Lucky Quarter Playbook: Options Overview - Q2 2025

Volatility is the King, and as one once said, everything's eventual

Welcome to the inaugural quarterly options review for the Price Action Playbook community! If a single "luckey quarter" can set a new destiny in motion, imagine what insights a whole quarter of market action can reveal. In this edition, I'll dive deep into the basics and key ideas, cover the strategies that shaped my performance over the past quarter, and look ahead to new opportunities. While I initially planned to finalize this after Quadruple Witching this Friday, today's market holiday provided a perfect opportunity to beat my own schedule, so here we go!

Important update - 20th July 2025

Given recent market and stock performance, I am updating the strikes for the cash-secured puts I’m watching this quarter. A few names have also moved between the winners and losers lists.

Key Ideas Summary

• Cash-Secured Puts for Strategic Acquisition & Income: I utilize Cash-Secured Puts to patiently acquire high-conviction stocks at desired discount levels, or to generate consistent income when assignment doesn't occur. This disciplined approach turns idle cash into an active tool for portfolio growth.

• Strike Selection through Technical Analysis: Key support areas, identified by converging horizontal layers and weekly trendlines, guide my selection of optimal strike prices for put selling.

• Covered Calls for Post-Assignment Management: Once shares are assigned, I seamlessly transition to Covered Calls to further reduce my cost basis or set profitable exit targets, actively managing my equity holdings for continued income.

• Annualized Percentage Yield (APY) Focus: A crucial metric for evaluating options trades is the APY to expiration, providing a standardized measure of potential annualized returns on capital deployed.

• Volatility as an Opportunity: Periods of increased market volatility, including specific events like earnings, are carefully considered to enhance premium collection or find more attractive entry points.

• Rigorous Risk Management & Discipline: While effective, both strategies demand diligent monitoring for market shifts, disciplined execution, and a clear understanding of potential capital commitments.

From Cash to Shares: The Put-Selling Strategy

In the world of options trading, one of the most powerful and often overlooked strategies isn't about wild speculation, but rather about patience, discipline, and generating income while I wait to acquire assets. This quarter, a cornerstone of my approach has been leveraging cash to gain strategic exposure to stocks—not by simply buying shares outright, but by employing a methodical options strategy designed to either generate consistent income or acquire desirable equities at a discount. For those new to the nuances of options, think of this as setting a "buy limit order with benefits." For seasoned money managers, it's about optimizing capital deployment, enhancing yield on sidelined cash, and establishing fundamentally sound positions with a built-in margin of safety. Crucially, I do not recommend executing this strategy on margin; it requires sufficient cash set aside in the event of delivery. Given the current short-term yields, this disciplined approach works in your favor, as the cash reserved for potential assignment can also earn interest. This strategy fundamentally shifts how I approach stock acquisition, turning passive cash into an active tool for portfolio growth and management.

My core implementation of gaining stock exposure centers around the disciplined sale of Cash-Secured Puts. This isn't about blind speculation; it begins with identifying high-conviction companies I genuinely wish to own at a specific, attractive price. The selection process involves thorough fundamental analysis – looking for strong balance sheets, consistent earnings, and competitive advantages – combined with technical analysis to pinpoint optimal entry levels. Specifically, I select the strike price I'm willing to sell the put at by identifying a key support area where a number of important horizontal layers and weekly trendlines converge together. Based on this analysis, I then choose a strike price at or below my desired acquisition price, typically out-of-the-money, and select an appropriate expiration date that balances time decay with market catalysts. It's important to note that to get a fill on my desired trade, the stock doesn't even have to move to that exact strike price; volatility spikes, such as those seen in April, can be enough to send premiums high enough to make these options worth writing.

The inherent beauty of this strategy lies in its asymmetric risk-reward profile, particularly when executed on quality assets. By selling the put, you immediately collect a premium, which serves as an upfront payment for your commitment. This premium acts as a buffer against minor price declines, effectively reducing your potential cost basis if you are assigned the shares. The primary risk, of course, is the obligation to purchase the stock at the strike price if it falls below that level by expiration. However, since the goal is to acquire the stock at a desired valuation anyway, this "risk" is often a welcome outcome, transforming cash into an income-generating tool that patiently waits for ideal entry conditions. This quarter, this disciplined approach proved particularly valuable in navigating periods of increased market volatility, allowing me to generate income while awaiting more favorable stock entry points.

Cash-Secured Puts: The Premium Generator

Building directly on my approach to gaining stock exposure, the Cash-Secured Put stands as a powerful and frequently utilized strategy in my options playbook. At its core, a Cash-Secured Put involves selling (or "writing") a put option and simultaneously setting aside enough cash to buy the underlying 100 shares if the option is assigned. This means for every single option contract you sell, you commit to having the capital ready to purchase 100 shares of the specified stock at the agreed-upon strike price if the stock falls below that price by the option's expiration date.

The immediate benefit of selling a Cash-Secured Put is the upfront premium you receive from the buyer. This premium is yours to keep, regardless of whether the option expires worthless (out-of-the-money) or you are assigned the shares. I employ this strategy when I am cautiously bullish or neutral on a stock I genuinely want to own long-term, but at a more attractive price than its current market value. It's an ideal way to generate income from cash that would otherwise sit idle, while simultaneously positioning myself to acquire high-quality assets at a discount if the market presents the opportunity. This quarter, Cash-Secured Puts were a primary driver of premium income, allowing me to capitalize on specific market dips to either gain stock at desirable levels or simply collect income without assignment.

Throughout this past quarter, my disciplined use of Cash-Secured Puts yielded significant premiums and allowed me to manage my desired stock entries with precision. I focused primarily on a diversified basket of fundamentally strong companies that presented compelling valuations at specific price levels.

A crucial metric for evaluating the effectiveness of this strategy is the Annualized Percentage Yield (APY) to expiration. This provides a standardized way to compare the potential return of options trades with different durations on an annualized basis. For math enthusiasts, here's a detailed breakdown of the calculation:

1. Calculate the Total Return:

   • Total Return = Premium Received - Fees

2. Calculate the Return per Day:

   • Return per Day = Total Return / Days to Expiration

3. Annualize the Return:

   • Annualized Percentage Yield = (Return per Day * 365) / Initial Investment

Example (for illustrative purposes): Let's say you write a Cash-Secured Put on Spotify (SPOT) for a premium of $10 per share and the option expires in 97 days (September quarterly expiration). The stock price is $700, and you sell the put with a strike price of $500. If the option expires worthless, your total return is $10 per share.

Return per Day: $10 / 97 days = $0.1031 per day.

APY: ($0.1031 * 365) / $500 = 0.0752 or 7.52%.

This means your annualized yield for this Cash-Secured Put trade is approximately 7.52%. It is important to note that for a Cash-Secured Put, the 'Initial Investment' in the APY calculation is the strike price, as that represents the capital needed for potential assignment, not necessarily the current stock price.

The APY I target usually varies based on overall market conditions, VIX levels, and the implied volatility for each specific stock. Some stocks, like TSLA, might warrant writing at a higher APY due to their inherent volatility, while it's perfectly fine to capture less premium for others, like MSFT, due to their stability. It's also necessary to understand volatility events that will take place before expiration, such as earnings reports, peers' earnings reports, investor days, development conferences, and so on. As a rule of thumb, I aim for 20-40% for the stocks in my Winners list and twice as much for those from the Losers list. I avoid biotech stocks and crypto names in this strategy for obvious reasons, given their often extreme and unpredictable volatility.

However, no strategy is without its nuances or potential pitfalls, even one as fundamentally sound as the Cash-Secured Put. For students, it's crucial to understand that while the strategy generates income, significant drops in the underlying stock below your strike price can lead to substantial unrealized losses and potentially require significant capital commitment if assigned. Money managers will recognize the importance of liquidity, especially in volatile markets, to ensure efficient entry and exit. I meticulously monitor for factors such as unexpected news events, earnings surprises, or broader market downturns that could swiftly push a stock below my intended strike, prompting careful consideration of whether to accept assignment or explore alternative management strategies.

From Put to Call: Managing Assigned Shares

The disciplined execution of Cash-Secured Puts often leads to a desirable outcome: the delivery of shares. This means the stock price has fallen to or below your strike price by expiration, and you've successfully acquired shares of a company you already wanted to own, potentially at a discount to its prior trading value and with the benefit of the premium you collected. However, acquiring the shares is just the beginning of the next phase of active management. This is where the Covered Call strategy seamlessly integrates, transforming simply holding stock into an income-generating or cost-basis-reducing endeavor.

A Covered Call involves selling (or "writing") a call option against 100 shares of stock that you already own. For every call option contract sold, you must own at least 100 shares of the underlying stock. By selling this call, you receive an upfront premium, just like with a put. In return, you grant the buyer the right to purchase your shares at the agreed-upon strike price before the option's expiration date. My primary goal with Covered Calls, particularly when managing assigned shares, is to either generate consistent income on my existing holdings, effectively lowering my cost basis, or to set a specific target price at which I am willing to sell the stock, usually at a profit. I usually write covered calls with a shorter Days To Expiration (DTE) than for Cash-Secured Puts, primarily to profit from accelerated premium decay and to decrease the probability of the stock being called away prematurely.

My decisions on which strike and expiration to choose for Covered Calls are driven by two factors: generating attractive premium and setting a realistic, profitable exit point. This often leads me to frequently write shorter-dated calls, allowing for multiple income cycles against a position before it's eventually called away. Such an approach technically lowers my average cost basis and increases my comfort in holding the stock. The Annualized Percentage Yield (APY), as discussed in the previous section, is similarly applied here to evaluate the annualized return on these covered call positions.

Should the stock move significantly against the call (i.e., well above the strike price), I generally prefer to allow the position to be called away, realizing profit from both stock appreciation and collected premium. Reinvesting when signals realign is often preferable to deploying additional capital for a call rollover in such scenarios. Understanding potential volatility events that will take place before expiration is also crucial, as these can significantly impact the premium and assignment risk. This proactive and adaptive management ensures that even after being assigned shares, I continue to extract value, turning potential holding periods into active income streams or strategic profit opportunities.

The art of "roll management" became particularly important in volatile periods. This involves tactically adjusting an existing option position by buying back the existing option and simultaneously selling a new one, often with a different strike or expiration. Specifically, the delivery of shares from a Cash-Secured Put can sometimes be avoided by strategically rolling over the put position. For example, if technical indicators shift significantly and a put goes deep in the money, it can be advantageous to lower your potential assignment cost significantly. This requires thorough analysis and a clear understanding of potential risks versus rewards, ensuring it remains a tactical move rather than a blind doubling down.

This past quarter, I’ve applied these strategies to my portfolio. I rolled over my put positions in AVGO, ARM, and CRM to adjust my exposure: