. The objective is to build diversification rather than simply increase the number of contracts on one position. Keep your lot size at 1, until you have over $24,000 and can trade all 12 underlyings. Note that I have personally changed over to NDX, RUT and SPX (in place of QQQ, IWM and SPY) because of my larger position size, and in order to save on taxes, commissions and avoid assignment risk, but the base system logic remains the same.
Call To Action
If you have followed the Put Path 101 Course to this point, you have already learned the basic mechanics of options, how to establish a brokerage account, how to obtain options approval, and how Put Credit Spreads create defined risk. Now the pieces start to fit together. We are building a system rather than looking for trades. That system is based on probability, discipline, diversification, liquidity, and defined risk. It is designed for someone who does not want trading to become a second full time job. The Put Paradise approach is built around spending roughly 15 minutes per week trading rather than spending hours staring at charts and trying to predict what the market will do next. If you want to see how these principles translate into actual trades, the next step is to follow the Put Path framework in real market conditions. Put Paradise offers free access to the Real Time Trades and The Score to Members so you can see how the system is applied and how the historical results have proved out over time. You don’t need to predict the market. You need a repeatable process to give you consistent results and greater piece of mind. That is the idea behind the Put Path.
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