The Ultima Income Generator Guide to Selling Options Part 4

So far, the focus has been on setting the stage for the strike and expiration selection for the Ultima Income Generator. The numbers say to sell more time, sell OTM and hedge your risk. Today, the focus is going to be on some of the advantages of the strike/expiration combination of Ultima.

Ultima Foundational Strategy

Before we delve into the theoretical rationale for the Ultima strangles, you’ll need to know the rules for placing these types of trades.

The foundational elements of the Ultima Income Generator are the selling of naked options. There are several hedging strategies that are used, but those are only there for protection. The core is selling premium as either a single call or put or as a strangle. A short strangle involves selling a call and put with the same expiration and different strike prices.

Selling is easy to do but has to be done the right way so that it emphasizes the positives and reduces risk. Selling high probability options can have the appearance that you’re doing something right until you experience a large loss. That makes strategy a major factor.

Ultima Rules for Entry

Here are the rules for strike and expiration selection.

• Expiration: 42 days minimum to 115 days maximum
  • Plan to scatter inventory over minimum of 3 expiration cycles
• Strike Selection:
  • Sell 0.07 – 0.11 delta call
  • Sell 0.06 – 0.10 delta put

You may notice right away that this is a little different than what you’re probably used to. Selling low delta options is a hallmark of high probability premium selling. However, the emphasis on selling more time will be a big change from what most people expect. I already covered one of the reasons being higher implied volatility, but there is another compelling reason that I’ll dive into in the next post.

Most people will default to the shortest expirations when selling. This is the lowest common denominator for premium selling. It’s presented with substantial risk in the form of gamma. However, people unwittingly get sucked in because they feel they can predict the price movement for a week more than they can for a month or longer. Oh, the hubris!

One caveat that you’ll begin to understand in the next few posts are the benefits of selling more time and the fact you’re not holding to expiration.

Conclusion

Today’s Ultima Income Generator post laid out the rules for strike and expiration selection. Hopefully, the previous posts helped add more understanding for how to sell high probability naked options. The intent is to build on the concept through understanding theta and managing risk. For our subscribers, we have classes on each element that we touch on in this introduction.

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