This Option Strategy Is Wall Street’s Best Secret
I’ve found that a lot of retail investors use the same option strategies.
Many of them buy calls or puts. Some might sell covered puts.
But the way I look at the options market is: Where’s the individual retail investor’s edge?
So, I set out to create an option strategy that’s different from what everyone else is doing.
In today’s 25-minute video, I’m joined by Chris Cimorelli from True Options Masters.
We discuss how my strategy works and why it’s a smarter way to trade options.
(If you’d prefer to read a transcript, click here.)
Chris Cimorelli: Hey guys. Chris Cimorelli here for True Options Masters. And I like to tell our first-time options traders that options don’t have to be complicated. We’ve got a lot of pros here who can show you how simple options trading can be.
But that’s not what we’re going to talk about today. I’m sitting here with Ian King, and he’s one of our “jack of all trades” at Banyan Hill.
Ian does everything. He has a killer track record in his stock service. His crypto service has set records at our company. And not to be outdone by anyone, now Ian is venturing into the options market with a completely different, brand-new strategy that we’ve never shown anyone before.
Ian, I’m excited to talk to you about this because, you know, there are so many different options strategies out there, but there’s one in particular that you really felt confident you could rack up some nice, consistent and even pretty sizable wins with.
So, let’s just go ahead and get started. What are we here to talk about today, Ian?
What Are Ian’s Options Trading Strategies?
Ian King: Thanks for having me, Chris. Thank you for those kind words. I’m really humbled by that.
I think the way I look at the options market is, you know, where is the individual retail investor’s edge? And I find that a lot of the services that retail investors subscribe to are sort of similar. They’re buying puts, buying calls, or maybe selling covered points.
I wanted to create a service that was a little bit different than what everyone else does. It’s a little more complex. It’s going to take, you know, maybe a few minutes of everyone’s time to kind of learn the trades. But I outline them.
And it’s based on the idea that the market tends to move sideways for longer periods of time than it moves up or down. You know, the market stays in a range. The bottom supports, and the top is resistance.
So, I basically created a strategy that helps you take advantage of these ranges. And it’s called a noncorrelated strategy, where you might have stocks that are going up, or you might have stocks that are going down. But this tries to make money on the fact that the market moves sideways.
So, it’s sort of, like, agnostic to market moves. As long as we stay within a certain range, we’re going to profit on each individual option.
Chris: Right. I need to comment on this because people may not understand the brilliance of this.
So, you call these “Profit Frames” because, to your point, most of the time — I think you guys studied this, and it’s actually roughly 80% of the time — the market tends to stay in a range, right?
So, really, most of your gains from long-term buy-and-hold only come from about 20% of the time. What do we call that, an 80/20 rule? I think there’s a special name for it.
Ian: I think it’s called the power law. You know, it applies to pretty much everything.
Chris: Right. Like, in an organization, 20% of the people do 80% of the work.
Ian: (laughs) Not at Banyan Hill, though.
Chris: (laughs) Not at Banyan Hill. No, of course not. We’re special.
The reason why this makes so much sense, and why this just really lit a light bulb in my head, is you’re not betting on what you want the market to do. You’re betting on what the market actually does.
When you buy a call, you’re betting the market will go up. You’re hoping and praying the market will go up. When you buy a put, you’re hoping and praying the market will screw everybody else over and go down.
Chris: What you’re doing with these Profit Frames is you’re going in line with what the market actually does most of the time. And this is what I love. You don’t really have to be right on the direction. All you need is for the market to stay in a range, and you can make money.
Chris: It’s brilliant. And it makes sense. I think anyone watching this will be, like, “OK, yeah, that does kind of make sense.”
Ian: Thank you. That’s a great way to explain it.
And then I would also note that the most money in option trading — like if you go down to see the market makers on the floor, or you, like, look at the algorithms — they’re all selling premium.
So, what I mean by selling premium is you want to be short options because there’s this thing called time decay. As an option contract gets closer to expiration, it loses a little bit of value every day. If you’re a seller of that contract, you get to keep that value. And, you know, if you’re a buyer of an option contract, that value is just going to be eroded away.
The thing that’s really fascinating about options is there’s this thing called nonlinear decay. It means, basically, that the time decay doesn’t move in a straight line from a year out to zero. It actually starts to accelerate.
Chris: Right. The closer you get to your expiration.
Ian: So, this strategy tries to take advantage of that sweet spot where you have an accelerating rate of decay.
About a month out, typically what we try to do is sell one of these trades or put one of these trades on a little bit more than a month’s expiration. So, let’s say three to four weeks, in general. And then we try to take it off the week before the expiration date because if you’re close to the strike price, options become a little bit more sensitive to price changes as you’re close to expiration.
So, really, the goal of this strategy is to take advantage of something that naturally occurs in the option market and also naturally occurs in the stock market. It’s basically layering on one phenomenon over another.
And, you know, we’ve shown some very consistent returns in our model portfolio and our track record. This is something that I also used to trade on my own six, seven, eight years ago when I was more of an active trader in the markets.
Do You Trade Options In Short Frames Of Time?
Chris: Right. OK, so, I want to talk about the time frame for a second here before we get into too many details. You’re saying about three or four weeks, roughly a month. A lot of our experts like to trade options that expire two or three months out. Some of them even go as far as six or nine months out.
Now, if you’re an impatient young millennial like myself, you don’t like waiting that long. I hate to say it, but sometimes I’d almost rather be wrong on a short-term trade than wait months for gains on a longer-term one. And maybe that’s a personality defect I should work on.
I like this, Ian, because a lot of people who try and bet on, you know, short-term direction, they get it wrong. But, again, you’re not betting on direction. So, I think you really are finding a sweet spot here. It’s relatively short-term options trading, but it still has a high win rate so far.
Ian: Correct. I mean, I think that we’ve been profitable on seven of our last 10 trades that we’ve done in the portfolio. I haven’t checked it recently, but it does have a high rate of success.
And, you know, if you widen the sort of frames that we’re looking at, it’s going to give you a little bit more risk if things go wrong, but it’ll give you a higher chance of success. And if you zoom in on a frame, it’ll give you a lesser probability of success, but it will be less risky as well.
But my rule of thumb is I use just a major index, whether it be the S&P 500, the Nasdaq or the Russell 2000, something that has very liquid option contracts so you can get in and get out without paying sort of slippage, because you’re investing in four contracts per trade.
Ian: And then, you know, I figure out what the direction of the range is.
The one thing I’ll say about using indexes is you eliminate sort of that idiosyncratic risk, right? So, let’s say I do a spread trade on Apple and, you know, Apple the next day comes out and warns about iPhone sales, and the price is going to go down.
That might impact the indexes. But the result of Apple dropping 20% is going to be more muted on the S&P 500.
Chris: Right. You’re betting on a lack of volatility, so it makes sense to trade an index as opposed to an individual stock because, you’re right, a piece of news can drop that can affect a stock.
Ian: Exactly. And I’ll tell you one other benefit.
You know, when I first got into option trading 25 years ago and then worked as an option sales trader on Wall Street, we had to pay $3,000 to $5,000 a month for different types of option software. So, that would be Bloomberg, which would give us our data on option volatility, historical and implied volatility. We were running a bunch of different software programs as well that the CBO used to publish for $4,000 a month.
Now all of that is incorporated right in your trading software. So, you know, if you do a little bit of digging on TD Ameritrade, one thing I love to show subscribers is how they can actually take advantage of the different platforms that they use, because all of this information is right in front of you now for the first time.
It’s just that a lot of people don’t understand, like, how to read it. They don’t understand what implied volatility means. What does it mean to be “rich” or “cheap”? Or should they should buy or sell options? That information is already in front of you if you know where to look.
Chris: Well, I’ve seen your course on your crypto service, and it’s very comprehensive. You really go above and beyond. And I like that you do that. I like that you actually take that next step and actually try to, like, educate our readers and market participants as opposed to just, like, “Here’s the trade you’re going to place, and I make you 100% reliant on me,” right?
That’s what I really want to be able to give them. It’s like, you know, “You don’t have to rely on us forever. We’re going to show you the ropes.” And you do that.
Ian: Yeah. And it’s important that people understand, like, what they’re getting themselves into, right?
One of the great things about option spreads is if you just buy a call option, you know how much you’re investing, and you know how much you can lose, but you don’t know how much you can make because it’s open-ended. But if you’re doing a spread trade, let’s say you’re selling a spread trade, you know exactly how much you can make or lose on every trade.
So, that allows you to position-size accordingly by knowing what your risk is on the trade. And I think that differentiates, you know, options from the stock market because it feels like with options that you’re addressing a problem with many different tools, whereas, like, if you’re just trading stocks, it’s like trying to renovate your bathroom with just a hammer. You know what I mean?
Like, there’s only so far you can go with it. Whereas if you had a tool kit, even from Ikea or whatnot, there’s a lot more that you can do. And that’s, I think, the benefit of options. You can trade a lot of different scenarios in the market that you couldn’t with just stocks,
Chris: That’s absolutely correct.
How Do You Make An Options Trade?
So, I want to talk about the actual, you know, placing the trade a little bit. Something I like about this — please correct me if I’m wrong — my understanding is you don’t actually have to pay anything upfront to get into these trades, correct?
Ian: Well, you have to have the margin in your account.
Chris: You have to have the money in your account. But when you buy a call option or a put option, you’re spending that money. Whereas this time, you just have to have the cash or the margin.
Ian: Yeah, you have to have the reserve to cover any potential losses. So, you know, if you’re doing any type of option spread trade, if you’re selling, let’s say, a put spread or call spread, you always have to have the amount of money in your account that can cover your account for any potential losses.
I mean, the good news here, though, is that when you’re selling any of these spreads, you know exactly how much you can make or lose on every trade. It’s basically a defined-risk trade.
Chris: Right. So, it gives you flexibility. And then the other part that I really like is that it pays you up front, correct?
Ian: It pays you upfront in the sense that you’re getting a credit in your account.
Ian: You’re selling something, and you’re getting credit.
So, think of selling an options contract like how an insurance company works, right? You’re basically selling your premium. You’re buying the premium from the insurance company. The insurance company is basically collecting your money and then paying out claims if things go wrong.
Option contracts, if you’re selling them, are very similar in the sense that somebody is paying you as long as things stay the same and the status quo is the same. More likely than not, you’re getting to keep that entire premium.
Chris: Well, you know, insurance is such a great business because the vast majority of the time, their customers aren’t really filing claims. So, they’re just making consistent money. This is kind of similar.
Maybe we shouldn’t follow that metaphor too far because, you know, you say you won on seven out of 10 trades. I think even more recently it was better than that. It was like seven out of nine, or something like that.
So, you’ve already proven that this can have a much higher win rate than most options strategies, which have win rates of 40% or 50%. Honestly, anything above 60%, I see that and I’m, like, “Wow!”
So, I like the consistency here. And again, it just makes sense. It’s playing the market a little bit smarter. It’s doing what it actually does. It’s doing what the big investors do, and they do that for a reason because it can be more consistent.
And like you said, it just takes fewer variables out of the equation. You know, some people aren’t comfortable with that. Some people don’t want to, you know, just sit on their hands and hope and pray that the trade they’re placing is going to work out.
Ian: Yeah. And I think one of the beauties of our strategy is because we’re not sitting on something for months, if you’re just rolling your contracts into a new trade every few weeks or so, you’re incorporating what the market is doing as well.
So, let me give you a case in point. I brought up the insurance analogy, and I think it’s a good one because, you know, let’s say that you’re buying car insurance. The insurance company Progressive is selling you insurance. It gets to keep the premium. But then at some point during the year or whatever your term is, you get in an accident, or you get a speeding ticket. Well, the insurance company is going to adjust your premium.
The option market works like that in the sense that, you know, the value of the puts and calls that you’re going to sell in the next trade that you do is going to be higher if the market starts to move erratically. So, if volatility picks up, you’re going to get more premium in these trades.
Ian: It’s the same thing as an insurance company adjusting your premium higher if you’re a bad driver. Options markets are very efficient in the sense that the market makers understand that if volatility is going up, the price of options goes up as well.
And because our trades typically come every week and expire every three to four weeks, we’re going to be able to take advantage of any heightened volatility in the market because we’re not sitting on something that, let’s say, you know, we put on six months ago, and we’re waiting for it to expire in three months.
We’re getting in basically as soon as the market moves or volatility is picking up. So, we don’t have to worry about that so much because it’s more of a shorter-term strategy.
Chris: So, I’m hoping that everyone who’s listening who didn’t understand that at least took away from that that Ian knows what he’s talking about.
Ian: (laughs) I hope so.
Chris: And I think that you said you were doing this on your own as many as, like, eight years ago, and you’ve been trading options for upward of 25 years.
I have a hard time believing that, Ian. You don’t really look that old to me. But maybe you’re just aging very well.
Ian: Yeah. My wife has a great skin care routine for me.
Chris: Gotcha. We live in South Florida, too. I mean, there’s a little Botox going on. You don’t have to tell me if that’s the case.
Ian’s Trading History!
Chris: But you’ve been trading options for a very long time. So, maybe you can just tell us a little bit about your history.
Ian: Sure. So, I mean, I read a book, McMillan on Options, which is a famous one, in college, and it was sort of during the dot-com bubble. I started trading options in my dorm room, essentially, and had some success.
I was working at fixed income when I left college and went to Wall Street. But then I got back into it, I guess, when I left the big bank and went to a smaller boutique shop. We specialized, basically, in crafting options strategies for hedge funds.
So, I’ve been able to talk to some of the most astute investors in the option markets and learn from them and really understand, you know, what, essentially, it is they’re looking for when they put on any specific trade.
I left that business and started my own fund for a while. And, you know, most of my success was basically on buying puts and selling upside calls on financial stocks during the financial crash. So, that brought lots of success. And I owe the options market a lot of gratitude for that.
Now I feel like, you know, I’ve learned all this, I’ve done other things in crypto and stocks, obviously, like you mentioned. And now I want to do this because I want investors to see, like, how you can better manage your risk in the options market and capitalize on a specific strategy that, you know, does really well.
And this is a service where we’re going to open up to other strategies. We’re not going to just stick with this one. I think that the key is the toolkit analogy. It’s, like, you have to figure out what the problem is, and then you can use the right tool.
There are going to be markets where we want to be buying put spreads, or selling call spreads if the market’s going down. But this is sort of the strategy that we’ve been working on just because the market volatility has been hinting that this is the right one that’s going to be successful.
Chris: Yeah, absolutely. I mean, you know, I trade IWM a lot. That’s the ticker for the Russell 2000. And the entire past year was basically in this range (makes a rectangle with his fingers). Now, it dropped a little bit below that range yesterday. So, we’re going to see what happens next.
But you’re absolutely right that there are certain market environments that are more conducive to certain strategies. And because you have so much experience, I trust you being able to kind of determine, OK, this is the right strategy for right now.
And I think a lot of the problem with certain traders is they stick to one thing. That’s going to do really well in certain environments and not so well in other environments. So, I really like hearing that you can be flexible. And again, that’s just going to educate our readers or participants even more in just understanding how to read the market the way you do. So, I’m very excited about that.
Ian: Thanks. I’d also mention, you know, there are times when you just don’t want to trade at all.
I mean, I think the best trade you can make most of the time is no trade at all. And, you know, even recently, we’ve got a couple of weeks without putting a new trade on just because I found that when the market is in what I call price discovery, whether that be on the upside or the downside, you know, it’s very difficult to sort of nail it into a certain profit range.
For me, protecting and preserving capital is key. And then making money on the natural tendencies is probably second. So, I’ll be the first person that will say, you know, just turn the switch off right now because I’d rather not take the risk on something that I don’t think is as certain as it typically is.
Chris: I’ve got to be honest with you: I don’t really have an opinion on what the market’s going to do next.
I’m kind of agnostic on the market as well, which is one reason I’m excited that we’re putting this in front of our viewers and readers right now because, you know, the S&P 500 has been going up and up and up. But yesterday the small-cap market did actually break out of a range to the downside.
So, it’s really kind of hard to determine, I think, what’s going to happen next. 2020 was great for smaller stocks. 2021 was great for bigger stocks. And now people are talking about oil at $100 again. It’s just like, where are we going? I thought the market was shifting toward, like, hyper innovation, and now it’s moving out of those stocks back to oil.
So, I love that you have something that can kind of, you know, zig and zag with the market rather than just hoping the market comes back into your favor again. I appreciate that. I can’t tell you how much.
Ian King: Yeah, I mean, we don’t hope in this strategy. You know, we trade what’s in front of us. And I think because it has shorter time frames, it gives you that ability where it’s, like, you don’t really have to sit and pray in positions. You just get in and get out.
It’s a little more conducive toward the kind of chaotic, schizophrenic market that we started with this year than in previous years. Like you said, 2020 was great for small caps, and 20201 was great for big caps.
No one really knows the direction it’s going this year. But we’ll see a lot of rangebound movement, I believe, this year as well. So, that’d be great.
Chris: Well, I’m really excited to get this in front of our readers at True Options Masters because this is really the kind of stuff that we created True Options Masters for. We wanted to be able to show them more advanced strategies, and that’s exactly what you’re going to be selling them.
So, we’re recording this a couple of days ahead. If you’re watching this right now, Profit Framing is live. You can click on this link to watch it now. It looks like a very, very, very good video. Again, it’s live. Take a look.
Ian, do you have any closing remarks for us?
Ian: I think you covered just about everything. I mean, you did a really thorough job asking the right questions.
Yeah, I would just say, check it out. If it’s not for you, it’s not for you. It probably might be for you, especially, you know, if you’re just getting into options for the first time. I feel like there’s a lot that can be taught.
And also, I want to make sure that everyone understands what they’re doing, what they’re trading. And then, you know, give them a new tool to kind of conquer the markets, whatever it might throw at them in the future.
Chris: I agree. In some sense, this is a bit like diving into the deep end of options. But at the same time, the trades are comprised of individual pieces, so you’re just trading four contracts at once.
Basically, if you know how to buy one option, you pretty much know how to do this. It’s not really harder. It’s just a little bit more work. You know, instead of it taking 60 seconds, it might take two or three minutes. No big deal.
And I want to mention this too: You had one trade that on a percentage basis won over 100%. Isn’t that right?
Ian: Well, the way they calculate it is a little different. You never really get 100%. But you do keep all of your premium.
Chris: So, the margin you had to have in your brokerage account … the premium you collected was more than that margin, right?
Ian: Right. And, you know, that’s what we try to do. So, like, if you’re putting a spread trade on, let’s say it’s $3 wide, the goal is to get more than $1.50 to get more than half on every trade.
The other thing I would say about the complexity of it is that these online brokers make it really simple, where you basically click a couple of buttons and it populates the trade for you. Whereas, you know, I remember when I first started trading stuff like this, you had to call down to the floor and basically have, like, different brokers make the trade for you. One had to do, like, the call spread, the other one had the put spread. And it just wasn’t simple.
Now, because of, like, all the algorithmic trading, there’s basically already a market for this because the algorithms just pair off exactly what you want to do.
Chris: And that makes it so much more exciting. I mean, this is something that elite investors have been doing for a very long time. It used to really not to be widely available to retail investors.
Now it is. Now you can do this. Now you can use Wall Street’s best secrets for yourself. So, that’s very, very exciting.
And I just want to say this one more time. Something that really stands out to me about this is when you’re targeting a higher win rate in options, you’re typically settling for smaller returns. And this doesn’t really do that. I think it’s the best of both worlds. I think you really have found the sweet spot.
I’m really excited to see, you know, what you continue to do over the next several weeks. And again, it’s live right now. Profit Framing. Check it out.
If you’ve got a comment or question for Ian or me, feel free to drop it in the comments section. And, of course, if you like this video, please like and subscribe.
Ian, thank you so much for taking the time to talk to me today and our True Options Masters readers. I feel like you didn’t exactly make it exactly for us, but we’re here. We’re excited. When I heard you were doing this, I was, like, “Oh my God, True Options Masters readers are going to love this.” So, thank you.
Ian: Awesome. Thanks for having me, Chris.
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