Step Two

We are going to use option contracts for SPLG to generate additional income for the fund. This aspect of the strategy can be thought of as one of the “wings” that ultimately control where the dragon can fly. For this we will use a fund that tracks the performance of the S&P 500. Over time, the S&P 500 has a continuing upward trend that from time to time will have pullbacks due to economic stress, hard times, or financial events that cause severe volatility in the market. The reason those risks even exist is what creates the possibility of income for stocks and options. The whole “it could go up, but it could go down” reality means that there will always be buyers and sellers of all the companies that go into the S&P 500.

This “wing” is the BULLISH side of the strategy, and so we’re going sell PUT contracts which is a bullish action. When you sell a PUT contract, you are taking on the attitude that the stock will stay above the target price you’re going to choose. In this strategy we’re going to be choosing prices for contracts, known as “STRIKES” that are somewhat conservative because we don’t really want to actually “buy” these shares, we just want bullish exposure to the movement of the S&P 500.

4 Month Timeframe

We will be aiming to sell our PUT Contracts for a 4 month cycle, and as one month expires, we will be looking to the end of the timeframe and add contracts to the 4th month forward. This will be a continual action based on the principles of the Slinky concept that I have been testing and perfecting for years. The expiry date for monthly options is always the third Friday of the month. If that Friday is a day when the market is closed due to a holiday, it will be moved to Thursday in most cases. At this point in time, our expiry dates are therefore, October 17th, November 21, December 19th and January 16th.

Selecting Strikes

For October, the expiration date is only 27 days away, so there is not going to be much meat on these bones, but we will still choose some strikes for that expiration date. For January however, there are option expiries that provide some more meaningful income. As we’re just getting started, the power behind this concept will not be seen at first until time has passed, and things begin to roll along a little bit. One of the dangers of beginning this strategy right now, in this moment, is that we are currently sitting at “All Time Highs” in the market. This will always exist, but it must be recognized because if there is a pullback, this strategy will immediately look like a failure, just like buying a stock at the top of a peak will look just days after buying it. Later on, you will read about how we will try to hedge that risk a little bit, but this fund is mostly an upward looking direction, and so it won’t have the same aspects of risk, and shorting that I have had on other individual stocks. 

▲ DELTA 

The options we select will use the ▲Delta indicator as a bit of a guide. There will be times when we choose ▲Deltas that are deeper into the money, or shallow, further away from the money. This will depend on our judgement at the time, and the decisions we have in front of us to make at the given time. To read just a little bit more about delta, follow this link: ▲Delta.

For now, we’re going to look to the end of the 4 month cycle and do some speculating with January options. This image is a simple chart with some notes I added on it. It’s not meant to be a prediction, I don’t have a crystal ball, nor am I able to predict where the market will go.

These channels and points of data just come from looking at what the options market is calculating right at this moment. It could change at any time, but this is what I am going to use to get started.