I’ve been getting a lot of questions lately about how I decide which options to sell.
It’s not random, and it’s not just about picking a strike price out of thin air. There’s a method behind it, and it comes down to implied volatility (IV).
When structuring a trade, one of the first things I check is whether I can sell an option at double IV. If I can, that’s my signal — that’s the hand I want to play.
Think of it like poker: You won’t win every hand, but the math is in your favor, and that’s what matters.
A lot of traders overcomplicate volatility, but at its core it’s just a statistical way of expressing how far a stock tends to move from its average price.
A one, two, or three sigma move shows how far a stock typically wanders from that mean. Structuring a three-sigma income trade positions you far outside those boundaries, which is why the probabilities lean your way.
The Premium Sweet Spot
Right now, option premiums are so high that I’ve adjusted my approach slightly. In this environment, I aim to collect $0.25–$1.00 in net credit per trade. That’s the range that makes sense given where volatility is priced.
This is also where my Two Sigma dashboard comes in. I use it daily to scan for names stretched far enough from their mean to justify taking the other side of the trade.
It highlights overpriced volatility, inflated premiums, and where the probabilities line up. With premiums this fat, there’s no need to chase bigger credits or stretch strikes. You can stay disciplined, pick your spots, and get paid well for minimal risk.
Starting With the Best Hand
Structuring a three-sigma income trade is like starting with the best hand or second-best hand. You won’t win every trade, but the odds are in your favor.
Risk management is key: Any premium collected puts capital at risk, so trades are sized conservatively and focused on probabilities instead of predictions.
You don’t need to win every trade — you just need to play the right hands repeatedly. That’s how you build a consistent edge in this game.
Talk soon,
JD
The Rational Trader
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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