Income & Volatility Arsenal

Selected Options

Guiding Philosophy: We are an insurance company for the stock market. We collect regular premiums by selling options (The Wheel, Iron Condors) when the risk is predictable and definable. Occasionally, we buy insurance (Straddles/Strangles) when we anticipate a "hurricane" event. Our profitability comes from a deep understanding of volatility and disciplined risk management.

The Volatility Regime Dashboard (The Core Decision)

Before any trade, we must identify the current market environment using a systematic, data-driven approach. This dashboard transforms raw market data into actionable regime classification.

1) Required Inputs (per underlying, per day)

A. Volatility Inputs (must be consistent tenor)

IV30: 30-day (or nearest 30–45 DTE) ATM implied volatility
IV90: 90-day (or 75–105 DTE) ATM implied volatility
IV History Series: Daily IV30 values for the last 252 trading days (or your chosen lookback)

B. Event Inputs

Earnings date: Next scheduled earnings announcement
Days to Earnings (DTEarn): Trading days until earnings (or calendar days; be consistent)

C. Pricing / Liquidity Inputs (guardrails)

Underlying price (S)
Options liquidity metrics (minimums):
- Bid/ask spread at ATM (absolute and/or % of mid)
- Open interest (OI) on ATM and short strikes
- Volume
(Optional but recommended) Borrow/HTB status for call overwriting and assignment comfort
(Optional) ATR(14) or realized vol (for risk sizing / strike distance sanity check)

2) Derived Metrics (Formulas)

A. IV Percentile (primary regime metric for single names)

Use IV30 series over lookback N = 252.

IV_Percentile = (#{t ∈ [1..N] : IV30_t ≤ IV30_now} / N) × 100

B. IV Rank (secondary "extreme proximity" check)

IV_Rank = ((IV30_now - min(IV30_1..N)) / (max(IV30_1..N) - min(IV30_1..N))) × 100

C. Event Premium / Term Structure Steepness (single-name event detector)

Two common versions—pick one:

Version 1 (difference):

EventPremium_diff = IV30 - IV90

Version 2 (ratio):

EventPremium_ratio = IV30 / IV90

D. Implied Move (for Binary/Event mode)

Approximate from the nearest-term ATM straddle (usually the weekly/earnings expiry). Let the ATM call and put mids be C_ATM, P_ATM.

ImpliedMove_% ≈ ((C_ATM + P_ATM) / S) × 100

(Use the expiration that actually contains the event.)

3) Classification Logic (Decision Tree)

Step 0 — Liquidity Gate (hard filter)

Before you classify regime, ensure the underlying is tradable for multi-leg options:

Minimum suggested thresholds (single names):

ATM spread ≤ $0.05–$0.15 (or ≤ 1–2% of option mid, whichever stricter)
OI on relevant strikes ≥ 500–1,000
Tight spreads on the strikes you would sell (condor wings / short put strikes)

If liquidity fails: No multi-leg premium selling (wheel may still be acceptable if you can execute CSP/CC with tight spreads).

Step 1 — Binary Event Flag (override)

Set BinaryEvent = TRUE if either condition holds:

A) Earnings proximity trigger

DTEarn ≤ 10 trading days (common and robust)

B) Term structure event proxy (even if earnings date is unknown or farther out)

EventPremium_diff ≥ 5 vol points
OR
EventPremium_ratio ≥ 1.25

If BinaryEvent = TRUE, you do not use IV Percentile to select "normal regime" short-gamma structures. You go into Event Mode.

Step 2 — Normal Regime (only if BinaryEvent = FALSE)

Use IV Percentile as primary classifier:

Low vol: IV_Percentile < 30
Moderate vol: 30 ≤ IV_Percentile ≤ 60
High vol: IV_Percentile > 60

Use IV Rank only as a secondary check:

If Percentile is high but Rank is low, it may be a "frequently elevated but not extreme" name. (IV is elevated versus typical history but has had one or a few extreme spikes that make the current level look low in Rank terms.)
If both are high (e.g., Percentile > 80 and Rank > 60), treat as "true fear" (more cash discipline).

4) Strategy Focus + Allocation Output

A) Event Mode (BinaryEvent = TRUE)

Dashboard output: "Binary Event / Known Catalyst"

Instead of "buy straddle/strangle by default," output a structure selection rule based on implied vs expected move:

You must provide (or estimate) ExpectedMove%. Use either:

Historical earnings moves (last 8–12 earnings), or
Analyst dispersion / guidance uncertainty proxy (if available)

Then:

If ExpectedMove% ≥ 1.3 × ImpliedMove%
→ Long straddle/strangle is viable (you are forecasting realized > implied by a meaningful margin).
If ExpectedMove% is ~ equal to ImpliedMove% (0.9× to 1.3×)
→ Prefer structures that reduce IV crush exposure, e.g.:
- Calendar / diagonal (short front event IV, long back IV)
- Debit spread (directional)
- Broken-wing butterfly / fly (cheap convexity)
If ExpectedMove% ≤ 0.9 × ImpliedMove%
→ Avoid buying vol. If you want to trade the event, prefer:
- Defined-risk short premium (iron fly / tight condor) only if you accept jump risk and have strict risk caps, or
- No trade / wait for post-event trend.

Allocation rule: separate sleeve, small

Event sleeve: typically 5–15% of options capital (because jump risk and model error are high).

B) Normal Regime Outputs (BinaryEvent = FALSE)

1) IV Percentile < 30 (Low vol / complacency)

Default focus: Iron condors only if minimum edge thresholds are met.

Edge thresholds (recommended)

Credit / wing width ≥ 20–30% (name-dependent; single names often require closer strikes—dangerous)
Short strikes at least ~0.10–0.15 delta (higher probability)
Avoid condors if spreads are wide or credits are "pennies"

If thresholds fail: shift to cash / selective wheel rather than forcing condors.

Allocation output (example)

40–50% Condors (only where feasible)
40–50% Wheel (high quality names only)
10–20% Cash

2) IV Percentile 30–60 (Moderate / normal)

Default focus: Standard wheel cadence (puts + routine CC if assigned)

Allocation output

60% Wheel
30% Condors (only in most liquid single names; otherwise lower)
10% Cash

3) IV Percentile > 60 (High vol / fear, but not event)

Default focus: "Wheel + cash discipline" (put-selling campaign, lower utilization)

Sell fewer CSPs than capacity
Use lower delta / further OTM puts
Maintain meaningful dry powder
In fear, you sell vol (rich premiums) but prefer asymmetric/single-sided (CSPs) over symmetric/defined-risk (condors) to limit tail blowups. Condors aren't banned – just not the "default focus."

Allocation output

70% Wheel (emphasis on CSP leg; selective CC writing if assigned)
30% Cash

Escalation to "true fear" (optional)

If IV Percentile > 80 AND IV Rank > 60, increase cash discipline:

e.g., 60% Wheel, 40% Cash

5) Parameter Defaults (Good Starting Point)

Lookback: 252 trading days
IV measure: 30–45 DTE ATM
Binary event window: ≤10 trading days
Event premium proxy: IV30 - IV90 ≥ 5 vol points or IV30/IV90 ≥ 1.25
Implied move: Nearest expiry that contains the event (usually weekly)
"Buy vol" threshold: Expected ≥ 1.3 × implied
Liquidity: Enforce tight spreads and meaningful OI

6) Output Fields (What Your Dashboard Should Display)

For each ticker:

BinaryEvent (Y/N), and if Y: event type + days remaining
IV30, IV90, EventPremium (diff and/or ratio)
IV Percentile, IV Rank
ImpliedMove% (if event mode) and ExpectedMove% (input/estimate)
Regime label: Low / Moderate / High / Binary
Primary strategy focus
Allocation recommendation
Trade gating flags: liquidity OK, spreads OK, catalyst risk OK

Action: At the start of each week, calculate these metrics for your core watchlist (e.g., SPY, QQQ, and your "Wheel" stocks). Feed the data through the classification logic above to determine your regime and primary playbook for the week. This systematic approach removes emotion and ensures consistency.

Strategy 1: The Wheel (The Core Income Engine)

This is our bread-and-butter strategy, optimized for consistent theta income with robust risk controls.

Stock Selection:
- Curated watchlist of 5-10 "Quality Compounder" stocks (happy to own long-term).
- Minimum criteria: Market cap > $10B, avg daily vol > 1M shares, dividend yield ≥ 1–2%, beta 0.8–1.2.
- Diversification: ≤20–25% per sector; skip if earnings within ±5 days or BinaryEvent=TRUE.
Entry Trigger (Selling CSP):
- IV condition: IV Rank 30–60 (ideal) or >60 only if IV Rank >40.
- Timing: 1–3 day pullback (RSI(14) <45 or 3-day ROC <-3%).
- DTE: 21–35 days (optimal theta cycles).
- Strike: Delta ~0.25 (prefer 0.20–0.30 range) AND below key technical support.
- Sizing: Max 10–15% capital per name; 5–10 wheels running simultaneously.
Trade Management Rules (Non-Negotiable):
- Profit target: GTC buy-to-close at 50% of premium.
- Roll winners: At 7 DTE, roll all open CSPs to fresh 21–35 DTE.
- Loss management (CSP Delta → 0.40):
  - Preferred: Roll down & out for net credit ≥20% original premium.
  - Accept assignment: Only if near expiry and breakeven attractive.
- Hard stop-loss: Close at -25% loss (anytime).
Covered Call Phase:
- Strike: Delta ~0.30, 21–35 DTE, ≥2–3% above cost basis.
- Skip CC if stock >10% above basis, or use 0.20 delta (let winners run).
- If called away: Immediately restart CSP on same name.
Risk Overlays (Portfolio):
- Net delta cap: ≤ +0.30 portfolio delta.
- VIX circuit breaker: If VIX >25, halve new CSP size.
- Correlation limit: Max 3 wheels per sector.

Strategy 2: The Iron Condor (The Range-Bound Specialist)

Deploy when market is quiet to profit from sideways action and IV decay.

Underlying Selection:
- Liquid ETFs: SPY, QQQ, IWM, GLD (avoid single stocks).
- Entry IV: IV Percentile <30 AND Credit/wing width ≥25%.
- Technical filter: ADX(14) <20 (confirms range-bound).
Entry Trigger & Structure:
- DTE: 35–45 days (theta sweet spot).
- Short strikes (body): 0.12–0.16 delta (~75–80% POP), outside clear trading range.
- Wing width: $10–20 per $100 underlying (e.g., $15 SPY wings); scale up $5 per $100 price increase.
- Min credit: ≥25–33% of wing width (e.g., $4 credit on $15 wings).
- Sizing: Max 5–10% capital per condor; 4–6 condors diversified.
Trade Management (Non-Negotiable):
- Profit target: GTC close at 50% credit (or 21 DTE).
- Early roll: At 21 DTE, roll winners to fresh 35–45 DTE for credit.
- Stop-loss:
  - Price breaches short strike → Close entire condor immediately.
  - -25% loss (anytime) → Close.
- Adjustment (if early): If tested but not breached, roll threatened side out/down for net credit ≥20% original.
Risk Overlays:
- No condors if VIX >20 or upcoming macro events.
- Portfolio max: ≤30% capital in condors.
- Max loss per trade: Defined by wings (acceptable if sized properly).

Strategy 3: The Long Straddle/Strangle (Event Volatility Bet)

This is a separate, specialized strategy. We do not use our core "income" capital for this. It is a calculated bet on extreme volatility.

High-conviction volatility arbitrage using dedicated "venture capital" (≤5–10% total portfolio).

Event Selection:
- Watchlist stocks with ExpectedMove ≥ 1.3× ImpliedMove (your core edge).
- Event in 2–5 trading days (avoid theta drag).
- Min liquidity: ATM spread ≤0.10, OI ≥1,000 both strikes.
Entry Timing & Structure:
- Optimal window: 1–2 days before event (capture final IV ramp).
- Straddle (high conviction): ATM call + ATM put (delta ~0.50 each).
- Strangle (lower cost): ~0.30 delta OTM call/put (wider move needed).
- DTE: First expiry post-event (avoid holding through).
- Max cost: ≤2–3% portfolio per trade.
Trade Management (Time-Based):
- Primary exit: Within 48 hours post-event (capture IV crush edge).
- Early profit take: Close at +100% gain (lock vol expansion).
- Stop-loss: Close at -40% loss if move disappoints pre-event.
- No holding beyond 48 hours post-event: Thesis is vol mispricing, not direction.
Advanced Filters:
- IV environment: Front month IV percentile >50% (event premium exists).
- No-go: If implied move already ≥ expected move + 10% buffer.
- Portfolio cap: Max 3 concurrent event trades.

The Integrated Risk & Portfolio Management Protocol

This is the glue that holds the system together.

Position Sizing (Your Rule, Perfected):
- Defined-Risk Trades (Condors, Straddles): Risk no more than **1-2% of total account value** on any single trade's max loss. Number of Contracts = (Account Value * % Risk) / Max Loss per Contract.
- Undefined-Risk Trades (Wheel's Cash-Secured Put): The "risk" is the cash set aside. No single put position should require more than **10% of total portfolio capital** to secure.
Diversification: Never have more than 3-4 active options positions on at once. Never have more than two positions in the same industry. We are running a book of uncorrelated bets.
Portfolio Review: Weekly, review all positions against our dashboard. Is the IV Rank still supportive of our strategy? Is our allocation in line with the current regime? Adjust accordingly.

This V2.0 strategy is superior because it:

Creates a clear, rules-based system for not just how to execute each strategy, but when and why.
Forces us to act like a data-driven insurance underwriter, systematically deploying capital based on the probability and volatility environment, which is the only path to long-term, consistent profits in the options market.