Options Trading

1. Your Relationship with Money Shapes Your Financial Reality

Those who have knowledge of money make money their slave; but those who do not have knowledge of money becomes slave to it.

Money is emotional. Your feelings, thoughts, and beliefs about money, shaped by upbringing and life experiences, form a deep emotional connection that impacts your financial decisions. Recognizing this relationship is the foundation for creating a healthier financial life and is critical for managing finances in trading. Reflect on early messages about money – were they positive or negative? Did you witness financial stress or success? These early beliefs, often formed by age 5-7, profoundly influence your adult money mindset.

Mindset matters. Becoming aware of your emotions and behaviors around money allows you to cultivate a more positive and empowering mindset. Limiting beliefs, like thinking money is the source of all evil or hard to come by, lead to fear-based decisions. Conversely, believing money flows abundantly opens possibilities. A positive mindset helps you make decisions aligned with your values and goals, reducing stress and improving overall well-being. Financial stress negatively impacts mental and physical health, while feeling in control boosts confidence and security.

Change your words. To overcome negative thoughts and self-doubt, reframe them into positive questions or affirmations. Instead of "How come I can't figure this out?", ask "I wonder how to figure this out?". Your body and subconscious respond differently, opening pathways for solutions. Identifying inherited beliefs from family is crucial; like the roast story, actions can stem from outdated reasons. Acknowledging these beliefs, accepting your current situation (without settling), and choosing to change is the first step towards a growth mindset and attracting abundance.

2. Stock Market Psychology: Emotions Drive Decisions

The stock market doesn't only teach how to make money but it also teaches lot about life, patience, persistence and wisdom.

Emotions impact markets. Stock market psychology is the study of how human thoughts and feelings influence trading behavior, leading to phenomena like bubbles, panics, and crashes. Fear causes panic selling, while greed drives irrational buying (Amateur Gaps). Institutional market makers, or the "Analyst Cartel," significantly sway sentiment through large trades and public statements, often manipulating prices for their benefit by creating selling or buying frenzies that retail traders follow. Understanding these dynamics is key to making rational decisions.

Fear and greed management. These powerful emotions can cause volatility and unintended consequences. To manage them, set clear investment goals and develop a well-thought-out trading plan. This removes impulsive decisions based on market swings. Monitor your "felt sense" – if a trade makes you feel stressed, it might exceed your risk tolerance. Use risk management tools like tightening spreads or reducing contract size to stay within your comfort zone, ensuring decisions are based on your plan, not emotional reactions.

Avoid the herd. Herd behavior offers a false sense of safety but leads to irrational decisions and can fuel bubbles or crashes. Don't rely solely on others' opinions or talking heads. Do your own research, look at objective data like Accumulation/Distribution ratings (which show institutional money flow), price action, and volume. The trend is your friend, but understand why the trend exists. Diversify across sectors and, most importantly, stick to your trading plan to avoid being swept up by the crowd's irrationality.

3. Options Trading: A Powerful Tool with Ancient Roots

Options are contracts that give their holders the right, but not the obligation, to buy or sell an underlying asset.

Ancient origins, modern use. The principles of options trading date back to Ancient Greece, where Thales used them to secure rights to olive presses, demonstrating the core concepts of limited capital, a down payment (premium), and profiting from price changes. Early forms appeared in the 17th-century Dutch tulip mania, highlighting both the potential for profit and the risks of speculation and inability to fulfill obligations, leading to market collapse. Today, regulated markets like the CBOE make options accessible for hedging risk and generating income.

Benefits and risks. Options offer advantages like less financial commitment compared to buying underlying stocks, potential for high returns, and opportunities in any market condition (up, down, or sideways). They act as insurance for large portfolios. However, risks include high volatility causing rapid price fluctuations, time decay (options lose value as expiration nears), a limited lifespan (they expire worthless if not exercised or sold), and potential limited liquidity for some contracts. Understanding these trade-offs is crucial.

Key terminology. Essential terms include call options (right to buy), put options (right to sell), strike price (the agreed buy/sell price), premium (the cost of the option), expiration time (when the contract ends), intrinsic value (profit if exercised immediately), extrinsic value (time value), underlying (the asset the option is based on), and implied volatility (market's forecast of price movement). Options trade in contracts, typically representing 100 shares. Approval from a brokerage, often requiring a margin account and minimum balance, is needed to trade options.

4. Weekly Options: Your Engine for Consistent Income

Time Decay Is Our Best Friend

Frequent income opportunities. Weekly options, available since 2010 on hundreds of stocks and ETFs, expire every Friday, offering 4-5 trading opportunities per month compared to monthly options. This faster cycle allows for more frequent income generation. While premiums per contract are lower than monthlies due to the shorter time frame, selling them weekly can yield significantly higher total income over a month (e.g., 83% more in the SCHW example).

Accelerated time decay. The primary advantage of weekly options for sellers is accelerated time decay (Theta). Options lose value as they approach expiration, and this decay speeds up dramatically in the final days. For option sellers, this rapid loss of value in the options they sell translates directly into profit if the option expires worthless or is bought back for less than the selling price. This makes the short, 7-day lifespan of weekly options ideal for premium collection strategies.

Flexibility and liquidity. The short duration of weekly options allows for better risk management and quicker adjustments to changing market conditions. Traders can enter and exit positions rapidly due to increased liquidity as their popularity has grown. They also enable traders to capitalize on short-term events or news announcements, placing trades based on expected immediate impact. This combination of frequent income, accelerated decay, and flexibility makes weeklies a powerful tool for generating consistent cash flow.

5. The KaChing Formula: Insurance Plus Weekly Cash Flow

Our long-dated put is the tub of ice cream that lasts for 120 days; each scoop is the weekly put we sell.

The core strategy. The Weekly Cash KaChing Formula is a strategy designed to generate weekly income by selling options while protecting capital. The basic setup involves two steps: first, buying a long-dated put option (insurance) that expires in several months (e.g., 120 days) and past the next earnings date; second, selling a short-dated put option that expires the following week. The premium from the sold weekly put is instantly credited to your account, providing immediate cash flow.

Time decay works for you. This strategy leverages time decay in two ways: the long-dated put (insurance) has slow time decay, preserving its value longer, while the short-dated put you sell decays rapidly, especially as Friday expiration approaches. This difference in decay rates is the engine of profitability. You pay a relatively small amount for long-term protection (the "tub of ice cream") and collect weekly premiums (the "scoops") that quickly recoup the insurance cost and generate profit.

Risk containment. The long-dated put is your sleep-at-night protection. It caps your maximum potential loss on the trade. For example, if you sell a $74 put and buy a $70 put, your maximum risk is the $4 difference minus the premium collected. Position sizing, keeping each trade to a small percentage (e.g., 3-5%) of your portfolio, further contains risk. Even if the stock drops significantly, your long put increases in value, offsetting the loss on the short put and limiting your exposure, allowing you to manage or exit the trade without catastrophic loss.

6. Sleep Worry-Free: Risk Management is Paramount

If there is ever a time when you can’t sleep and are feeling anxious because of your positions in the stock market: You are overexposed.

Know your risk tolerance. Anxiety about market positions is a clear sign of overexposure. Just like day traders define a maximum daily loss they can emotionally handle, you must define your acceptable risk per trade and for your overall portfolio. This threshold should allow you to say "Oh well" to a loss, not "OH NO!". Your trading plan dictates this level, ensuring decisions are unemotional and within your comfort zone.

Protection is key. The KaChing formula ensures you are never without protection due to the long-dated put. This insurance limits your maximum loss, preventing account-crippling events like margin calls experienced by the author. Even if a stock tanks, the long put's value increases, offsetting the loss on the short put. While there's a cost for this insurance, its slow time decay means it doesn't erode quickly, preserving your capital and peace of mind.

Diversify positions. Spreading your capital across multiple, smaller positions (e.g., 3-5% of portfolio per trade) in different sectors hedges risk. If one sector or stock faces headwinds, others can compensate. Avoid concentrating too many trades in the same sector. This diversification, combined with the built-in protection of the long put and adherence to your trading plan, allows you to navigate market volatility and temporary setbacks without losing sleep, knowing your downside is defined and managed.

7. Adjusting Trades: Navigating Market Swings with a Plan

I have a personal mantra that says, “I am in the right place at the right time, and things mostly work out fine.”

Adapt, don't abandon. Not every trade goes perfectly according to plan; markets fluctuate, and external events occur. Adjustments are necessary, but they must be based on whether the stock still meets your criteria (has an "edge"), not emotional reactions. If the stock loses its edge (e.g., makes a new low on high volume), exit the trade. If it's a temporary pullback, adjustments allow you to stay in the trade and continue generating income.

Rolling positions. The primary adjustment is rolling the short put to the next week. If the stock price drops and your sold put is now in the money, you buy back the current week's put (at a loss) and sell the next week's put (often at a higher strike or for a higher premium due to increased volatility). The premium collected from the new sale often offsets the cost of buying back the losing put, or at least reduces the net loss for the week. You can roll indefinitely as long as the stock maintains its edge and you have long put protection.

Track everything. A detailed trading journal is essential for understanding your trades, adjustments, and overall performance. Record stock name, dates, put details (long and short), premiums collected/paid, and weekly results (profit/loss). Notes on market conditions or reasons for adjustments provide valuable learning. This unemotional record helps you stick to your plan, identify patterns, and see how rolling trades allows you to recover from temporary losses and eventually become profitable again, reinforcing trust in the system.

8. Selecting the Best Stocks for Weekly Income

First, there is no one perfect stock, and each trader has their own preferences.

Look for specific traits. Ideal stocks for the KaChing method aren't necessarily the most volatile or the biggest names. They should trade above $20 (for sufficient premiums) and ideally below $400 (to avoid excessive volatility swings that complicate adjustments). Avoid stocks known for unpredictable, massive jumps or drops that can quickly make your protective put ineffective or create unmanageable spreads. Personal preferences and risk tolerance play a role, but certain characteristics make stocks more suitable.

Chart patterns matter. Focus on stocks showing a steady upward trend or a sideways consolidation pattern over a 3-month period. This indicates stability or potential for a controlled move, suitable for selling weekly premiums. Use simple indicators like moving averages (100, 50, 20), price action, volume, and volatility channels (Keltner, Bollinger Bands) to identify support/resistance levels and typical price behavior. Avoid overly choppy charts or stocks with accounting transparency issues (like some Chinese stocks, based on the author's preference).

Ignore fundamentals, follow money flow. For this trading style, deep fundamental analysis (valuation, earnings reports) is less critical because the market has already priced this information into the stock chart. Instead, focus on technical indicators that show institutional money flow and price trends. Resources like Investor's Business Daily (IBD) can help identify strong sectors and leading stocks within those sectors that are likely candidates for consistent premium generation. Trade what you see on the chart, not what you believe about the company's long-term prospects.

9. Your Trading Plan: The Unemotional Blueprint for Success

If your plan is complete, you have a course of action, and all you do is execute.

A roadmap for trading. A trading plan is a written, unemotional guideline that defines your goals, risk tolerance, timeframes, and trading preferences. It acts as a blueprint, removing guesswork and emotional reactions when faced with market events. Without a plan, you're likely to make impulsive decisions based on fear or greed, leading to inconsistent results or significant losses. A plan provides a clear course of action for every scenario.

Define your parameters. Key components of a trading plan include capital allocation (how much capital is dedicated to this strategy), maximum risk per position (e.g., 3-5% of allocated capital), and trading goals (e.g., target weekly or annual return). For the KaChing method, this means defining the number of contracts based on the spread width and your risk percentage. Having ample reserve capital is also part of the plan, ensuring you can manage drawdowns or take advantage of new opportunities.

Set clear rules. Your plan should detail your trading preferences and rules, such as: sticking with trades as long as the stock has an edge, diversifying across sectors, being willing to hold cash during high volatility, avoiding trading through earnings announcements, and favoring smaller contract positions to reduce overall risk. It also includes profit-taking rules (e.g., taking 80% of premium early) and rules for handling assignments or rolling trades. The plan is dynamic and can be adjusted as your experience grows, but adherence is paramount.

10. Supersizing Your Weekly Profits in Favorable Markets

When money realizes that it is in good hands, it wants to stay and multiply in those hands.

Capitalize on uptrends. When market conditions are favorable, particularly in a strong uptrend, you can enhance the KaChing strategy to potentially increase profits. This involves adding directional trades that benefit from the upward movement, while still maintaining your core risk management principles. These supersizing methods are typically employed when your weekly put sales are consistently profitable and the stock shows strong momentum.

Adding long calls or spreads. One way to supersize is by buying long calls with the same expiration as your protective put. Choose a strike price based on your risk tolerance, often aiming for a delta around 0.5 or higher to capture more of the stock's upward movement. Alternatively, use bullish vertical call spreads (buying a call at a lower strike and selling one at a higher strike) to reduce the cost of the directional bet while capping maximum profit. These directional trades act as a "sweetener" to your core premium collection.

Manage directional risk. While supersizing adds profit potential, it also adds directional risk not present in the core put-selling strategy alone. Define clear exit strategies for these directional trades in your plan, such as a percentage loss threshold (e.g., exit if down 35%). Stick to your position sizing rules, ensuring these directional bets don't exceed your defined risk per trade. Even if some directional trades result in losses, the math works in your favor over time if you maintain discipline and your core KaChing trades remain profitable.

Last updated: May 1, 2025