The J. Arthur Trading Plan: Part 1

This is the trading plan that has served me well.

It took me many years of learning, testing, and trading to arrive at this method, which fits my personality and has been consistently reliable. Some folks may scoff at this plan, and that’s okay. I’m not here to win approval; I just enjoy making reliable profits from option trading and have had many requests to share my full plan. So here it goes . . . .

First off, I sell strangles on ETFs and commodity futures. And I sell them with 150 days until expiration. I will talk about why I do this later on. For now the important thing to understand is that this is the heart of my trading plan.

The goal with my trades is to close them with a profit that is 50% of the credit I received when opening the position . This was something I learned from Tastytade long ago, and it has stood the test of time.

I also get out of any position if it reaches a loss of 3 times the credit received. So, if I collected $100 of credit for the trade and it is showing a loss of $300, I close it. I used to close them at a loss of 2x, but I discovered that most of those trades would have turned into winners if I had waited.

Even with that hard stop loss in mind, my primary goal is to defend a trade like mad and absolutely not let it get to that 3x stop loss . . . . if I can help it.

How do I do that? With rolling.

My rolling is much more preemptive than many other traders. Here is how it works.

First of all, I aim to sell options that have around 10 deltas. Once I am in the trade, if the delta of one of those options doubles, I roll the other side in to 3/4 of that troublesome delta. So, if the stock moves down and the put option becomes a 20 delta option, I roll the call down to the 15 delta spot.

After that first roll, my subsequent defensive formula goes like this:

If the delta of tested side = 4 x original delta: 2nd roll in of the untested side..

If the delta of tested side = 5 x original delta: 3rd roll in of the untested side.

If the delta of tested side = 6 x original delta: 4th roll in of the untested side.

You may have noticed that my rolling gets more frequent after the first two adjustments.  It’s because things are getting serious at that point and I am just trying to neutralize the threat of a bigger loss.  While I currently have a 93% win rate on my trades, I believe the real key to making this plan exceptional is being able to defend those positions that go bad and minimize their losses.

Here is an example of where I defended the daylights out of a trade and avoided a loser.

On June 19, I sold a strangle in GLD with 122 days until expiration (150 is not always available): A 134 Call and 112 Put, as indicated by the red dots.

gld1

The delta of each option was 10. I actually sold 2 contracts of each option, but I will refer to them as “the call” and “the put” to keep things simple.

The total credit I took in for the trade was $146.

On July 17th, GLD had moved down enough that the delta of the put option was 20. I made an adjustment where I rolled the call down to the 125 strike (bought the 134 call back and sold the 125 call).

gld2

I took in $82 for this roll. So the total credit I had now taken in for this position was $228.

On August 13th, as GLD continued to march downward, the delta of the put hit 40 and I rolled the call down to 120.

gld3

I collected an extra $62 for this roll. This increased my total credit received to $290. At this point the trade was at a loss of about -$200.

On August 15th, the delta of the put hit 50 and I rolled the call down to 117.

gld4

I collected an additional $54, bringing my total credit received to $344.

On August 16th, I rolled the call down to 115 and collected another $68, bringing the total collected to $412.

gld5

Finally, on September 4th I closed the position for a small winner, paying $401 to close the position.

All of this rolling allowed me to further reduce my downside risk as the stock moved downward. You will notice at the end I had a pretty tight strangle, and it would have taken a very long time to actually hit my profit target. But at that point, I’m not going for a profit; I consider the trade to be in quarantine and I’m just trying to get it back to scratch.

Does this tie up capital while I’m trying to do this? Yes. But it would probably take me at least 3-4 good trades to make up for this one loss, and that takes a lot more capital. I’d rather sit tight and try to get this one back to even. Plus, with this defense method I’m not hopelessly pleading with the stock to change direction and go the other way. I’m just hoping it calms down—which is much more likely.

Now if the market continues to move hard against me or bounces the other direction with a vengeance and creates a full loser, so be it. At least I gave it a darn good fight.

Be sure to check out Part 2 of The J. Arthur Trading Plan, where I describe how long I stay in trades, when I roll them forward, why I sell options so far out, and more. Feel free to send questions and I will try to address them in my next post. Stay tuned!

-J. Arthur

 

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34 comments on “The J. Arthur Trading Plan: Part 1

  1. Awesome job. I am looking forward to part 2!

    Liked by 1 person

  2. Rick Hoffman

    Thanks, interesting. Tastytrade big Bat often says sic “roll untested side to a strike (within same expiry) which will reduce your position delta by 50%” when tested (tested generally being when underlying price hits at whatever the expiry breakeven price is). How/why does this generally correspond to your rolling process when tested?

    Liked by 1 person

    • J. Arthur Squiers

      My rolling is different than the Bat (I’m certainly not saying it’s better–it’s just what I prefer) in that I roll a LOT sooner. This allows me to make it pretty close to a neutral trade again. Bat is also a contrarian, where I am more of a true random walk believer. i.e. I think the stock is just as likely to continue going down as it is to come back. Also, the fact that I am selling 150 DTE allows me to start out much wider and have more room to make these adjustments without getting too narrow with the strangle right away.

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  3. Boris Iglesias

    Thank you Arthur, interesting case study and trading plan, I have been applying something similar to your plan, but trying to sell IC, not strangles, there are some underlying that are cheap in relation to buying power reduction but most of them have large margin requirement in relation to my account size, so I need to go limited. thank you very much for your explanation, looking forward to read 2nd part…
    question, what underlying do you use for that trading plan?
    thank you again.
    Boris Iglesias

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    • J. Arthur Squiers

      I will provide an underlying list in future posts. It’s all ETFs and futures commodities.

      Like

  4. Loved it. Felt like it’s my trade except 65 in place of 150 and Tesla I place of ETF. Well that say who is in red and who in green. I m just waiting for breakeven to take a good night sleep..

    Liked by 1 person

  5. Thank you J Arthur. You are very clear in your writing. No ambiguity to what you present. I had been wondering just how far out to set the strikes on a strangle. I, like Boris, have a small account and need to use ICs to create a strangle. But the rolling is one step I’m not sure of in the case of an IC. I suppose it comes down to buying back the untested leg and selling another spread and attempt to take in a credit that pays for buying back the first. I am eager to see part two.
    Thanks again.

    Liked by 1 person

    • two downsides to iron condors with this strategy IMO. 1) Vega edge is reduced by the long options 2) extra legs double transaction fees which will kill you if you are only taking in $100 of premium.

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  6. J. Arthur Squiers

    I haven’t used this method for Iron Condors, though I think it could work. You can roll the untested spread down closer and collect more credit.

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  7. Great post! Thanks for sharing with us. I often wondered how people “manage their deltas”. Have you watched Rising Star Steven’s second interview? Do you think this is how he is also managing his hedge fund?

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  8. What instruments are you trading in options on futures that have enough volume that far out and that wide? Oil? Gold?

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  9. Pingback: The J. Arthur Trading Plan: Part 2 – Fire by Arthur

  10. Ravi Palaiyanur

    Hi Arthur – Thanks for explaining the roll logic. I have been trading credit spreads and Iron Condors and rely on adjustments to repair bad trades. I have found that adjustments have the benefit of not only turning loss into profit, but also giving a sizeable profit even more than the initial credit. The adjustments are one or more of the following, depending on how “ugly” it gets:

    1. On the tested side, put on a debit spread – this converts the credit spread to a butterfly. However the trick I use is to put on debit spreads that have shorter expiration, so less debit.

    2. On the tested side, double up on the long call or put. This becomes a ratio backspread.

    3. When I feel very aggressive, I will do both.

    These adjustments seem to work well and I have been able to get out of the hole in a few such tardes very quickly. The reason I think is because since I initiate only low delta credit spreads, the short side is already deep out of the money. If that strike is threatened, the move in that direction must be stronge nough that the probability of gain would be higher by trading along with the trend.

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  11. Hey J….10 deltas on each side of the strangle or the whole position? Thanks for the transparency here…

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  12. Love your strategy! Been trading it for a few months now and it carried me through the recent vol spike. When you roll, are you ever concerned that the untested side isn’t showing a profit yet? If vol expands quickly, this can happen from time to time.

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  13. Hi J, fantastic strategy. Can I ask, if the price begins to move against you, but implied volatility drops, do you still roll? Will that not reduce the credit you take in as well as risk IV moving up again? Or is it always worth rolling just to save the position from bigger losses?

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    • I do still roll, as I almost always still get enough credit to help save the position from further loss to the tested side. Many folks express concern that I am narrowing the window by rolling the untested in. However, in my personal experience (when starting with 150 DTE < 10 delta) I almost never lose by getting whipsawed from a reversal. Whenever I lose, it's because the stock just keeps plowing in one direction. So that is what I defend against.

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  14. Hi J, do you roll the same day deltas are breached, or do you wait several days to see if it recedes?

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  15. Thanks, J. Arthur, for sharing your trading plan, very concisely and lucidly presented. I’m wondering what your adjustment strategy is when the market is whipsawing. For example, you may have a tested short put and roll down the call to 3/4 of the short put’s delta. What happens when the market moves in the opposite direction so that your short call now has a higher delta than the put side?

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    • It’s pretty rare that I get whipsawed, given the width I start out at. However, if I do, I will only adjust if the delta on the newly tested side has reached a threshold that the other side did not reach.

      For example, if my put gets tested where the delta hit 2x it’s original delta, I make that adjustment. If the market whipsaws the other way, I don’t make an adjustment until the call side reaches 4x the original delta.

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  16. Good day J,

    Do you consider credits gained from rolling when closing at 50%? What I’ve been doing is making GTC close orders of 50% in tastyworks for the current strangle plus credit received from rolling (which makes it less than 50% for the current, but 50% of initial). Or is it 50% of the current strangle, which seems riskier, and probably not possible for strangles that become straddles or inverted? Thank you.

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  17. Pingback: The J. Arthur Squiers Trading plan: Cheat Sheet – Fire by Arthur

  18. Thanks for sharing your plan. What do you do when there is no option chain in the 100 – 150 DTE range? For example on the SPY right now, there is a 93 DTE and a 177 DTE…nothing in between.

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    • I tend to avoid the underlying in these cases. Or, I really want to trade it, I’ll go for the 177 DTE.

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      • Thanks. Then how do you keep up enough occurrences? Of the ETF list that you published, roughly 36 symbols, I found about 8 or 9 that had option chains in the 100 – 150 DTE range. Right now, almost everything has high IV rank, but in a time of low IV, seems like it might be hard to find something to put on to keep up enough occurrence and premium selling. Again, appreciate you sharing. I like your approach and just trying to glean a little more info.

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      • I rarely have less than 20 positions on at a time; all are among those ETFs. But it takes time to build up the portfolio from the start. The ~90 and ~170 DTE gap in time period is a little weird. It doesn’t actually happen very often. I did put some 170s on over the past week even though that’s generally way too long for my taste. Sometimes one has to take what they can get.

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  19. Let’s say after you rolled GLD call to 117, What would you do if GLD went up instead of further going down ? Similar thing happened to IWM on Dec 24th 2018, right ?

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  20. Eddy Van Esch

    Hi Arthur,
    I was wondering, have you ever tried (much) larger expiration periods? Say, around 12 months or so? Using 10 delta, the strangles are really wide.
    Just checked the SPY March ’20 10 delta strangle. That is one year further from now. Premium to Margin Requirement ratio was around 15%. So this could mean 15% annual gain, if the underlying stays within your short strangle of course… Not too bad ..
    Kind regards
    Eddy

    Like

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