Sa's Option Trading Lessons: Part 2 · Invest & Retire Community

Sa L

Sep '25 • Monthly passive income

Sa's Option Trading Lessons: Part 2

Continuing the series of sharing the Option Trading lessons I learnt

VIX & Capital Allocation: The total amount of capital to be allocated to options trading should be based on VIX levels. If VIX is low (say 10-20) like we are now, then the max capital should be 30%. If VIX is high (30+), that's a great time to be selling options and you can increase the capital to 60%+. When VIX is low, if the trade goes against you and at the same time if VIX rises as well then the option value can balloon up so high that you'll get a margin call and can face deep losses. So remember this critical advice
Reminders: Again reminders from first lesson: 1) Always be on sell side of options, this is where the edge is 2) Keep trade size small (each trade < 2% of your portfolio) 3) Choose high expectancy trades 4) Trade many times to realize the expectancy
Implied Volatility and IV Percentile: While VIX represents the whole market's volatility, each stock has it's own IV and IV Percentile. IV gives an indication of the percent the stock is expected to move in next year. IV percentile is a percentage indicating how many trading days in the past year the stock had an IV lower than the current day's IV. The general advice is to sell high IV tickers so that you can make higher premium. While this is true they are also risks with doing that. You can instead choose more stabler stocks but sell premium when they are at their highest IV percentile.
Tail Risk: It is critical to understand tail risk. All your gains can be wiped away in one black swan event if you don't take care of tail risk. For example selling puts on high IV stocks can seem to work for a while till the stock tanks and you are bag holding or see a big loss. Understand tail risk of your strategy and adjust your trades around it. For example when selling a put, buy a far OTM cheap put to protect against big downsides and margin calls
Beta Weighted Portfolio: Diversify your portfolio so that it can withstand turbulence. Don't just sell on SPY do it on commodities (GLD), bonds (TLT) etc too to diversify. Don't just sell puts, ensure you have some trades (calls etc) that benefit if market pulls back. Don't just be on the sell side. If VIX is low being on buy side is beneficial. Also incorporate as many market neutral trades as possible in your portfolio (iron condors, butterflys, straddles, strangles etc)

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