My Options Trading Strategy For 2023 | Introducing SOP Options Trading Strategy

In this article, I want to share with you an options trading strategy that is relatively low-risk and has a good margin for error, while being profitable and easy to implement.

For simplicity sake, I shall called it the SOP strategy as I have been using it for the past 2 months and so far, I have achieved 100% win-rate, i.e. I have not lost any money using this strategy.

What Is The SOP Strategy?

The SOP strategy basically stands for “Selling OTM PUT” options.

In a PUT options contract, the seller agrees to buy 100 shares of the underlying stock if the share price of the underlying stock closes higher than the strike price on expiration date.

If you do not understand how a PUT options contract work, you may want to refer to this article:
How does PUT Option Works?

An OTM PUT options contract means the underlying share price is trading at a price higher than the strike price of the contract.

A full write-up explaining ITM, ATM and OTM concepts with examples can be found in this article:
What Is In-The-Money (ITM), At-The-Money (ATM) And Out(of)-The-Money (OTM)?

Essentially, it is selling a PUT options contract that is likely to expire worthless, thus allowing seller (Me) to collect premium and keep my capital free as I do not need to buy any shares. The downside of this method is that premium collected will be lower than selling ATM or ITM PUT options. In exchange, selling an OTM PUT gives you a safety margin of getting the trade wrong.

Take for example, Apple is currently trading at USD171.

If you sell an OTM PUT options contract at a strike price of USD150, you have a safety margin of USD21, which means that if Apple rises above USD171, or stays constant at USD171 or fell to USD150.01 on expiration date, the PUT contract will expire worthless and you will still get to keep full premium.

Getting It Wrong

So, what happens if Apple’s share price keeps falling and is hovering around your strike price? You still have an option to roll the contract to later date to avoid the contract getting exercised. At the same time, you get to earn more premium as you are stretching the contract to a later date and getting more time premium. I have explained the rationale of the contingency plan in this article:
How You Can Possibly Not Lose Money In Options Trading? | How To Trade Options Safely For Passive Income

This is a real-life example of me getting it wrong but still get to earn a small profit all thanks to my safety margin that I set for my strike price in the OTM PUT options contract that I sold:
I Was Wrong On Tesla’s Direction But Still Close Options Contract With Profits

Time Is The Only Constant In The Options World

In a choppy 2023 where even the best gurus got their analysis wrong, time is the only constant. This is why we need to take advantage of the time value in every options contract, be an options contract seller to help us earn a profit while the market can go up, down, sideways and keeps repeating these price movement with a short time frame, again and again.

Selling an OTM PUT options allows you to take advantage of the bullish trend and sideways movement (stock price does not change much throughout the duration of the contract) and gives you some leeway to absorb a price drop.

This Is Not The Wheel Strategy

The Wheel Strategy is a popular options trading strategy especially for newbies and beginners because it involves alternating between selling PUT and selling CALLS, when options contract get assigned or expires In-The-Money (ITM).

I realized that the Wheel Strategy works for stocks that do not have huge downside movement. If a stock keeps falling after the Wheel strategy is initiated, the options seller eventually runs out of premium to earn.

You can read more about the risk of selling Covered CALL/ Cash Secured PUT here:
The Truth About Options Trading That The Gurus Never Told You | What Newbie Options Trader Must Know Before Getting Started

The difference in the Wheel Strategy and the SOP Strategy is that the SOP’s main objective is not to get assigned, thus going for a lower premium with a safety margin for the contract to expire worthless. By not getting exercised, the SOP options seller can always have his cash on hand while earning contract premiums, one after another. When the SOP strategy is failing, it is important to activate the contingency plan explained above to prevent getting assigned with 100 shares, which would create the risks of getting stuck with the shares for a long time (if the share price continues to drop over time).

Taking Small Profits Regularly

One of biggest lessons that I have learnt in 2023, other than not to blindly follow any gurus, is to take small profits regularly. There were so many occasions whereby a decent profit turned into a loss, just because I decided to wait awhile longer or for a bigger profit, which eventually did not come.

In early 2023, I once had a chance to close my bearish vertical spreads positions for a USD2k profit and decided to held onto them and now I am down by USD30k. Recently, I had a chance to close my Tesla Covered CALL positions for more than USD2k profits but did not do so and now they are back in paper losses again.

So, moving forward, I try to take profits whenever I can, never mind if the market rises after I closed the position, I at least secure the profits rather than watch them evaporate into thin air. So, I will always remember this principle when it comes to trading in 2023, that “one bird on hand is better than two in the bush”.

Using Leverage With Margin Account

Selling Cash Secured PUT has not been widely popular due to the huge amount of capital required up front to pay for owning 100 shares of the underlying shares should the contract gets exercised at the strike price. Take for example, if you are selling a PUT contract on Apple for strike price of USD180, you will need to have USD180 x 100 = USD18, 000 of cash reserves before you can open (sell) a Cash Covered (Secured) PUT.

However, the above situation is only applicable for cash account. If you are using margin account on Interactive Brokers, you do not need to have the cash reserves in your account before selling a PUT contract. If the event your PUT contract gets exercised and there is not enough cash inside your trading account, you will go on a margin loan, i.e. your brokerage lends you money to buy the shares and charges you an interest for that.

I have shared how I use my margin account to provide that extra cash reserve to support the SOP strategy, while the managing the risk of going into margin loan and margin call. It is important that you read this post before using your margin account as leverage to sell PUT options contract:
How I Use My Margins Account To Earn Extra Income (Safely)? | How My Margins Account Help In My Selling PUT Strategy?

Less Time Needed To Monitor Share Prices

One advantage after adopting the SOP strategy and ditching my vertical spread strategies is that I spent less time monitoring the stock price and get less stress from trading. The safety margin that I have in the SOP strategy allow me to tide through the stock market’s volatility and price fluctuation while still giving me a decent chance of the contract expiring worthless (I get the full premium without having to own any shares).

Previously, I was spending so much time monitoring the share prices and chasing after the trends, opening up bearish spread positions when the share prices drop and bullish positions when the share prices rise. And because the market is so choppy and prices move up and down so quickly, I ended up closing most of my trades in losses.

100% Win Rate

I am really pleased that after using this strategy at end March 2023, I have maintained a 100% win rate and has yet to close a contract with a loss. Other than spending less time monitoring the market, getting less stress doing options trading, I am also getting a higher chance of winning, which was really encouraging after my disastrous start of trading in 2023.

What Strike Price & Expiration Dates To Choose

I like to choose contracts with length between 29 to 36 days because that is when theta (time) decays the fastest. As option sellers, we want the time value of the contract to decay more with each passing day so we can earn a bigger profit when we close (buy) the contract. Also, with the average 30-day cycle, the price is not likely to drop by more than 20 to 30%, which is usually the buffer I set for my strike price.

Speaking of strike price, I like to give myself around 20% price drop buffer as my safety margin. For example, if Tesla is trading at USD200, I will open up a SELL PUT contract with a strike price of USD160. That means that within the 30-day window to expiration, Tesla’s share price can drop as much as 20% and I will still win.

My Favourite Stocks For SOP Strategy

My top 4 favourite stocks for the SOP Strategy are Tesla, Nvidia, AMD and Palantir. These 4 stocks have higher Implied Volatility (IV), which means they are more volatile but at the same time, they reward options seller with a higher premium.

These 4 stocks are also among the top performers of 2023 and thus suits the bullish strategy of selling PUT. The chances of success is lower if we are using the SOP Strategy on bad performing stocks.

Selling Covered CALL (Premium + Bearish Hedge)

While the SOP Strategy is my main strategy for 2023, it does not mean that the majority of my funds allocation is on bullish bet . On the contrary, I have been overly bearish on 2023 by faithfully following a guru who is adamant that 2023 will see the worst market crash in history. I sold Covered CALL at the worst possible time, when the rally was about to start and had 40k of paper loss in bearish spread positions that are most likely going to expire worthless.

The overview of my fund allocation is as follow:

It is still very much geared towards being bearish with 83% allocated on bearish positions.

Investment Strategies (DCA, SSB)

Other than the options strategies listed above, I am also doing DCA into 2 ETFs, the SPY and QQQ because I think they have 20 ~ 30% upside potential in the coming years. Find out about how I do DCA automatically in this post:
Why I Am Doing DCA (Automatically) For SPY & QQQ For My Long Term Investment? (20% ~ 30% Upside Potential) | Step By Step Guide To Activating Automatic Recurring Investment On IBKR

I also have 120k worth of bonds as a emergency cash reserves and I share 5 reasons why I have built this reserves in this post:
Why I Am Building $120,000 Of Cash Reserves In Singapore Savings Bonds (SSB)? | 5 Reasons Why SSB Is A Worthy Low Risk Investment

Concluding Thoughts

IMHO, 2023 will be a year filled with plenty of bull and bear traps as the new bull market or a bigger market crash will not come so easily. So, it is important not to repeat my mistake of being too one-sided and leaving yourself with minimal downside/ upside protection, just in case you get it wrong. I thank you for reading till here and hope you have benefited something from this lengthy sharing.

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