After 10 Years at Tastylive, This Is Still My #1 Options Strategy transcript

I think a lot of traders are always looking for the new thing, they're looking for the fancy thing and the shiny thing. I'm like, I don't know, man. I think we can get back to basics. Get back to the basics and we can solve 80 85% of the puzzle with just that strategy. >> For years at tastytrade, Dr. Jim Schultz traded and taught all kinds of sophisticated options strategies. But, when asked about what his favorite is, he comes back to one of the simplest strategies there is, selling puts.

But, why? Let's find out. Welcome, Dr. Jim. >> It's good to be here. I'm very excited to be on the the Theta Profits YouTube channel. Thanks for having me. >> Thanks for joining and let's get straight to it. Give us the 40-second version of why just selling puts is your favorite strategy. >> 40 seconds? Oh, man, I don't know if I can do that. Okay. >> [laughter] >> Well, so so generally speaking, most traders and investors in the marketplace are they're bullish.

They're permabulls, right? So, entering the marketplace with some bias other than bullish kind of feels a little bit foreign to them and it feels a little bit like, I don't know if I really want to do this. So, a short put in just 40 seconds elevator pitch, it's going to give you all the powers of selling options while also giving you that bullish bias that you might be used to having invested in index funds or your favorite stocks or what have you.

So, you have that perfect marriage of all the option strategic advantages, but also that upside bias that you might be familiar with. >> And we are of course not only going to talk about selling puts in general, we are going to dig into how you do it. What are your favorite way of selling puts or how you find your trade, what DTE you choose, etc. etc. But, first tell us a little bit about yourself. >> I grew up rail side of Detroit and I grew up like if people have seen the movie 8 Mile with Eminem, I actually grew up on 10 Mile.

So, I grew up like 2 miles away from where a lot of that movie was shot. My parents are still They still live in the house I grew up in. I went to undergraduate college at Central Michigan University. Fire up Chips. I went to my PhD program down at the University of Memphis, and that's where I met my wife. And I graduated with a PhD in finance, and I actually started teaching finance at a small university in South Carolina.

And I loved it. Like I loved it so much that I thought that that's what I would do for my whole career. But then I met Tom in the fall of 2015, Tom Sosnoff. And in the fall of 2015 and the tastytrade network had been It had been on air for a few years. And I was like, "Wow, man, what they're doing is revolutionizing trading. It's revolutionizing like how retail traders can approach the marketplace with derivatives." And so, I got to know Tom.

And I was like, "Man, I can always go back and teach. Like academia is not going anywhere. So, what if I join the team? Like what if I came to Chicago, I joined the team, and I was part of the network?" And so, we went back and forth about that. And then I joined the network in fall of 2015. And I was on the network up until about a month ago when I left to build my own thing, which is Options on Caps. So, I've been finance the entire my entire adult life has been devoted to finance. >> And still on a long sabbatical from academia. >> Yeah.

Yes, a very long sabbatical. And it's funny like I I thought I thought, you know, academia is not going anywhere. I don't know, John, with like with YouTubers like yourself, with YouTubers like myself, we give them a run for their money now. Like they're not necessarily free of competition. >> When we discussed this interview, you said that, you know, you can build a full financial foundation on just selling puts. How is that? >> Yeah.

So, again, I've been in the unique position of being on the tastytrade network now for, you know, over 10 years. I mean, I just left the network, but having done all the events that we've gone around We've gone around the country, we've even gone to other countries, and then emailing viewers that would email in to me like, you know, every day for my show, blah blah blah blah blah. I've had thousands and thousands and thousands of conversations with traders over the years.

And so, getting getting all that kind of first-hand, uh, you know, eyewitness data from all these conversations, you know, it it just kept reinforcing the power of short premium. It just kept reinforcing the power of selling options. And so, then I was like, all right, selling options, it just makes so much sense for a million different reasons that I'm sure we'll get into at least to some degree, uh, in this interview.

But it's like, okay, we have all these things. And then as I alluded to in the introduction, it's like, all right, most traders want to play the market from the long side. Most traders want to tap into the positive drift, the positive risk premium, just this upward trajectory that the market has enjoyed for 100 years, 125 years, whatever it's been. And so, it's like, all right, how can we marry these two things together?

The short put just makes a ton of sense. But then, having had all these conversations, John, I cannot tell you how many traders that I've met and spoken with, conversed with, their entire portfolio, the foundation of their portfolio, is selling puts in SPX, or selling puts in SPY, or selling puts in the major market indexes, and that's literally all they do. Now, that's an oversimplification of all the management and the scale and the abilities, so I'm not trying to obviously water down what they're doing.

But at the base level, when you look at it, like from a zoomed-out bird's-eye viewpoint, it's like, man, they're just selling puts. It's really that powerful. And so, I think a lot of traders are always looking for the new thing, they're looking for the fancy thing and the shiny thing. I'm like, I don't know, man, I think we can get back to basics, get back to the basics, and we can solve 80 85% of the puzzle with just that strategy. >> So, let's spend a little time on the basics, then.

What is actually selling a put and how does it make money? Maybe we should just bring up an example here. >> Yeah, sure. Yeah, we can bring up an example. So, like so for example, you know, if I just bring up here, I'll just bring up like a market. We'll just go to SPY. Like we can talk about like my trade entry mechanics here in a little bit, but if I go to SPY and I go into this October example, or I go into this October expiration, I should say.

And let's say that I want to sell again, just kind of picking one at random for the purposes of this specific question. Let's say I sell this 760 put. So, if I sell this 760 put, you're going to see that this guy's going to expire in 38 days. Right now, I'm collecting a credit of $9.19. That's going to be my maximum profit. This is obviously the maximum profit is on a per contract basis. The credit collected is on a per share basis, and every options contract, of course, is 100 shares.

And so, right now, I mean, this is a fairly high probability play because it's out of the money. So, my pop is 68%. That's my probability of profit, the probability that I make at least one penny at expiration. The probability that I collect at least 50% of max profit at any point over the life of the trade is actually north of 80%. So, that's really nice. My delta is obviously going to be a positive delta. It's right there on the option chain that we just looked at.

So, I'm positive about 40 delta. My theta shows me obviously the rate of decay. This is what your entire channel is about, so you know that quite well. This is my rate of decay. So, those are the basic parameters around the around the trade bar. Okay. Now, how do I make money? Well, just as the case with any short options position, you're going to make money one of three ways. You're either going to make money if if I actually go to the curve view here, I think it'll be a little bit clearer.

If I look at the curve view and I click on my analysis tab, so you can see hopefully you can see that if SPY rallies, then you're going to make money. So, if SPY goes up, this is a bullish trade, right? I mean, if you do a bullish trade and the stock goes up, you're going to make money. If you do a bearish trade and the stock goes down, you're going to make money. So, at the surface level, it is that simple, just as it is with any other option strategy.

So, number one, it's a positive delta play. I make money if the index of the stock goes up. Okay, great. Number two, because it's a positive data play, which you can still see on the screen down here, you can see that I'm going to make about 16 cents a day from theta. Now, that's just what it is now, that I would see changes, it's dynamic as you get closer to expiration, but it just shows me the power of selling options again, that I know that your audience as well is very familiar with, but just in case any beginners kind of snuck through the security guards there, the theta shows me that this guy is going to decay from one day to the next.

So, now I'm making money if the market goes up, that's how I can make money. I'm also making money just by time going by, just by the option price decaying as you get closer and closer to expiration. That's the second way that I'm going to make money. And then, the third way that I'm going to make money, if we go back to the table view here, it'll be a bit more uh clear, I think. One of the variables I have pulled up here on the tastytrade platform is Vega, and Vega shows you how the option price will change when the implied volatility of that stock or index changes.

And by being by selling an option, you are short Vega, so you are short volatility. So, generally speaking, the three ways that you make money with every options position are going to be direction, which we just talked about, that's delta. It's going to be time, which we just talked about, that's theta. And then, it's going to be volatility, which we're talking about now, which is Vega. If I sell an option, then that means I am short Vega, and if volatility goes down, or volatility contracts, then I'm going to make money on that position, because the lowering of volatility helps my position by sending the option price down.

Whenever you sell an option, of course, you want the option price to go down. If I was positive Vega, I would want volatility to expand. I would want the option price to go up. And so essentially, I've got three ways to make money. Direction, time, and volatility. Now, there's other ways. There's interest rates and even dividend pricing kind of sneaks in there from time to time, but those are going to be much smaller in nature, not the primary movers.

So, this is how you make money with a short put. You're either right directionally, time passes, or volatility contracts. And just as a bit of a piggyback off of why I love the short put so much, if you get in a situation where the market is rallying, where the stock or the index is going up, this can be so nice because you can get paid so quickly. Right? If the market rallies and you get paid on Delta, that's great.

But the market is rallying and time is going by, so you're getting paid on Theta, that's great. Okay, the market is rallying, prices are going higher, what's typically happening to volatility when that's happening? It's going down. Well, again, remember, this is a short put, so I'm short Vega, I want volatility to go down. Volatility is going down, so I'm getting paid on that as well. So, in the event that you're right, you can get paid really quickly.

Of course, as I always like to say on my show, for every gimme, there's a gotcha. So, the gotcha is when you're wrong and it goes down, now you're getting hit on Delta, you're getting hit on Vega, and we can talk about that later when we talk about management, but you have to understand what you're signing up for, and I just like the upside so much because it has so many benefits. >> And we will for sure also get into the risks.

But before we get into the details of how you trade selling puts specifically, I'd like to hear what what you try to achieve by your way of selling puts. >> I guess what I'm trying to do, like what the short put it just it fits into the marketplace in in so many different ways because of the upside bias of the overall market, because of the power of short premium. But there's actually a third element that I think can be really helpful to tap into.

So if I look at SPY for example, and this is again why I think short puts in the market indexes can be such a powerful foundation. And this is what I'm really trying to take advantage of when I sell puts in the market, specifically in the indexes. Now I'll sell puts in individual stocks, too, but specifically with the indexes, which I think can be a great starting point for just about anybody. If you look at like if I go back to October, let me actually delete Let me delete this order just so we can look a bit more closely at the chain.

So you can see the option chain for SPY right here. You see all the strikes right there in the center. I'm sure a lot of your viewers are familiar with the tastytrade platform, but I'm sure a lot of platforms are set up very similarly. If I change my Vega to implied volatility, so now I'm actually looking at the implied volatility for each individual strike. And what you'll notice Again, just look at the relationship between the at-the-money strike of 767 with SPY right around 767.

My at-the-money strike has an implied volatility of 12 or just over 12. As you move further out of the money, so on tastytrade that would be moving up on the screen, down in strike, you can see the implied volatility is climbing as you move up on the screen and down in strikes. This is the volatility skew that has been studied, it has been researched. It was a consequence of the 1987 market crash with Black Monday. That That's when volatility skew became a thing because that's when, you know, the market kind of realized, "Wow, these downside moves can be a lot more significant and potent than the upside moves.

And so maybe we should start pricing options differently rather than being just completely symmetric on both sides of where the stock or the index currently sits." And so because you have this volatility skew, you can get paid a king's ransom for selling these out-of-the-money puts. And I just really, really like that in terms of what I'm personally trying to tap into with the short put. So again, you've got the positive drift, you've got all the power of short premium, but this strategy specifically taps into the volatility skew itself that's on the option chain by selling these strikes with really juicy, rich implied volatility, which can be really nice from a profit potential standpoint. >> So, let's dig into how you trade it.

And let's start with the entry mechanics. And my first question is how do you choose your underlying? What are your criteria? What is your process to find which underlying are you going to sell puts on? >> Yeah. Yeah, that's a great question. So if we go right back into the platform, there's two very, very simple ways to do it. So on tastytrade, if you click on the small hamburger menu right here, it brings up the potential you have a few things you could choose from.

I typically like to start on the watch list. And the two watch lists that I like to use are Tom's watch list. So this is Tom Sosnoff again. Maybe we'll get a Dr. Jim watch list at some point in the future, but it's not there yet. So Tom's watch list and then the tasty default watch list is another really good one. Now there's a bunch of them people can play around, you can check out other things, what have you, but I like these two because essentially by being on this watch list, all the underlying stocks that you see on these watch lists, they're effectively going to be pre-screened for activity.

They're going to be pre-screened for volume. Like these are the same stocks that everybody else is trading. So my personal approach is I'm not interested in finding some stock on a Motley Fool website or what have you that nobody's looked at ever and nobody's even heard of it. That's not the game that I want to play. I'm not going for a 10-bagger. I'm not going for a 20-bagger. I'm not doing any any of those things. I want to trade the same stocks everyone else is trading because I want super high liquidity.

I want to I want to be trading tight bid-ask spread differentials with fair markets, easy to get in, and it's easy to get out. So, by sticking with the tastytrade and Tom Sosnoff's list, that puts me in that sandbox right out of the gates. >> But how then do you pick the stocks from the watch list? And I guess I assume for those of us who are not on tastytrade, the the important point here is to make a watch list of highly liquid stocks with a solid volume.

But how do you pick from your watch list which one you will do the trade on right now? >> Exactly. And I think that's a great idea, by the way. Yes, high volume, tight bid-ask spread differentials, and create your own watch list. And I would just start with the S&P 500. It's a pretty pretty good place to start. Maybe the S&P 100. So, now that I'm on my watch list, so, being a premium seller, right? Trading from the short side.

We're focusing on the short put today, but that of course is not the only strategy that I use. But 80 to 90 to 95% of the strategies that I do employ on a given day are going to be short premium strategies. Well, being a premium seller, what we found on the tasty network for many many many years, and I'm continuing on with options on capped and my own stuff, is selling premium when volatility is elevated, when volatility is higher, gives you more statistical advantages than just selling premium all the time or anytime.

Selling premium is so powerful that it's still very advantageous to essentially sell anytime, but it can be that much more effective if we wait for volatility to be elevated before we sell premium. So, the metric that I like to use, which is right here, it's on the the drop-down menu, this IVR metric. So, this stands for implied volatility rank. And what IVR measures is it is essentially showing you where is implied volatility right now relative to where it's been over the previous 12 months.

And so it is showing me kind of like a distribution, you know, what what percentile is implied volatility sitting in relative to whatever range it's been in over the previous 12 months. So for example, right now I have IVR sorted from high to low. Which is typically how I look at it because I'm wanting to sell high volatility. So if I look at EWZ for example, this of course is the Brazilian ETF, you can see the implied volatility rank of EWZ is 90.2.

So what that is telling me that is telling me that the implied volatility for EWZ right now is basically in the 90th percentile of all of its implied volatilities over the previous 12 months. So if I think and just mentally visualize a distribution, right now it's sitting on the right hand tail of that distribution. So if I'm looking to sell high volatility, which I am looking to do, this could potentially be a great candidate for me to sell volatility.

Now again, I mean it's a Brazilian index, these markets aren't necessarily amazing, so I may pass when I'm looking at other criteria, but just to kind of describe where I begin the process, it would be looking at implied volatility rank. And so if I go down the list just a couple of stocks here, you see Apple is up here too. So Apple has an implied volatility rank of 54.4. So that is also relatively high. So obviously Apple, everybody knows Apple, I'm sure 100% of your viewers are trading Apple day in day out, week in week out, what have you.

This can be a really really great thing to look at when it comes to trying to find an opportunity in Apple when it comes to high volatility versus low volatility. So 54.4 is also really good. So naturally, if I was watching this interview or listening to this interview, the follow-up question that I would have is, all right Jim, is there a cutoff point? Like, is there a point where you determine what's high versus what's low?

And this is again, I got to give a huge shout out to the tastytrade. I mean, they've just done amazing work over the years and continue to do amazing work. Right around 30. 30 is actually a really good cutoff point for high versus low volatility. So, anything over 30, I'm very interested in selling premium there. Anything under 30, I'm a little bit less interested. And then, you know, things like single digits or in the teens, I'm definitely a lot less interested.

I'll probably wait for something else, for a different opportunity. But within the watch list themselves, IVR is going to be the thing I look at. >> So, high liquidity, a high IV, are there other important criteria you would like to mention when you choose your underlying? >> So, those [clears throat] once those two checks are in place, you know, from there, I mean, I I actually genuinely feel like the stocks are interchangeable.

Like, I don't really I don't really care about what Apple might be doing or not doing. I don't really care about what I mean, going on down the list, like what Meta's doing or not doing, what Goldman Sachs is doing or not doing. And so, those are going to be the two that you know, the two primary checks. And then, you I mean, going down the list now, obviously, the stock price is going to play a big role. Simply be not because it's high or low be or because I think I know where it's going next cuz I I don't.

And I'm not sure anybody does, to be perfectly honest with you. But it does tell me a lot about, okay, what type of position I might put on. For instance, if I do something in Apple at $300, if I'm going to do something naked in there, like a short put, I'm going to have to be ready to put up, you know, probably five or six thousand dollars in margin. So, I want to make sure that I have the account size to handle that.

I want to make sure I understand what I'm getting myself into. And so, when we're talking about something like a short put, that's obviously very relevant. But if I did like something in GDX, for example, which is right down that that's the next ticker down on the list, this is only a $100 stock now. So, now I can probably do whatever I want in here that's, you know, undefined risk and defined risk. I can sell puts, no problem.

The margin requirements are going to be a lot less simply because the basis on the underlying is a lot less. >> So we have chosen our underlying or you have taken us through the process of choosing the underlying. Now you need to decide what type of put will you sell? You know, what DTE will you sell and what delta for instance and why? What is your process there? >> Yep, that's a great question. So let's go into GDX to actually look at this because again, I think this is going to fit a lot of different account sizes.

So if I look at GDX again, I mean the IVR 52.8 that looks really good. And so now I go to the trade page and so now I'm trying to figure out A DTE, that's typically the first choice we have to make. And then B, I already have my strategy selection. I know it I know it's going to be a short put. DTE and then strike selection with the kind of looking at deltas and things of that nature. So DTE 30 to 60 days is typically where I like to live.

Anywhere between 30 and 60 days, you're in really good spot on the out of the money decay curve where that decay is starting to pick up steam. If you want something that's a bit more conservative, I would go further out in time, closer to 60. If you want something that's a little bit more aggressive that's going to move a little bit faster, but you're okay with potentially, you know, some adverse moves against you that could be more problematic, then choose something a little bit lower.

I don't typically like anything like super short term for this specific purpose. Like I know zero DTE is a huge thing right now. Obviously it's wildly popular. For this specific use case, I don't think it's going to be a great fit because you want to have time for the decay to build up in the position. You know, and if you do something that's zero DTE or one DTE or even seven DTE, there's just not enough time for the decay to build up and you're not really getting paid or compensated for the risk that you're taking, in my humble opinion. >> So, you are a tasty veteran after all. >> Hey, I mean, we've done amazing research, man.

I mean, they've done some incredible research, and so I think 30 to 60 is just a sweet spot, and so I really, really like it. That's correct. And so, I I don't typically choose the weekly options unless there's a good reason to do that, like if there's an earnings event or FOMC or something, then I might do a weekly, but I'm typically living in the monthlies. So, for my purposes here, I'll go to October with 38 days to go.

I open that guy up. And you can see it brings up the entire option chain. So, again, we're going to be living in this quadrant right up here because I'm going to be selling puts, and they're going to be out of the money puts. Maybe you can have me on again, and we can talk about some super special cases of selling in the money puts and and things like that. But, I'm going to live up here. And so, now I need to decide what delta do I want to choose.

Well, I personally like to live between uh I'm usually around 30 to 35 delta, but I might go as low as 25, and I might go as high as 45. So, why do I like 30 to 35 as my baseline? Well, like for example, if I click on this 34 delta short put in GDX, which is a 95 strike, you're going to see right away, and again, just note that the buying power here is very, very modest. That's only $1,500, so I'm that's going to fit a lot of different account sizes, which is obviously really nice.

But, the thing I like about the 30 to 35 delta is it's a really nice balance between credit collected and probability of profit because it's always going to be a give and take, right? It's always going to be a give me and a got you, right? If you want more credit collected, you have to be willing to accept lower probability. But, if you really want higher probability, you have to be willing to accept lower credit collected. >> So, how much credit are you getting here now on 38 days at your 30 35 with a delta. >> Yeah, I'm getting about $3.40.

And so $3.40 per share, $340 per contract. And if you look at that like one of the terms we used to use on Tasty was a the premium efficiency of the trade. So if you look at the premium efficiency of the trade, that's not too bad. I mean, you're getting 20% in terms of the premium efficiency. I would say I typically like to make sure it's at least at 10%. 15 to 20 is a lot more favorable because we want to think about how is my capital being used?

Like we want to think about you know how much bang for the buck am I getting on this trade? And so right here, $3.40 or $340 for the contract on about $1,500 in buying power. And so 35 delta is kind of my baseline. When would I go up to a 45 delta? So this would be like the 99, basically the at the money strike. Well, this might be a situation where I want to be more directional in that stock. Maybe I have a hunch about it.

Maybe I have a feeling about the stock. Maybe I want more positive delta for my overall portfolio. That happens all the time. Where I'm looking at my total portfolio metrics and I'm like, "Man, I need some more positive delta." Because I'm too short, because I want to be more long, whatever the reason might be. So now I might be looking for higher deltas at the individual position level because it will deliver that for me.

So that might be one of the reasons why I might deviate away from my 35 delta baseline. Now, what about the 25 delta or maybe going a bit lower? Well, this might be the case if I do want to be more conservative. So now maybe it has an event coming up. That could be an earnings event or could be some market wide catalyst like I mean, obviously FOMC's again one of the best candidates to kind of explain that principle. Could be the jobs number, could be whatever it is.

Where I want to be a bit more conservative, but I still want to get paid. Like I still want to make money. So you can see right here this 24 delta, John. You can see it's about a $2.14 credit. And so again, premium efficiency still looks pretty good. My probability is obviously jumped up to 76%. So that's really good. Uh but generally between 25 and 45 most of the time. And with the baseline around 35. One thing I do want to say, and I know that this is going to twist up some knickers out there, so I definitely want to say it.

One thing I don't like doing is going down to like a super low delta. Like this nine delta. Right? This is a very popular strategy that's online. And every time I see it, John, it just ah man, it makes my blood boil. Because yes, it's a super high probability trade. Like yes, most of the time it's going to work. Yes, it can it can bring in that extra paycheck. It can sell options for income. All that other rigmarole that you just see all over the all over the internet.

The problem is when it doesn't work, man, it can put you in the hurt locker really fast. Really, really fast. Because when the market starts moving down towards that strike, all of a sudden, you're getting hit on all these different effects. You're getting hit on delta. You're getting hit on Vega. You're getting hit on Vomma, which is a second-level Greek that a lot of people don't really think about until it's too late.

And so I just wanted to mention that really quickly since we're on the topic of delta selection. That might be a its own episode another time. But don't love the low delta options cuz I don't feel like the risk justifies the return. >> But are you being more hit with a low delta than on the the higher delta you are selling on? Explain that very quickly. >> Yeah, abs- you you are. And that And that's what kind of surprises some people.

Because when you Because when If I sell like a 20 If I sell my 30 delta, let's say. So let me let me let me scroll this back down. If I sell this 30 delta, right? So obviously, if the market goes down, I'm going to lose 35 cents on the on the dollar from just the delta effect. But it's the other Greeks, namely the second-level Greeks like Vomma for to to get more specific with this, that is much much lower and it's much more contained.

And so, it's a situation where I'm going to get hit on Delta, but I have a much bigger padding to absorb the hit, number one, and then number two, all the other, you know, kind of ancillary Greeks are more controlled and more contained. When you go down to like a six Delta or like a four Delta or like a nine Delta, right? You have no padding to absorb that move because you only collected 60 cents, 80 cents, you know, 40 cents, whatever, and then all of a sudden these second and third level Greeks begin spiraling out of control.

And so, all of a sudden you're like, how am I losing so much money? My Delta was only nine. But the market dropped, you know, 1%, 2% in the day, whatever. Why am I down so much money? It doesn't make any sense. My option is still out of the money. This is what surprises a lot of people. It's because all those other Greeks took hold of that option and they're causing the option price to skyrocket. And so, that's the reason why.

And also, obviously, I mean, you probably see this a lot yourself. What are most traders doing with those eight Delta, nine Delta options? They're not selling one. They're selling multiple because they can, because they get the buying power relief. And so, you know, on a one-for-one basis, is it a big difference? I still think it's fairly significant, but it's not as big of a problem. But like if I go to, you know, like you can see my 35 Delta, my buying power is 1,500 bucks, okay?

Let me go back down to my nine Delta. Now my buying power is only $800. Right? So, now all of a sudden, where does everybody's mind go? Myself included. It's like, man, I'll just do two to make up for the difference. Right? Well, that's where you can run into some real big problems. >> Let's move to the exit mechanics. You have entered your trade. You have found the perfect underlying. It's liquid, has high IV. You have sold your delta put 30 to 60 days out choosing a monthly expiration.

Now, how are you going to get out of this trade? What are your exit mechanics? What are your rules for taking profit and taking a loss? >> Yeah, so so a couple different ways obviously. Let's go to the profit side cuz it's very simple and straightforward. Generally speaking, 50% of max profit is where I like to live. I just think it makes a ton of sense because, you know, going for the full profit doesn't really make a lot of sense to me because then you're holding on the trade until the very end.

And the very end of the expiration cycle, that's where a lot of the risk becomes concentrated with gammas expanding, directional risk expanding. It just doesn't make a lot of sense to me. I like the 50% marker because it's the perfect balance between like if you think about a credit that you collect, right? If I collect $3 on a trade, let's say, and I'm up a $1.50. Now, just within the credit collected itself, my risk return is perfectly in balance in terms of the profit that I've captured and the potential profit that's left.

Once I go beyond that point, now all of a sudden it begins tilting in an unfavorable way to where now I have more captured profit at risk and the potential profits are deteriorating relative to what I've already captured. So, from a profit potential standpoint, I like 50% of max profit. When would I deviate from that? I actually don't deviate from that too often. The one exception to that rule would be if I'm in a trade for like let's say I put on a trade with 40 days to go and I'm in the trade for 3 days and I'm already up 30%.

Okay, that makes some sense. That makes some just logical intuitive sense. You take the risk off the table. You're already more than halfway to your profit objective. Again, just use kind of trader common sense. Where you need to be careful doing that though, and I've seen this happen a ton. Again, this is where all the conversations have been so advantageous for me. You got to be really careful because, you know, as a premium seller, the game that we're playing is obviously we're risking more to make less in exchange for higher probabilities.

That's the price of admission. That's what we all do every single day. Okay, that's fine. The problem is if I'm going for 50% of max max profit, that's fine. But if I then end up taking my 50% and turning them into 42% and turning those into 37% and turning those into 31%. That's it's a slippery slope, obviously, right? And so I really I'm really careful with taking my winners off too early because I need to be aware that if I take my winners off too early, I'm going to need even more winners on the backside to make that make sense.

I already need a lot of winners to make it work in the first place because I'm risking more to make less. But if I start even taking my profits even earlier, you just have to be aware of what you're signing up for. You're going to need even more winners. So from a profit standpoint, that's how I look at it. >> Let's say you're not reaching that 50% level, but the trade is, you know, moving along. It's not in negative territory.

Will you take it off at some stage no matter what? >> Yeah, typically when you start getting around I'm going to say somewhere between 14 and 21 days to go in the expiration cycle. And so it's a fairly known phenomenon that near expiration, the gamma does begin to naturally increase. And so it doesn't really start to get super gnarly until maybe the final week or so. So I say, you know, 21's a good marker. I personally think 14 is also a good marker.

And so anywhere between 21 to 14, you know, if I'm not at my profit target yet, but I maybe I have a little splash of green on the screen and I'm at 19 days to go or 18 days to go and I'm like, all right, like maybe I take the trade off now. That makes a lot of sense because you are getting closer to expiration. The other Greeks such as gamma are going to begin to increase in an unfavorable way. And so taking the trade off at 14 to 21 or even if you don't want to take it off, you can always just roll it to the next cycle, too.

That's a very common adjustment tactic that we would do from a profit standpoint. >> So far we have talked about the trade going in the direction it should, but um sometimes it doesn't move with us. Uh what are your rules for accepting a loss? Do you use a stop loss and when will you take a loss? >> I don't know, John. My trades always work. You mean you have trades that don't work? >> I do. I do actually. >> [laughter] >> Well, I'm really sorry to hear that.

Uh no, I'm kidding, of course. Uh >> [laughter] >> Every trader has trades that don't work. It happens to all of us. Anyone who's been trading longer than a day has had trades that don't work. Great question. So, I think there's two different ways that you can approach this with one huge bonus that the short put has, and this is one of the reasons why I absolutely love it. So, number one, there's two different ways you can do it.

My preferred way, which sounds a little crazy, but it's the way I like to do it. I don't have a stop loss and I don't have a predetermined exit point. So, I treat it on a case-by-case basis and a day-by-day basis. I like to evaluate it within the context of my overall portfolio risk. And again, because I'm trading the same stocks that everybody else is trading, the likelihood that I with a short put specifically, we're not talking about short calls, with a short put specifically, the likelihood that I'll run into something that's really difficult to handle is fairly low.

Especially if you're focusing on the indexes. Now, you get into some individual names, obviously that likelihood increases rather significantly sometimes, but you get paid for that with higher premiums. And so, again, that sounds like maybe a secondary or tertiary uh conversation we can have another time. But no predetermined exit point, case-by-case basis, I think that can be a very powerful way to treat your short puts.

But for a lot of traders, that's going to make them nervous, and that's going to make them anxious, and rightfully so. So, I think, you know, managing somewhere between 2x and 3x of credit received can make a lot of sense. So, for instance, if I sell a put for $2, if I want to manage that guy, no matter what happens, at a 2x of credit received like stop loss, then I'm buying it back for $6. So, there'll be a $4 loss.

If I want to do a 3x of credit received, that would be buying it back for $8. So, that would be a $6 loss. But, here is why I really One more I want to make sure I say this cuz this is really important. Here is why I love the short puts so much, especially on the same stocks that everybody else is trading. If it gets really bad, if things get crazy, and the market takes a dive, and blah blah blah blah blah, whatever else, never forget, if it comes down to it, you can always just take the stock.

You can just take the stock, and you can be a long-term investor now, which is kind of a silly thing to say, but not really, because it's like, man, you know, if I'm selling puts in like Apple, or I'm selling puts in like Netflix, or hey, heaven forbid you're selling puts in Nike, they're not doing too well these days. But, even still, it's like it's Nike. Am I really super concerned about Nike? I don't know, it's still Nike.

And so, like when you think about things like that, it's like, all right, there's likely going to be kind of this natural lid on just how bad the damage could get, and you can just take the stock and put it in your sock drawer, and go live your life. And again, if doing that with individual stocks makes you nervous, then don't do it with individual stocks. Just do it with indexes, and then it becomes an even stronger selling point. >> But, is that what you would actually do, or would you also with those losing trades you said that you're not using stop loss yourself, but would you also with the losing trades close them at 10 to 20 days before expiration with a loss. >> Well, so I I probably wouldn't close it.

I would probably roll it. So, if I get to let's say I get to 14 to 21 days then I have a trade on, a short put on that is red, I'm probably not going to take that loss, not yet. I mean, again, it's case-by-case. I don't I don't want anyone out there to believe I never take losses cuz that is absolutely not true. That's 100% I take I probably take more losses than your average viewer out there. But just go just going into the trade, I don't want to think about it that way.

But at 14 to 21 days to go, I would probably roll it out to the next cycle. So, I wouldn't close it and be done with it, I would roll it out to bring in more premium, improve the break evens, maybe even adjust the strike around a little bit. And that just speaks to the flexibility of options, which I know your audience is well aware of. >> And that lead us to our next segment, which is actually how you will manage the trade.

It to what to what extent you manage them, in what situation you manage them, what are your rules for managing them? And you already mentioned rolling. >> Yeah, exactly. So, again, if we kind of think about the hierarchy, right? If the trade works and hits 50% of max profit, I take it off, I'm done with it, and I move on. If the trade doesn't work, I'm typically trying to think in terms of duration. I want to give that trade duration.

I want to give it a chance to come back. Which again, doesn't doesn't in any way, shape, or form mean that I never take losses cuz that's not at all what I'm trying to communicate. But it does indeed mean that I want to give this thing a chance. I want to give it positive drift a chance to work. I want to give, you know, the positive upward trajectory of the overall market or individual stocks kind of writ large a chance to work.

And so, I do that with position sizing, I do that with obviously strike selection. And so, I want to give it I want to give it time to work. But again, 2x to 3x of current receive would also be fine. But what about all the stuff in the middle? Well, that's where I think, you know, that's where the skill and the ability really comes into play. And I think 14 to 21 days to go is where I'm rolling out to the next cycle.

Uh you know, kind of regardless of what's happened. If I get to some profit that has not hit my objective yet, so I'm not at 50% but I'm at 17 days to go and I've got what I like to call an economically significant profit, I'm probably taking it off. Like for instance, let's say I sell a put for $3. And my profit objective is $1.50. I get to 17 days to go and the trade is up 60 cents. So it's not anywhere close to my profit target, but again, I think it's helpful sometimes to think in terms of like, all right, is that actually like an economically significant profit?

It doesn't matter how many contracts you have on. Just think about that just in like everyday terms in a way. It's like, well, that's 60 cents. So that's $60. When I think about commissions and I think about transaction costs, it's like, yeah, that's going to be a meaningful trade that's going to move me forward towards whatever objectives I might have. And so once something gets to uh economic significance, that's when I'm looking to take it off if I'm inside that 14 to 21 day marker.

I would say for me personally, this is going to vary from one trader to the next. I've seen it vary from one trader to the next. Economic significance probably cuts off for me around, you know, 25 to 30 cents. Once I get beyond that point, it's a pretty easy decision. You know, if I'm sitting on a 17 cent winner, am I going to take it off? Probably not. I'm probably going to roll it cuz to me that's right around the scratch still.

And so I'll probably still leave that trade on. And then of course, if it's red, I'm definitely going to roll it to give it time. And so that's how I think about the management for kind of everything in between. >> And some of those situations with your 17 cent example, I guess you can also get pretty nice premium by rolling. >> That's exactly right. That's 100% right and that's the beauty of options which I know that you know and your whole audience knows that I mean being able to roll and adjust and extend duration is a huge advantage that we have in our back pocket. >> Selling a put is also the first step in the very popular wheel strategy where you sell until you are assigned the shares and then you switch around and sell a covered call on top of it.

Do you do that when you are assigned the shares? >> I don't it typically. Not because I'm opposed to it, but it kind of it depends on the situation. So for instance, if I sell a put and I'm assigned then if I if I'm assigned around the actual if I'm assigned and the stock is still around the assignment price, then I might sell a call. Then I might want to bring some premium in against that. So it would be kind of a more typical more traditional type of wheel strategy.

But a lot of times and I hopefully some of you viewers out there have had similar experiences so I'm not alone in this. A lot of times the puts that I'm assigned on, they're not right around the strike price. They're actually they're in the money by a significant margin. So when that happens, I actually typically don't like to sell calls against it right away because I'm effectively faced with two scenarios, neither of which is good.

Either A, I sell a call that's really far out of the money, really up the chain because I have to because I need to be mindful of my assignment price. Like for example for example, let's say I got assigned at 60 and the stock fell down to 50. Well, my basis on the trade is 60 with again, I had the premium I collected on entry and we'll just leave that out for just the purposes of this example. I'm going to be looking to sell calls above 60.

Well, the problem is if the stock is at 50, the premium on those 62 and a half calls is going to be what? It's going to be nothing. So I have to think, all right, am I going to really cap my upside for you know, 19 cents or 26 cents? Probably not. So right there, I'm like, okay, I'm probably just going to hold the naked shares and I'm going to be okay with that. Or also, number two, my other option is I move down the chain.

So, now I'm not selling the 62 and 1/2, maybe I'm selling a 57 and 1/2 or a 57. Remember, the stock is at 50. What's the problem there? My basis is at 60. So, now I'm selling underwater calls right out of the gates. I don't really like that, either. And so, a lot of times when I'm assigned on a put that is somewhat in the money, I'm actually okay just holding the shares. And again, this is one of the huge powerful things about selling puts in the indexes because I'm going to say that most of your audience is actually okay being long the S&P 500 or you're okay being long the Russell 2000 or what have you.

That's really powerful. So, let's use that to our advantage and so, not feel the urgency to sell the call right away. Just hold the naked clean delta to the upside. If you get a rally, if you get a move higher, then maybe you look to sell some calls when it makes more sense. >> Let's dig a bit more into the risks with selling short puts or naked puts. What is the worst that can happen? >> Yeah. So, the theoretical worst that the worst thing that can happen, and I am legally required to say this, the stock or the index could go to zero.

So, theoretically, that is possible. Theoretically, you have to know that the S&P 500 could go to zero today. Theoretically, the Nasdaq could go to zero today. There's a theoretical possibility. Is it a practical possibility? I'm going to say no, but everybody has to make up their own mind out there. I cannot tell you what to think or what to do. And so, when it comes to actual practical realities, I think thinking in terms of like two or three standard deviations makes a lot more sense.

And so, this is where when you actually look at the buying power that you have to set aside for a short put that's naked, that buying power actually coincides with right around typically a two standard deviation move. And so that gives you a very practical representation of what a likely worst-case scenario would actually be. Now again, could it be worse than that? Yes. Will there be times when it is worse than that?

Yes. And again, theoretically it can go to zero. And if you're doing it in individual stocks, sometimes they do go to zero. Again, not super likely, not super often, especially not in the stocks that I'm trading, but it does happen. But when I look at the actual risk, like when I'm trying to figure out how much risk is in this trade, I use the buying power. The buying power to me is a very tangible way for me to say, "All right, I'm going to do that put in GDX that we were looking at. $1,500.

Okay, worst-case scenario, that's probably what I'm looking at. Could it be more than that? Yes. Am I prepared if it is more than that? Yes. But this does give me at least some baseline as opposed to just being some you know, some theoretical infinity sign that of course that's the theoretical max, but is that really going to happen? No, it's not. >> But the more realistic scenario may be if you are selling puts on different stocks and different indexes, is that we see a major fall in the mark in the whole market.

And and then you are in big >> [laughter] >> I thought this was a family show, John. Okay. All right. Well, yeah, but but that actually that actually makes my right. So what would be a huge daily move in the market? Like huge, huge, huge. 10%, right? I think what I think everybody can agree 10%. Okay, if the S&P 500 drops 10% today, we're all in trouble. Everybody's in trouble. Okay, understood. Okay. In order to hit the actual theoretical maximum loss point that every platform has to show you, that every equation has to show you, it It have to drop another 90% on top of that.

It's just It's just not going to happen. It's just not a realistic possibility. And so again, thinking more in terms of even the 10% I mean, what's the I mean, that's happened what? Two, three, four times in the history of the stock market? And so it's like, okay. Now again, size so that if that thing does happen that you're still going to you know, you can keep the lights on. Like I understand that. But in terms of a day-to-day practical reality, it's just not something that I think it is should be on most traders' radar. >> I always ask my guests to put their strategy on a risk profile scale where one is very low risk and 10 is very high risk.

And in my show, you are free to define the numbers as you see fit. And you are a professor of finance, so we are curious about your definition. Where would you put selling short puts? >> Well, I like the fact that you've given me the freedom to kind of reinvent the scale. That's kind of nice. Uh >> [laughter] >> I would say, again, it really traces back to the delta selection on what strike you might go with. I would say it's between a one and a five.

It's no higher than a five. Even if you're selling an at-the-money put. In fact, if we can go Let's go back to the platform just really quickly cuz this will make a really really good point. So if I go if I go to SPY, so again, major market index, right? I go to October. If I sell what is essentially, you know, in a lot of ways the riskiest put that I could sell without going in the money cuz that's a separate discussion that I think warrants a an entirely different uh angle.

The riskiest put that I could sell would be the at-the-money put, right? So the stock is at 767. I sell the 767 put. Look at the probability on selling This is the at-the-money put. This is the put where you theoretically have no wiggle room between where the stock is and the option going in the money. And look at the probability of profit. It's still 64%. Look Look the probability of making 50%. It's still 80%. Now, why is that?

Well, it's because you have all this extrinsic value. It's because your break-even point is so much further below where the stock price is. And so, that's why I put the ceiling of a short put at a five. And that's if you're selling at the money puts or even in the money puts. Like that's if you're taking essentially the riskiest of the bunch. Once you move out of the money to any degree, your risk drops precipitously.

So, now my risk is probably only a three or four or two or maybe even a one. I mean, if you're selling 25 delta puts on SPY or QQQ, I would have to say that is one of the least risky strategies that you could employ. Obviously, we have to talk about size and the parameters and things like that. And so, you know, from a sizing standpoint, I think staying, you know, between 3 to 5% of your account in terms of buying power is a good place to live so that you're not oversized.

Uh but yeah, I would say one to five is probably going to be the range. >> I mean, what I'm just curious, what would be a number 10 strategy on your scale? >> [laughter] >> Well, I so I would say I mean I mean selling straddles is is pretty high, I would say. So, obviously a straddle is where the where the put and the call sold at the same strike. So, I mean, if you're selling like if you sell a straddle in AMD or you sell a straddle in Micron, you're going to get paid for that.

Like the premiums you're going to collect. Like here, let's actually I mean, we'll pull it up cuz we can, right? Let's go to Micron. I'm just choosing one of the memory stocks that's obviously in play right now, right? A thousand-dollar stock so you're going to need a huge account to do this. But just to make my point, if I go into the 38-day cycle, you've got Micron at 1025. So, if I sell, hey, let's be a little bullish.

If I sell a 1030 straddle, right? I'm going to collect $180 in credit. Now, that's $180 per share. So, it's $18,000 per contract. And my buying power now is 30 grand. So again, if I'm thinking about 5% position sizing, you know, that's what you I'm looking at 600,000 to do this trade the right way to where I'm not emotionally charged up. I can do it the way I can be objective, blah blah blah blah blah. To me, this is getting a lot closer to it like eight out of 10, nine out of 10, 10 out of 10 because A, you're in an individual stock, so that's a different ballgame.

B, you're selling calls, that's also a different ballgame, especially with an individual stock. And then also C, you're doing it on a stock that is wildly in play right now. Like you can see the implied volatility of Micron is 71%. I mean, just for example purposes, if I go back to Apple really quick, Apple's only what? 40% or 30%? Yeah, you look at the implied volatilities of Apple, it's 32%. And so you're talking about Micron, it's it's more than double the implied volatility of something like an Apple.

That would be nine out of 10 or maybe 10 out of 10. >> Jim, you have been selling puts for a long time, I'm sure. What are your actual results selling short puts? >> That's a great question. So, as every trader out there, I don't have the results of the actual just the puts themselves because it's a combination. It's a piece to the puzzle. Like it's a piece to the overall portfolio. But again, I mean, if you look at I mean, you can still go to the tastytrade research now.

You can pull up the market measures. You can pull up the options dives. I mean, they've looked at this for so many years, right? Just how effective short puts can be in terms of, you know, matching market returns with a fraction of the capital. Like, you know, how can I get market-like returns with less capital? How can I get market-like returns with, you know, less risk? I mean, short puts can do that for you. And so I don't have like a short put number for you like, oh, I mean, short puts added, you know, 300 basis points to my returns or 400 basis points to my returns or what have you.

I don't have that information for you now. And I I I'd be curious to know if, you know, too many traders out there actually have it broken down by strategy. If they do, then I need to know what kind of journals you guys are using cuz that's pretty impressive. >> But how do you measure the the how would you measure the results? And let me ask in a different way then. What what would [clears throat] you say would be realistic long-term results from selling puts that traders could expect if they are doing it okay? >> Yeah.

Yeah, a great question. Yeah, so so I think that, you know, if we think about if we think about market returns. I'll I'll answer your your second question first. If we think about market returns being about 10 or 11% on average, I personally think that most traders with enough skill and enough ability can achieve market-like returns with less risk or slightly better than market-like returns with similar risk profiles.

So, slightly better means I mean, you know, 13 to 15% annualized returns does not seem out of the question to me with a strategy like a short put only. If that's all you did. Again, if that's exclusively what you did, then that is I think that's very very achievable. So, thinking about the baseline. But then when I go back to, you know, how do I know it's effective? Well, again, it's not like when I think about my own portfolio, like trading and testing and trialing, I mean, if things aren't working, they don't stay around.

Because again, I have no I mean, the only reason why I'm trading, just like you are Johnson, just everybody is, we're trying to move forward. We're trying to make money. And so, if it's not getting me what I'm what I'm going for, then it's gone. Then I'm not doing it. Like case in point, this is why I personally don't like selling put spreads. So, this is actually a perfect continuation and it makes the point that I want to make.

A lot of traders out there like selling put spreads because you have the defined risk and you know your worst-case scenario and you're able to benefit from the upward trajectory in the market. Okay. I was doing that, too. But then I'm like I'm selling put spreads and I'm also selling puts. I'm like man, the puts are just so much more effective. They're so much more effective because you have that unfiltered exposure to the Greeks, which is what I want.

I want the unfiltered upside exposure with Delta. I want the unfiltered decay exposure with Theta. I want the unfiltered Vega exposure to volatility contraction. With a short put spread, yes, I'm defining my risk, but I'm losing out on all that exposure. My Theta's watered down. My Delta's watered down. My Vega's watered down. Not to mention, you know, what do you do if you have a short put that doesn't work? Nothing.

You just take max loss basically, right? You can't roll it for a credit. It just becomes really difficult to deal with. And so the short put is kind of like a, you know, kind of like an in-house game of Survivor, right? Where it's like man, I'm like the short put spread was there, but now it's mostly gone because the short put is just so much more effective. So for me, let me control my sizing on entry. Let me let me make sure that I'm not getting out over my skis, and then I think the short put can just have a home in pretty much anyone's anyone's portfolio. >> Let's uh sum up.

What would be the two or three most important takeaways that you really want the audience to remember from this interview? >> So so the number one thing that I want everyone to remember, and this is actually new. This is not something that we've even mentioned, but it's such a perfect way to introduce this idea. The short put is such a powerful strategy that regardless of whether you are bullish or bearish or neutral in the market, I think it has a home in your portfolio.

And that makes it quite unique in that regard because, you know, a lot of other strategies only really fit if they match up with your overall bias. Like, you know, I mean, if you're bearish, then selling call spreads is going to make a lot of sense. If you're bullish, selling call spreads is not necessarily going to make a ton of sense. Now, it might make sense in terms of balancing your portfolio metrics, but it's not going to be your go-to strategy when it comes to, you know, executing or implementing that bearish bias.

But a short put is so powerful. I actually think that it can fit either if you have an overall bearish bias in the marketplace because it can complement all of your other bearish positions so incredibly well. And then the second thing I want to make sure that everybody remembers is again, if you are a permabull, if you like playing in the market to the upside, you have the huge advantage of taking if that's what it comes to.

If you want to wheel it, you can wheel it. If you don't want to wheel it, you don't have to wheel it. Like there's a number of different things you can do. It's just really beneficial and advantageous. >> What would be good resources to learn more? >> Well, obviously, I mean, Options Uncapped would be a great place to to check out. I mean, that's my brand new YouTube channel. And, you know, one of the thing I mean, you were asking about results earlier.

So, one of the things that I'm doing differently, John, that I really cuz I want to make a big positive impact on the industry. And so, if if anyone checks out the Options Uncapped YouTube channel, what you will find is you will find me trading my own portfolio, no business account, no corporate account. It's my capital and I am showing full transparency. So, I'm showing the P&L. I'm showing all the trades. You see all of it every day that I'm on the stream.

I explain everything I did, why I did it, and you see everything out there. And I mean, you know yourself, John, it's like there are very few traders out there that will do that. And so, I'm putting my money where my mouth is. It's on the Options Uncapped YouTube channel. Those are my daily streams, and then we have a bunch of educational content that typically goes up in the evenings. >> Um I will, of course, recommend that you watch some of the other interviews here on Theta Profits.

There are several interviews about selling puts in in different ways. If you like to follow the channel, I also suggest that you subscribe to the newsletter that we send out every week. And every Monday at noon Eastern is Theta Live with new guests every week. Dr. Jim, thank you very much for coming here and sharing how you sell puts with such great enthusiasm. >> You're welcome. Thanks for having me.