MM30 - Strangle Lesson

I want to take a moment to answer some questions about selling strangles, straddles, and calls in our current market. Up until a few weeks ago, every single chart was consolidating. Trading between resistance and support. Holding the 200 moving average. That is the setup I look for when selling premium.

Now very few charts look like that. Almost everything is breaking out in the sectors we trade. So if I am looking to sell a strangle for income, my first rule is that it has to be in a stock that is consolidating. I have no interest in selling strangles, straddles, or calls on stocks that are ripping and breaking out to new all time highs. Those are racehorses. I teach this in Course 202 and Course 203, and if you watched MM14, you saw me explain the difference between racehorses and workhorses. This is workhorse territory.

Second rule. I always sell my strangles on 20%, max 25%, of my portfolio. Because when those stocks finally break out, I am most likely going to allow myself to get called away on that portion. Those are the rules I live by.

Consolidating vs Breaking Out

In the last six months, selling premium on Marvel has been extraordinarily lucrative. Even if 20% of the portfolio gets called away, the premiums collected on strangles can more than make up for it. When I do get called away, what is phase two? I look to sell a put and repeat the modified wheel. I am looking for a pullback either to -2 mean reversion or I am looking for a retest of the breakout area around $110. I might simply buy stock if it gets back down there.

That is how I compare charts. Marvel was consolidating and now it is not. So I do not touch it for strangles right now. I do not try to sell calls on it. I am looking for charts that are still trading sideways.