Options Income Trading: Why Do You Win So Frequently?

Options Income Trading can have exceedingly high win rates when certain options strategies are employed. In this video we explain the major reason why certain options strategies have such high win rates.
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[@timstocker6946]

Hi Seth, I love SMB Capital and everything you and the rest of the team do to help educate us. I have watched almost everything SMB has posted and have taken it to heart. I have now been trading options for one year and I am doing awesome. I owe some of my option trading success to you and all the great people at SMB!!!! Keep up the great work. Your approach and presentation skills are great and you know how to present information in a way that is understandable. I have also watched all of Mike's videos and have learned a tremendous amount from him as well. All I can say is THANK YOU for sharing your knowledge and I look forward to learning more in the future! Thanks Again, you guys are great!!! Tim S.

[@andreassmidelov]

If you're doing this particular trade, you NEED a solid exit or adjustment strategy, or things could go spectacularly wrong. If the price is in-between your call spread or your put spread at expiration, you could find yourself either buying or short-selling 100 shares of Amazon, which is a big pile of money, much larger than the $9k you thought were at risk.

[@rajeshg2559]

It’s bounded. The maximum you can lose is when it’s beyond long call because you have to pay for the entire spread. If the short call is 1900, the long call is 2000. If Amazon closes at 1999, you’re down 99x100=9,900. If it’s 2100, then you’re down 200x100- 100x100=10k. If the win rate is 80% as described, expected return is 80%*1000-20%*10000=-1,200. So over time this is a losing trade.

[@scottsomer4150]

Under this campaign, Four of the total of SIX of these INCOME trades are indeed "earnings trades." So 10 Delta gives LOTS of room.

[@affluentproducts]

Excellent video. One thing missing from the video that would have been nice to also include is ideas and examples how to properly manage risk on the trade and what adjustments can be made to the trade (if any) should the underlying start taking off sharply up or down VS exiting the trade completely. Perhaps in an upcoming video you could also talk about that as well. Also it would have been helpful to also show examples of how the P&L looked on the trade at various stages of days left til expiration to show how the P&L progresses throughout the trade (example - if the options have 60 days til expiration - show P&L on trade with 30 days left til expiration and again at 15 days left til expiration - and then at expiration).

[@smbcapital]

This is noted Jay, talked with Seth and we will start including how to position when things don't go as planned.

[@affluentproducts]

@@smbcapital ok thanks!

[@EzekielPrellus]

Really wish the level of these videos was higher. Very very basic material.

[@bobdingledine]

Question: If we are trading the Iron Condor at a 10 delta, why would we need to execute this trade 60 days out, instead of a week out on a trade like SPX (weekly options)? A 10 delta is just that, a 10 delta. Yes the strikes are closer to the underlying, but the DTE is 7 (or less) rather than 60. If we are 90% chance of the trade going in our favor (thus the reciprocal of a 10 delta) why not put our capital to work each week? I am sure there is a great explanation that I am not seeing. Thank you Seth for the amazing content, I have been fortunate to have been learning through your videos very early on in my trading experience and I am sure it has saved me thousands in rookie type mistakes.

[@Neptday]

Hi Seth, I realize this is an old video but I wanted to challenge myself to see what my paper trade would be. It's Feb 7, 2023 ATC . I used GS as my stock. Reason it's a Dow component pays a small dividend and meets the price level you recommend. I used April 21, 2023 for my 60 ish day. I found a delta 10 call @ Strike of $425 so sell to open limit mid price is $1.65. I buy protective call @ $435 limit mid price is $0.95. I open to sell the 9 delta ( no 10 delta) put @ Strike $315 limit mid price is $2.27. I buy protective put @ $305 limit mid price $1.60. This puts me with a paper credit of $1.37 minus slippage and commissions. My max loss is $8.63 plus slippage and commissions. I've never done anything like this in real life but it's scary to think I could be on the hook for $800+ dollars. I'd really have to prove to myself I could win 9 out of 10 times. Is that possible? Interested in seeing what April 21 brings. Thank you for the challenge. I feel excitement and fear just doing this exercise.

[@rickcramer7892]

Hi Seth, great series of videos. On a starting out, month long winning streak myself with iron condors and put credit spreads. Thanks for the tip about not increasing the roll too quick. Which program/website are you using to list the option deltas and other info?

[@chrisnickles9498]

Seth, I'm choosing ROKU because of the elevated IV due to earnings on 11/4. I want to take advantage of the volatility crush that will ensue after earnings is reported. I recently closed a broken wing butterfly in AMZN that hit my 50% (of premium collected) profit target today. I'm going with a DEC 20th expiration (56 days out) - 1 contract (trading live) Put Spread - 85/90 Call Spread - 175/180 credit - 1.30 Max risk - 370 I went a bit beyond the 10 delta on the put side because of the macro environment and recent ROKU volatility, my short put is .08, long put .06 The 175 call is just under the all time high.

[@sethfreudberg4750]

Wow, nice win on the AMZN BWB Chris! Which strikes on ROKU would you choose and what price would you get for them if you entered today or tomorrow? BTW, doing these over earnings can be a bit more dangerous because of the big price moves, but can also be a lot more profitable if the earnings move is mild.

[@scottsomer4150]

In the case of AMZN. the 60 day option position with March, May, September AND November had earnings INCLUDED in the trade

[@BrMark-cu9ih]

But if you don’t actually own the underlying how do you benefit from a dividend it? Please explain. Thanks.

[@beLIEve77]

@@BrMark-cu9ih 3 years later..... 1. AMZN doesnt pay dividend. He just said earnings, usually increases Implied Volatility. 2. Dividends affect Stock Price, therefore affect your Options premium

[@cybersaket]

Recently attended an SMB Options workshop from an email invite which promised that I will learn ' unique options strategies' for 'consistent income generation' and can be learned by beginners and advanced traders and investors alike, because of their highly systematic, rule-based nature. Instead it was 2 hrs of relentless sales pitch with zero discussion on Options strategies. Truly let down by wasting 2 hrs and leaves me wondering about SMB ...

[@sethfreudberg4750]

Shadow actually we provided about 45 minutes of instruction during the webinar on multiple options strategies. Are you sure that you watched the entire webinar?

[@johnwisdom9208]

Just recently, I placed implied volatility as primary. Time decay can be helpful with vertical put spreads, but, it takes a bloated premium for income.

[@luisf7105]

Seth, thanks so much for this valuable free content... I really appreciate your teaching style! Quick question, could this strategy be applied to $SPX as well?

[@sethfreudberg4750]

Luis, no doubt. I have traded iron condors on the $SPX myself.

[@justinshaw6173]

@@sethfreudberg4750 was trading iron condors on SPX and win rates were solid, but, I would get bad fills on my stops (slippage?)...have not found a solution. Do you have any experience with this issue? Thank you!

[@gregkeen4907]

Thanks for posting this video! Would you let the Iron Condor in this example go to expiration or would you but it back at a specific profit target, say 25% or 50%? Thank you.

[@sethfreudberg4750]

Greg, OUTSTANDING question. The answer is that there should be alot of back testing work to determine the optimal target profit on this trade, presumable based on some multiple of the stop on the trade. Many people target 50% on condors.

[@wew6438]

Little is told about how implied volatility affect the whole edge.

[@sethfreudberg4750]

Wew, there is a school of thought that condors gain edge in higher volatility times.

[@gregdolley9189]

@@sethfreudberg4750 IC's gain edge in high vol times as long as you put them on _after_ vol's have increased. Then when vol goes back down to normal, the IC's short Vega really kicks in, and you make your profit target faster. But if you put an IC on when vol's are low, and then there's a spike, you'll quickly see how the short Vega works against you, as your temporary profit will shrink and your theta decay will slow down. In other words, the short options' Vega overtakes its Theta. If you're just doing weeklies, this probably won't apply to you since your Vega exposure is minimal that close to expiration; but going 60 days out, your Vega exposure is huge - typically 20x more than your Theta.

[@kalef1234]

oh they'll tell you all of that, once you buy the course 😏

[@stang6882]

Love your content Seth, thank you so much! I want to ask you a question if you have ever looked at Power Options - they have historical backtest (but end of day data unlike OptionVue who has 15 min/30 min intervals for backtest). I would love your opinion who is better OptionVue or Power Options for backtest purposes. Thank you!!

[@sethfreudberg4750]

Stan, end of day data is going to be greatly inferior to every 15 minute data like Optionvue, so I'd go with OV.

[@scottsmith4145]

Seth great video,, question why did you say these trades had a 80% statistical advantage? Shouldn't a 10 delta should be approx a 90% advantage ? One other thing this is all great when price stays between but if it shoots up ITM just once especially near expiry it can wipe out all your profits very quickly. Eventually, probabilities will fail. Is there a good way to manage ones that dont work out to minimize losses?

[@aaronsmith600]

I missed why it's done every other month instead of every month? Is it simply because it allows for more time for the trade to develop?

[@bjo179]

I'm not sure if this question will make sense or not but...when the underlying moves between the shorts, the P/L of the trade can go from positive to negative.....if at expiration, the trade is showing a negative P&L negatively impacting your net liq...does that negative P&L go away after expiration if the underlying winds up between the shorts at expiration? Maybe a better question would be if the stock price stays between the shorts....is there ever a negative P&L?

[@sethfreudberg4750]

B Jo, anywhere between the short strikes on expiration will be a nice win. That's one of the beauties of making these so wide, like we do in this video. Since the long strikes are farther out from the short strikes, the trade is always a credit spread.

[@sethfreudberg4750]

BJo great question. The trades can often be negative PnL between the short strikes in various circumstances, but if the options expire with the stock between the short strikes, the PnL has to be positive.

[@egorisakson6283]

Great stuff! Some potential editing advice: instead of switching to green slides for stats and key phrases, just have them to the left or right side of the speaker in the same clip? That way there is more focus on the speaker and less abrupt switches.

[@sethfreudberg4750]

Thanks Egor.

[@scottsomer4150]

$CMG Dec 620/680/900/960 for about 4.50 credit

[@sethfreudberg4750]

Okay Scott let's track this one together

[@sethfreudberg4750]

Trades up a little bit a week into it.

[@scottsomer4150]

823 at 14 DTE

[@scottsomer4150]

Looks like on Dec 6th close about 1.30 is left

[@samsabrosa6841]

For the example given, the IC would need at least 87% win rate to have an edge in the long term.

[@gogather6260]

Why wasn't there any discussion of the risk on the 20% chance that the stock moves into and through the strike price you sold?

[@sethfreudberg4750]

Go Gather, there is potential for that of course, at which point you need to take a pre-determined stop, based on back testing experimentation, or utlilize a repair strategy to limit the loss size. We have done videos on the repair strategies if you peruse our channel. It is difficult to cover every topic in a single instructional video, that is why we produce multiple videos.

[@gogather6260]

@@sethfreudberg4750 Understood..appreciate the effort you take to make these videos. It would have just been nice to talk about both risk and reward. Thanks again

[@scottsmith4145]

Dont you know,,, iron condors always win and make money! Lol....

[@patriciomontemayor7660]

Hi Seth, Since the Iron Condor is a neutral strategy I chose BA (Boeing) for this exercise because the stock has been in a range btwn 331-383 for the last 6 months. Here are the Technicals on Thu 10/24: ********************************************* BA price: 343.45 VWAP: 341.44 IV: 28.50 IV Rank: 20% (Low) Expiration Date: Fri, Dec/20/2019 Days to Exp: 57 Next Earnings: Jan29/2020 (Not Confirmed) For the Puts Legs (Put Credit Spread): Short Lower Strike: 290 (10 deltas) Long Lower Strike: 280 (7 deltas) Probability BA < 290 in 12/20 = 6.7% For the Calls Legs: (Call Credit Spread): Short Higher Strike: 390 (9 deltas) Long Higher Strike: 400 (6 deltas) Probability BA > 390 in 12/20 = 13.0% On one (1) Contract: Capital Required: $ 888 Credit on expiration 12/20: $ 112 (12.6%) ********************************************** I did place it on my Demo. Thank you Seth for having this trading rehearsal for the community.

[@sethfreudberg4750]

That's a sound choice, although remember that the options market will adjust its pricing for lower volatility stocks, so your risk/reward may not be as good. I'll follow the 310-315-395-400 trade and let's see what happens. (December monthly expiration)

[@patriciomontemayor7660]

@@sethfreudberg4750 Thank you Seth. Sounds good on following the 310-315-395-400 trade. Have a great day!

[@sethfreudberg4750]

@@patriciomontemayor7660 trade is treading water at the moment, but that's normal at the outset of an iron condor

[@patriciomontemayor7660]

@@sethfreudberg4750 If BA stays in the Profit range 315-395, it would make theta in our favor and the P&L curve would catch up the final Profit target, correct? and what about if we have a change in Volatility. An increase let's say, that would make the trade be underwater even if 315

[@sethfreudberg4750]

@@patriciomontemayor7660 Yes Patricia, volatility can increase or decrease profits until expiration, as will price, but AT expiration, the only issue is price.

[@eyeservantez]

It is so complicated, I think about how much I learned about futures/forex etc.. I think I'm not ready to go down that rabbit hole yet but definitely saving for later.

[@lexandersantana8089]

I know all about options but futures and forex are wayyyy to complicated for me

[@sethfreudberg4750]

@@lexandersantana8089 to each his own, Lexander :)

[@sethfreudberg4750]

Eyes, it takes about two weeks for all of the light bulbs to go on in most cases. It's just a matter of getting used to the jargon.

[@sexyemay2526]

I'm new to trading and still learning, but I'm doing pretty good as a starter. What I have learned is that if a trade expires worthless, how on earth are you making a profit from it. I understand the range between the call and put, but If the calls goes below the strike price and the put goes above the price. This is a loss not a gain. I'm I right, or I'm I missing something here. ???

[@beLIEve77]

You make profit when the Call or Put you sold expires worthless. If the Stock goes below the Call strike price or above the Put strike price, loss or gain depends on the price you traded them.

[@ricanxd]

$BA 1/17/19 expiration. -1 385C/+1 390C. -1 320P/+1 315P cost of trade $213, Max profit $216, Max loss $284

[@sethfreudberg4750]

Great, Fail, let's see how it does!

[@sillyme714]

BA Dec 20 280/290/390/400 for 1.41 credit

[@sethfreudberg4750]

Silly Me--Great! Let's track this trade.

[@StevenSoto]

I have heard so much about condors and such. How much $ would you need in your account to do that which you just mentioned?

[@StevenSoto]

@@danielwestereng155 THANKS !

[@anafranks3248]

Iron Condors seem wonderful for larger accounts than mine...How can I grow my $2000 account with Iron Condors? Is the trick choosing an underlying stock with less costly option premiums?

[@scottsomer4150]

$2000 is a "smaller" account, the key in smaller account is properly choose a level of risk (in Iron Condor it is done by choosing a spread width) that fits your account size.

[@digitalfuture7941]

Hey, i do Like to know what Would happened in the case of market ending above or below our option trade ? Is it minor losses or 🤔 huge losse compared to invested capital ??? Thanks @smbcapital

[@sethfreudberg4750]

Hi Crazy, like with any options trade, you set a stop that is WAY below losing the entire investment. As I have mentioned in other replies, you'd need to backtest to set a stop that is tight enough that the numbers work, but not so tight that the trade can't "breathe"

[@Ninja-iq2xt]

My third eye is opening...

[@sethfreudberg4750]

Glad to hear it Ninja :)

[@farmerjoe2103]

Sorry to point out the elephant in the room ....but you seemed to miss the information about down side risk... What happens if price expires outside the range.Risk to Reward Ratio , is investing basics....This strategy has an eighty % win Rate...Not much good if you lose 5 grand twenty % of the time.

[@arnielucki1689]

Exactly. Was going to post something similar but you covered it.

[@arnielucki1689]

AMZN will rip your head off if you are anywhere close to the death range of the put or call with even very little time left on the clock.

[@brandonvillatuya9539]

Isn't that why you're only supposed to risk like a small % of the account account at a time? As to not blow it up?

[@sethfreudberg4750]

Farmer Joe of course every strategy has downside risk. The point of the video was to show that trades can be set up to generate very high win rates, but there must always be a plan for risk management with any trading style. Teaching adjustments/repairs on trades is a very long process and not really the province of a video like this.

[@scottsomer4150]

$GOOG 980/1100/1400/1520 for between 7.80 and 8.30 credit

[@sethfreudberg4750]

Awesome Scott, let's see how this turns out.

[@sethfreudberg4750]

You know you're up over $500 on that already after six days. That's impressive. You'd think about booking some/all of your profits at this point on such a quick win.

[@sethfreudberg4750]

Scott I'll be doing a video about this GOOG trade today so watch out for it :)

[@scottsomer4150]

Seth, do you use your Twitter account? Which to interact with you there.

[@scottsomer4150]

Four of these trades include EARNINGS so from trade entry to report date they will decay more SLOWLY then after the report it will crush down to where it should have decayed to normally unless the stock blows outside the shorts

[@Ratbeeitch]

Why they win so frequently is due to 25 small wins can be wiped out by one big loss.

[@scottsomer4150]

Dec 20, 2019, here is another February "10 delta $10 wide Iron Condor" trade $NFLX 265/275/415/425

[@MauuuAlpha]

How $7.63 times 100 is 881 ?

[@scottsomer4150]

The $NFLX trade was quoted at between 1.40 and 1.45

[@gingergander774]

Tell them how much they'd lose if the trade loses...

[@Ninja-iq2xt]

@@danielwestereng155 thanks daniel for ur comments, those r helpful.

[@goose4186]

Set a stop loss based on stock price, not premium.

[@sethfreudberg4750]

Ginger, you'd have to set a stop as I've mentioned in other replies to this video. That is arrived at through back testing. Many people use a stop which is some logical multiple of the original credit received. You'd never let it get to 9k

[@sethfreudberg4750]

@@danielwestereng155 You wouldn't let it get to that point. You'd have an earlier stop.

[@goose4186]

Seth Freudberg a good place to set a stop is at the underlying price that corresponds to the crossover point between the +1Exp risk profile and the risk profile experienced upon position inception. Don’t take me word for it, check it out. Setting a stop based on the underlying value is a little more complicated than setting a stop based on the mark of the option. However, it prevents early stops from being triggered due to fluctuations in volatility. Maybe worth a video.

[@rajeshsingh-joomla-expert]

You need 100% win rate to make money, if even one trade goes against you you loose like 10k in single trade

[@thund3rstruck]

Not at all. As soon as it's clear the trade is gonna go against you its your responsibility to exit the trade. Most people use the breakeven point as their sell signal. As long as you are getting price alerts you should have no trouble capping you losses to a reasonable level as soon as it becomes clear a big event is transpiring.

[@yoursurgerysister]

Who actually thought that option traders win more frequently? Lol

[@sethfreudberg4750]

Options income trades have a much higher win rate than most trading styles, Sister :)

[@yoursurgerysister]

Seth Freudberg so the answer is you.

[@dancer1]

Seth Freudberg all trading styles have a 50% win rate because when you win so one losses and vice versa

[@yoursurgerysister]

trainsirf ummm huh? Thats not true. Some ppl wont even win 50% of the time nomatter what style they use because they just will never master their emotions enough to be successful. While others will have returns more than 60% easily.

[@yoursurgerysister]

I find that if you master options trading you can more easily stock trade whereas most stock traders will never grasp options.

[@scottsomer4150]

Two others are $SHOP 290/300/510/520 $TSLA 305/315/535/545 These two were quoted earlier between 1.60 and 1.65. If you choose to do these trades NEVER open with a MARKET order or you may give up as much as 15 cents. Instead start a penny or two ABOVE the mid and lower your order ONE cent at a time until you are FILLED, you will usually get as much as TEN cent BETTER prices on these than MARKET.

[@johnb382s]

I never win nothing but losses 😡

[@sethfreudberg4750]

There could be something wrong with your strategy, John. You may want to subject it to a backtest to see if there is a fundamental flaw.

[@ryanisber2353]

You’re risking 10x the amount you are making... doesn’t seem too safe

[@scottsmith4145]

You must factor in the probability numbers. If you have high probability of winning a trade you can risk higher. And besides that you manage your trade to keep losses small and exit as necessary.

[@102gerr]

Great for a 1600 dollar stock .... lets see how that works for a 50 dollar stock ..... at 10 delta it won't work>

[@sethfreudberg4750]

Gerald, that is why I mention at the end of the tape to pick a $300 or greater stock. For a variety of reasons, commissions also being a major one.

[@brianlardin9404]

@@sethfreudberg4750 Who still pays commissions? E-trade, Schwab, RobinHood, almost all of them charge 0 commissions now and just contract fees. For e-trade, it's 50 cents per contract so any worthwhile trade can easily cover that. For closing short positions, etrade charges nothing if it's 10 cents or less so a very conservative trade that you intend to hold to very close to expiration with multiple contracts can be closed very efficiently. If it's a wide spread trade at much higher pricing (example: 1 contract on an iron condor where your premium intake was $100 and you want to close for $50), you'd pay $2.00 in contract fees to open and $2 in contract fees to close. If that's unaffordable, it's not a very good trade to begin with, is it?