My favorite rule on trading shares/options, covered calls (CC), cash secured puts (CSP) is the 2% Rule. The 2% Rule seeks to get a 2% return on your cost basis of your shares each month. If you were to collect 2% each month, that would give you a 24% Return on Investment (ROI).

Benefits

• The S&P500 and Nasdaq 100 annual ROI is approximately 10% to 10.4%  (some years are greater and some years are less)

• This means you could beat the market in returns with a conservative 2% per month (2% x 12 months = 24%)

• Billionaires, in 2021, expected to see 17.5% annually on their investments.  Look at compounding our investments at the ROI.

  • • 2% per month is 24%

    • 2% compounded monthly is 26.8%. 

    • 3% compounded has a 42.5% ROI

    • 4% compounded has a 60% ROI

    • This is why taking profit on small consistent wins can bring big returns in the long run; not every investment will 10x

    • See Compounding Chart 

You can use any percentage, but the goal is to beat  the market average of 10%, 15-20% for managed funds, or 17.5% that billionaires expect annually; we know 2% can beat all of these averages (technically 1.5%/month is 18%).

If after 2-3 years of trading you cannot beat the average, invest more into funds that can get you the average return, minimize your personal investments, or simply move all of your funds to a managed fund/portfolio.

Weekly Option

• Current Price is $19.79; you can use this price or the price you purchased the shares. If price has risen, use the current price to determine your 2%.

• $19.79 x 100 shares x 2% = $39.58

• We would look for the option strike that has a similar ROI (left side of chart below)

• In this case the 20.5 strike ($20.50) is above  the 2%  (bid $46) or the 21 strike ($21.00) is slightly below (bid $31)

• Remember, the 2% rule is for one month, so we actually need 1/4 or 0.25% of the 2% we calculated above $39.58/4 = $9.89 week

• The 22 strike has a $14.00 premium or the 22.5 strike has a $9 premium

General Reminder

• Remember, the strike means that if the price is above or equal to the strike at the end of the week we will sell at our strike price regardless of how much higher it could be. If it is below, we keep the shares and premium.

• Delta represents the approximate likelihood of it reaching that price by end of the period.

• The closer the strike, the greater the premium. The farther the strike, the lower the premium. 

• In our example above, the probability of the strike hitting on the strikes above are:

  • • 20.5 strike - 38% (0.38)

    • 21 strike - 29% (0.29)

    • 22 strike - 15% (0.15)

    • 22.5 strike - 11% (0.11)

Profitability

• Beyond the 2% or fraction of the premium you receive, if price rises above the strike you also profit from the sale of shares.

• Let us see how we would have profited if our strike is hit

  • • 20.5 strike hit: we keep the $46 premium plus we collect the difference between our strike $20.50 and our cost $19.79 x 100 shares that we own. 0.71 x 100 = $71

    • $46 + $71 = $117 profit or 5.91% ROI ($117/$1979) in one weeks time; almost 3 months worth of profit (2% /month)

• • • 22 strike hit: we keep the $14 premium + difference between the strike and cost ($22.00 - 19.79) x 100 = $221

    • $14 + $221 = $235 profit or 11.8% ROI ($235/$1979) in one weeks time; almost 6 months worth of profit (2% x 6=12%)

Monthly Option (4 weeks)

• Current Price is $19.79; you can use this price or the price you purchased the shares. If price has risen, use the current price to determine your 2%.

• $19.79 x 2% = $39.58

• We would look for the option strike that has a similar ROI (left side of chart)

• In this case the 23.5 strike ($42.00) is above the 2% or the 24 strike ($34.00) is slightly below

General Reminder

• Remember, the strike means that if the price is above or equal to the strike at the end of the week we will sell at our strike price regardless of how much higher it could be. If it is below, we keep the shares and premium.

• Delta represents the approximate likelihood of it reaching that price by end of the period

• The closer the strike, the greater the premium. The farther the strike, the lower the premium. 

• In our example above, the probability of the strike hitting on the strikes above are:

  • • 23.5 strike - 22% (0.22)

    • 24 strike -  19% (0.19)

Profitability

• If price is below our strike we keep our premium and shares

• Let us see how we would have profited if our strike is hit

  • • 23.5 strike hit: we keep the $42 premium plus we collect the difference between our strike $23.00 and our cost $19.79 x 100 shares that we own. 3.21 x 100 = $321

    • $42 + $321= $363 profit or 18.3% ROI ($363/$1979) in one months time; 9 months worth of profit (2% /month)

• • • 24 strike hit: we keep the $34 premium + difference between the strike and cost ($24.00 - 19.79) x 100 = $421

    • $34 + $421 = $455 profit or 22.9% ROI ($455/$1979) in one months time; almost a years worth of profit (2% x 12 = 24%)

Here are a few pointers to help you with selecting your strike for CSP and CC

• Make a decision on whether you are wanting to hold on to shares for the long run or if you are willing to let be called away.

  • • If you are wanting to reduce your cost basis (DCA), hold on to shares for at least a year for tax advantages, or to consistently collect premiums for monthly revenue, then do not be greedy on premiums. Look for your 2%/monthly or 0.5%/weekly.

    •  If you are looking to get in and out of positions and start new ones, then consider a more aggressive strategy using the 40 delta as your target (select the 40 delta or one below the 40 delta) to collect higher premiums 

• Determine the market strength. If your stock is showing great strength, consider a lower delta as it gives you a higher strike. This can help you to hold on to your shares longer without them being called away or to take advantage or selling your shares at higher strike and profit from your purchase price of the shares.

• Use IV Percentile (Volatility Measurement) to determine if the premiums are higher or lower than usual.

  • • Low (< 50), Medium (50-70), High (71+)

    • The higher the IV Percentile the greater the premiums, the lower the IV Percentile the lower the premiums

    • Read Volatility under Options to refresh your memory on IV Percentile

    • For me, if I see IV Percentile >70, it is not uncommon for me to look for weekly options that are 2% (monthly 8%)

    • I want to take advantage of the higher premiums to make up for slow weeks/months; potentially even sell my shares at strike price for a quick return

    • In high IV Percentile moments, depending on the current price, I am looking for 15-20% for strike prices while maintaining a 2% weekly premium.

      • • e.g. Current price is $100, I initially look at the $115/$120 strikes and what the premiums are on the weekly and monthly

    • MARA Example (12/31/23)

      • • In the example below, MARA has been rising exponentially over the past weeks and has an 85% IV Percentile, 85% of the time volatility has been lower during the year, which means the volatility is in the top 15% of days this year and premiums should be really high.

        • If we used the 15-20% strike rule, we would take the current price of 

        • $23.45 x 1.15% = $26.96 or $23.45 x 1.2% = $28.14

        • We would first look at the 27 strike (1.01 or $101) and the 28 strike (0.77 or $77)

        • 27 Strike or 31 delta, we receive a $101 premium or 4.3% ROI for premium and $355 profit [100 share x ($27.00 - 23.45); if price is above $27]; this gives us a total profit of $456 or 19.4% ROI in one week

        • 28 Strike or a 26 delta, we receive a $77 or 3.2% ROI for premium and $455 profit [100 share x ($28.00 - 23.45); if price is above $28]; this gives us a total profit of $532 or 22.6% ROI in one week

        • Both meet the 2% premium requirement. My personal belief is to know your charts and your strategy (DCA, long term, short term) and make a selection of your premium and strike

        • You can also consider a monthly call to reduce the management of your CC; but you will earn less premiums 

• One thing I like to do for my positions is having a mixture of weekly and monthly positions so I never feel like I missed out on either play. You will find there are benefits to both and you will have to determine for yourself what works best for you.

Above: Weekly Call

Above: Monthly Call

• Note how the premiums are higher; more time until expiration, extrinsic value, the higher the premium

• Also note the delta used at each strike; larger deltas for strikes at similar levels on the weekly

• On a monthly strike with a high IV Percentile I would look for 8%-10% on the premium alone. In this case,  I would be looking at the 40 delta, 30 strike, premium 2.41 or $241 (10.2%). If the price is above $30, I will sell the shares for a profit of $655 or a total of $896 ($241 + $655) for a 38% ROI.

For each scenario, calculate the following:

• 2% per month and week on your total investment

• 2% per month and week based on a single option contract (Unless you only own 100 shares)

• ROI of your total investment for the year 

• New Cost Basis 

Scenario 1

• You have 100 shares

• Total cost is $2,000

• Average cost is $20

Scenario 2

• You have 400 shares

• Total cost is $25,600

Scenario 3

• You have 300 shares

• Total cost is $15,000