I’m often asked what stocks, indexes and ETF’s I use for generating my own monthly income credit spread and Iron Condor option trades.
The book The Monthly Income Machine spells out a technique and a series of specific qualifying “entry criteria” that must be met for an underlying stock or index to be used properly for these credit spreads and Iron Condors.
Here’s how I approach the selection process each month in terms of parameters reviewed, and my own current list of underlyings that typically meet some of the basic entry requirements. (All of the requirements are spelled out – in specific detail – in the book.)
Step 1: I’ve Already Eliminated Most Stocks From Consideration
There are approximately 2750 NYSE, 500 S&P, and 3200 Nasdaq listed stocks (and there is some duplication).
The good news is that the vast majority of them do not meet The Monthly Income Machine requirements for liquidity (we want actively traded underlying stocks and indexes with narrow bid-ask spreads) and for price and volatility (we need high enough stock prices and sufficient price movement for us to be offered at least the minimum acceptable premium required by the technique).
In short, I start with a list of candidates (see below) that is most likely to offer me the required premium income at the system’s required option strike price distance from the current market price. Unless a stock meets liquidity, price, and volatility entry criteria, I don’t even bother checking any of the rest of the necessary qualifications for credit spread consideration.
Note: the screening for some entry rule parameters (e.g. average daily volume of underlying, price of underlying, etc.) can usually be accomplished efficiently using the stock screener application most brokerages offer as part of their websites.
Step 2: Evaluate the Step 1 Survivors in Terms of the Rest of the Entry Criteria
Therefore, deciding on my credit spread and Iron Condors each month begins with Step 2 since I already have completed Step 1, my working list of current potential underlying stocks, indexes and ETFs.
Below is my list of the stocks, indexes, and EFTs I currently (mid-2017) consider. It’s my personal list and as such does not represent every possible qualifying underlying stock, index or ETF and – obviously – just being on the candidate list does not mean that this underlying meets all the necessary Monthly Income Machine trade entry requirements at any given moment.
But I find that most months I am able to find, based on this universe of underlyings, some qualifying credit spread and iron condor trades that do meet all the requirements.
Note: Remember that, depending on the available strike prices, we can use spread Strike Prices with intervening strikes, i.e., we are not limited to adjacent strike prices for capturing sufficient premium.
* These underlyings are usually – but not always – a particularly good hunting ground for “entry rules” conforming underlyings.
Step 3: Underlying Conformity to Earnings Report Dates, Price, and Liquidity Parameters
We further refine this month’s candidate list in terms of underlying conformity to earnings report dates, price, and liquidity parameters by pulling up a quote on the stock. The resulting quote screen will show: (1) when the next earnings report is due to be released (no trades qualify if underlying will experience an earnings report prior to expiration), and (2) enable us to confirm whether or not the current underlying price is high enough, has sufficient volume, etc. to remain a candidate.
I immediately eliminate those stocks for which there will be an earnings report prior to the option expiration date or whose price or liquidity has dropped below required levels.
Step 4: Look up Remaining Candidates
We next bring up the option chain data for remaining candidates to
- check to quickly see which underlyings have options whose strike prices both are at the required distance from the current market, and also meet the minimum premium required;
- confirm that each potential trade still under consideration meets the delta verification criterion;
- by reviewing the 6 month chart to note proximity to near term support and resistance points to further assist in choosing the most attractive trade candidates from the list survivors.
Step 5: Determining MRA (Maximum Risk Amount)
Now we determine MRA by establishing and writing down the MRA (maximum risk amount) for the trade(s) having been selected based on “Machine” guidelines, i.e., to pin down a pre-determined “exit point” (usually well below my MRA) in the event that the position were to come under pressure as a consequence of a significant support or resistance point being breached after the trade takes place.
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To date I’ve not used Stop Loss, I simply rescue which ever legs are at risk of going ITM by Rolling further out/away from the underlying..by closing the current positions at risk. & Open a New CALL Spread or Put Spread ONLY on legs at RISK ! Larry Most of the time can be achieved by doing an Iron Condor Trade. I’ve always been concerned with the batter/investors out there ! Now you got suckered into closing prematurely !
I just started reading your very useful newsletter. For Iron Condors, do you use the 1.5x to 2x premium rule for stop loss based on the entire premium received (on both the the spreads) since if you’re loosing one side, the other side is +ve? Also, if you use 2x, aren’t you at risk of continual losses? Same is true for 1.5x but perhaps you last longer. Thanks for your insights.
RB – when setting your stop loss order – as with everything we do regarding credit spreads and Iron Condors – each spread must meet the MIM criteria individually.
So, as it relates to Iron Condors, we can enter the two spreads of the Iron Condor (either all at one time (a 1-step Iron condor) , or as is usually the case first one spread conforms and then later, after some movement of the underlying, the other spread conforms and the Iron Condor can be completed (a 2-step Iron Condor).
But whether in 1 step or 2 steps, EACH spread must INDIVIDUALLY meet ALL of the trade entry requirements of MIM at the outset.
Similarly, when entering a stop loss order to protect your existing Iron Condor position, you should place atop loss on EACH of the two spreads to be triggered if the net premium of the spread reaches your stop out point (e.g. loss of 2.0 times net premium collected up front on that spread).
What website or what software do you use to “bring up the option chain”?
Bruce, whatever brokerage firm you are using for option investing will have Option Chain for all underlying stocks, ETFs, and Indexes on its online platform. If you are unable to locate the page at the brokerage website, just call them and ask how to access their Option Chain data.
By the way, option chain data is also available free at many non-brokerage sites such as Yahoo Finance.
Thanks for your answer.
I already know all that. But there are varying degrees of usefulness in the option chains provided by different outlets. Some provide very limited information. The only one I found which provides Delta is marketchameleon.com. Of course, the paid sites offer much better information.
So back to my original question: What website or software do YOU use for option chain?
We use the former OptionsXpress (now merged with Schwab) for our options accounts. They – like all other option-friendly firms I know of – provide detailed option chain data and “Greeks” data including delta.
Suggest that you call your brokerage firm and ask them exactly where to find option chains, etc. on their platform.
Are the picks ranked from best to least?
Has support and resistance levels and overbought/oversold been taken into account when making the picks of the subscription selection service?
I have studied option trading (with specific interest in credit spreads and condors) for some time now and am using TorS with some proficiency. I am 77 and don’t have the energy or quickness to put in all of the research effort required to be comfortable with trade selection, which is why I am interested in your Spread Screener Service. Do you make specific recommendations of underlyings and suggested strike prices for entry with follow-up advise on any adjustments required etc? Do you deal in weekly’s or monthly’s only? Do you have a published track record of your suggested trades?
Obviously, I am looking for a service that can make the calls for me as I don’t feel that I am up to speed yet on making my own. I have enjoyed reading your ‘white papers’ and I think you would be a good fit for what I am looking for if your service provides what I am looking for.
There is a SaferTrader subscription service (Conforming Credit Spreads Service) that provides a weekly list of potential credit spreads that meet all the entry criteria of “The Monthly Income Machine” as of the closing price data on Friday. The Service was created in response to requests from members of the SaferTrader Advisory Council.
It’s important to understand that the investor could come up with exactly the same list of conforming credit spread candidates based on the “rules” detailed in the book. The possible benefit of the optional screening service subscription is that it saves considerable time in performing the search for conforming trade candidates.
It’s also important to note that the “Conformings” reports are NOT recommendations. They represent the results of a screening of available stock, ETF and index-based credit spreads. The investor still needs to confirm that the listed candidates still meet the entry rules at the time he contemplates entering trades.
A possible protective stop point, based on the book’s recommended 1.5 – 2.0 times the net premium received up front, is shown with the specific conforming credit spread candidate.
But the bottom line is that the Service is not an “advisory service.” As noted earlier, it provides the first step – the preliminary screen of all markets for credit spread candidates that meet all the entry requirements of the “Machine.” The SaferTrader investor is responsible for confirming that the spreads listed still conform when he is ready to place an order, for choosing which – if any – of the conformings he will employ, when and where he will exit from the trade if there is an unfavorable move in the underlying (whether or not he uses the suggested stop points and risk management strategies outlined in the book), etc.