Rinse and Repeat

Rinse and Repeat is an income strategy based on short options. It is designed to generate consistent income in up and down markets by selling options (both calls and puts) on a regular basis with various risk levels. Short option strategies abound, from random to prescribed. As with any option strategy, the nuances are the key to success.

We present this strategy from a practical perspective first, and add our philosophy and mindset later. The latter is no less important to the strategy.

If you do not want to execute this strategy yourself, but are looking to view our portfolio and trades to learn more about it, you can access that in our companion tool Brokenstock.

Pre-requisites

To execute this strategy successfully, the trader/investor should have the following pre-requisites in place:

• Understand the basics of options trading, including what is a call, put, strike price, expiration date, covered call, cash covered put, naked put, buy-write, sell to open, buy to close, sell to close, assignment and exercise. In this strategy document, we will not explain these terms, though we will be using them. You are responsible for understanding the nuances of this type of instrument, and you take the responsibility for losses or gains as a result of your knowledge.

• You will need a brokerage account where you have trading permissions to at least execute buy-writes and covered calls. Selling puts is also advantageous, but not absolutely necessary. Even for cash covered puts (vs naked) some brokers require a higher permission level for those. Check with your brokerage to ensure you have the appropriate level of options trading enabled. If you cannot be granted the ability to short puts, you can still execute part of this strategy with covered calls only. However, there are instances where selling puts is advantageous. We describe that within the strategy documentation. Additional recommendations:

  • Become very familiar with your broker’s option trading tool(s). Some are more difficult to understand than others. For example, Fidelity’s default web tool is extremely easy to use, while IBKR’s tools are not; the latter provides more advanced functionality that is strictly not essential to the strategy.
  • We recommend using a separate brokerage account for Rinse and Repeat than you do for other strategies. This is standard Butcher’s Row practice, and helps you focus on the strategy without emotional confusion from other strategies.

• You will need sufficient capital in your brokerage account for the range of underlying equity prices you intend to operate on. This is because one option contract requires either 100 shares of stock (covered call) or $100 times the contract strike price as cash (cash covered put). If you intend to trade options on margin, you need sufficient margin to do so. Butcher’s Row never recommends trading on margin. The only reason Butcher’s Row trades on margin is to get around settlement delays on cash, i.e. the cash is guaranteed just not settled, limiting its immediate deployment. With settlement moving to 1 day (T+1) recently, this is less of an issue.

  Regarding required capital, Butcher’s Row is a diversified methodology. You cannot successfully execute Rinse and Repeat on just a few symbols at a time; you will need sufficient capital to diversify across many symbols, at least ~10 with ~20 being ideal. Additionally, you should deploy no more than 1/3rd of your overall portfolio (all your strategies combined) to Rinse and Repeat. This means you will need a total of 3x the capital for your whole portfolio that you intend to deploy to Rinse and Repeat. Typically, this strategy is worth considering on portfolios that are at least $1M in size but may be appropriate for smaller portfolios. A primary reason for this is that to execute the strategy in a smaller portfolio means more reliance on low price underlying equity.

  Often price of equity can be a function of risk, with stocks priced below $10 (in our opinion) as being too risky for the portfolio with few exceptions. We recommend the median price of the underlying to be around $30. This means that for 20 symbols, you will need $60k in capital for the underlying stock or cash covered puts, implying an overall portfolio of $180k. This is a minimum, and we recommend larger portfolios.

• You will need a whole market scanner with specific properties. This scanner should provide the ability to filter on major dimensions. We describe dimensions we use in this strategy later. The most important property is the current short option ATM premium yield on the next upcoming expiration date. I’ve not yet found a commercial scanner that does this, and certainly not one with real time capabilities. Brokenstock, our companion tool, provides such a scanner.

• You will need to easily view an option chain for a given expiration date as a function of premium yield and overall yield at expiration. Most option chain tools simply provide the dollar amounts on the option, and require additional math (though simple) to calculate yield. You will need these quantities at your fingertips regardless of your trading frequency. Along with usual stock data, this tool will be used as a primary filter for the strategy. It need not be real-time, but it should likely not be delayed more than 15 minutes. EOD scanners are only directionally useful due to opening volatility we observe in the markets these days. You can build such a tool in a spreadsheet leveraging a spreadsheet API such as that offered by Alpha Vantage, or you can use the functionality of our companion tool, Brokenstock.

• You will need a short option premium expiration ladder tool. This is a tool that shows you the dollar amounts of short options you own across your accounts/portfolios by expiration date. This is important because while you receive the premium up front, holding a short option creates a liability position — you will notice that your brokerage balances your short option against your stock. The ladder provides a quick view of your overall short option exposure by expiration date, and the capital/margin deployed against those. The strategy later discusses how to structure a ladder for overall success. We do not know of a tool in the market that provides this functionality; maintaining one on a spreadsheet is possible but tedious. We offer this functionality in our companion tool, Brokenstock.

• You will need an overall symbol level yield tool, preferably with powerful sub-symbol yield analysis. Almost no brokerages provide even close to this capability. What is an overall yield tool? Consider the Butcher’s Row definition of a trade: Butcher’s Row Definition of a Trade. Because a trade can be complex, and Rinse and Repeat trades are very complex due to options and rolling, it is important to understand the overall profitability at any point in time, which your broker does not provide, so that closing decisions can be evaluated at any point, at the tip of your fingers. Brokenstock provides a total yield tool. Let us provide the motivation for this:

  • Assume you have a covered call on a symbol. The symbol is worth $100 at buy-write time, and you received $2 for the short call.
  • Later, the symbol moves to $105 in price. Your short call is now worth $3 on the market (you own it at $2). You decide you want to take advantage of the $5 capital price move, and you look to roll to some future date, trading duration for premium yield.
  • You find a future dated call on the symbol that is worth $3.50. You roll your short call, buying it back at $3 and selling the future dated call at $3.50. Congratulations — if the symbol stays above $105, you will have realized a $5 capital gain at expiration. But what about the option premium?
  • You initially received $2 for the short call, but bought it back at $3, leaving a balance of -$1 on paper. But you simultaneously sold the future dated call for $3.50, leaving you with a net of +$2.50 on paper. So at expiration you will have made $5 in capital gain and $2.50 in premium, for a total of $7.50 if the underlying stays above $105. Nice!
  • HOWEVER, during the lifetime of this trade, your broker will only report the yield on the stock and that on the current option. So you will see the capital gain of $5, but your option yield will not reflect the roll dynamics. Often, closing a position after rolling, or rolling several times, can lead to massive losses even though the brokerage reports a profitable option yield because it does not take into account the roll dynamics.
  • A Rinse and Repeat strategy implementation almost never results in a loss on a single closed trade (Butcher’s Row definition of a trade). To achieve this, a total yield tool is essential.

You will also need an expiration calendar tool that shows the dollar amount of short options expiring in the next several weeks. This is useful to spread out your effective principle over time, and avoid having all your options expiring in one week. Again, you can build such a tool in a spreadsheet leveraging a spreadsheet API such as that offered by Alpha Vantage, or you can use the functionality of our companion tool, Brokenstock.

Mechanics

Philosophy

While this is technically an income strategy, the philosophy — and mindset — is that of a lender. Rinse and Repeat is a lending strategy where the “lender” (the trader/investor) lends stock or cash to the market in return for a premium. The difference between a conventional loan and Rinse and Repeat is that the principle is variable, while the yield is fixed within a given timeframe.

When the trader/investor writes a call, they are lending stock to the market in return for a premium. When they sell an opening put, they are lending cash to the market in return for a premium. The principle is variable because the value of the stock can change, and because assignment of a put can lead to stock ownership. The yield is fixed because the premium is fixed for a given timeframe.

While the variability of the principal is secondary, it is not ignored. There are key characteristics of the underlying asset that are important to the success of the strategy. But fundamentally, the trader/investor is focused on the yield of the variance in the principle.

We call the strategy Rinse and Repeat because it is designed to be executed on a regular basis, typically weekly. The trader/investor “rinses” the portfolio of expiring options and “repeats” the process by selling new options against the underlying assets or cash. The trader/investor may also be assigned by design, and then perform a new buy-write on the underlying asset or resulting cash. Finally, the trader/investor may also roll options forward to a new expiration date. This is all standard options trading mechanics, but within the context of the Rinse and Repeat, each decision is measured against the overall loan yield.

Option Mechanics

The trader/investor should understand short option mechanics; what is a buy-write, what is a covered call, what is cash-covered and a naked put. We can’t do justice to these topics here, and there are better resources available. However, we provide a brief overview.

American stock options are contracts that give the buyer the right, but not the obligation, to buy (call) or sell (put) 100 shares of an underlying stock at a specified price (the strike price) before or on a specified date (the expiration date). The seller (or writer) of the option receives a premium for selling this right.

Many trader/investors get excited about buying calls and puts because they are cheaper than buying the underlying, and promise a wild swing in value as the stock approaches the strike price. But this is a risky strategy, and most retail buyers of calls and puts lose money.

The seller of the option, on the other hand, collects the premium and hopes that the option expires worthless, allowing them to keep the premium as profit. Regardless of what happens, they keep the premium. This gives them an inherent advantage as it provides a break even point on their trade.

When selling a call, which ends up in a covered call, the trader/investor owns the underlying stock and sells a call against it, often at a higher strike. They are selling the right for someone else to buy the stock from them. If the stock price does not rise above the strike price at expiration, they keep both the stock and the premium (because no one would want to buy the stock at a higher price than market). If the stock price rises above the strike price, they are obligated to sell the stock at the strike price, but they still keep the premium. If they don’t want to sell the stock at the strike price, they can also roll the option forward. At any time prior to expiration, they can also buy back the option (buy to close) and keep the stock, or they can buy back the option and sell the stock simultaneously.

A buy-write is when the trader/investor buys the stock and simultaneously sells a call against it. The reverse is selling the stock and buying back the option simultaneously. Many if not all brokers allow these simultaneous transactions as part of their offerings. It can be slightly cheaper and less complex to do so than to do the two transactions separately.

When selling a put, the trader/investor is selling the right for someone else to sell them stock at the strike price. If the stock price is above the strike price at expiration, the put expires worthless and the trader/investor keeps the premium. If the stock price is below the strike price at expiration, the trader/investor is obligated to buy the stock at the strike price, but they still keep the premium. If they don’t want to buy the stock at the strike price, they can also roll the option forward. At any time prior to expiration, they can also buy back the option (buy to close) and avoid assignment or expiration. A cash covered put is when the trader/investor has cash reserved equal to the strike price of the put, which may be enforced by the brokerage. A naked put is when the trader/investor does not have cash reserved equal to the strike price of the put, which may be allowed by the brokerage on margin. We do not recommend trading on margin, and definitely do not recommend naked puts. Trading on margin can lead to margin calls.

If all of this sounds really complex to you, be very careful when trading options, and take your time. Only do a few at a time and do not expose yourself to risk by gambling without understanding what you are gambling on. But eventually, all of this becomes second nature, and the explanations are almost overly wordy.

Example

A trader/investor has a portfolio of $100,000. They select a quality asset, say an ETF, that has weekly options with a premium yield of 1.5% one week out. They buy 100 shares of the ETF at $100 per share, for a total of $10,000. They then write a call option with a strike price of $100, expiring in one week, for a premium of $1.50 per share, or $150 total. This is a premium yield of 1.5% for the week. If they repeat this pattern weekly that’s 78% annualized yield.

Let us now say that at expiration, the price of the stock is $102. This means that the call option will be exercised, and the trader/investor will be required to sell their 100 shares at $100 per share. They will receive $10,000 from the sale of the shares, plus the $150 premium, for a total of $10,150. They can now rinse and repeat and “loan” out $10,150.

But perhaps the trader/investor decides to roll the option forward and up, in order to benefit from capital gain. So they look to roll to the following for a credit. What they find is that at $102 strike, there is insufficient premium to roll for a credit. They would have to “pay” to roll. Perhaps volatility dynamics have changed such that the $2 value of their expiring option (because it’s expiration day and the stock is worth $102, so their $100 strike option is in the money for $2 at 3:59 pm on expiration day) cannot be exceeded by the $102 strike option a week out, which is now only $1.50. So when they roll, they would have to buy back their option for $2, but only get $1.50 back.

From a lending perspective, this is not a good deal. But FOMO gets the better of them. They figure that if strike at $102 next week, they’ll gather $2/share in capital gains, which is $200, which will more than offset for the loss of $50 on the roll. So they go ahead and roll, paying $50 to do so. Unfortunately, the stock tanks to $98 the next week. They keep their stock, but now that $50 loss is on the books. In this case, rolling was the wrong decision.

At its heart Rinse And Repeat is an income strategy based on short options. If you think you know all there is to know about short options strategies, stop here and be happy. But if you think you can learn something new, and would like the possibility of consistently making 50%, 100%, 150% or more in annualized yield, read on. In fact, Rinse and Repeat is not an income strategy at all. It is a lending strategy. I call it an income strategy because equity traders don’t typically like lending, they like investing. But more on that later.

The Rinse and Repeat strategy fits in a portfolio of strategies. i.e., this is not your only strategy. It is a nice complement to other strategies such as Growth, Value, Momentum, Dividend Compounding, Bond or Preferred Stocks and so on. It can complement or be additive to thematic strategies such (examples: Financials, Energy, AI, Tech, China, Emerging Markets and so on). In short, an overarching philosophy within the Butcher’s Row methodology is diversification, including diversification of strategies. But done properly, it can be a very, very lucrative strategy, and one that is more predictable than Growth, Momentum or Value.

As with all Butcher’s Row strategies, you should think of executing this strategy in an isolated “portfolio” so that your mindset is focused on its rules alone when reviewing your specific positions. Whether that portfolio is organized in a commercial journaling application like Brokenstock, a spreadsheet or ideally also within a specific account in one of your brokerages is up to you. But strategy isolation is important to avoid emotional confusion with other strategies.

Summary of Strategy Mechanics

Rinse and Repeat is a short option income strategy that seeks to generate consistent income in up and down markets by selling options (both calls and puts) on a regular basis with various risk levels. As with any option strategy, the nuances are the key to success.

Short option strategies abound. The fundamental mechanics are straightforward if not simple to the newly initiated. One basically sells calls or puts against underlying assets, cash, or naked. Butcher’s Row does not re-invent the mechanics; however over time an approach to the strategy has evolved that is unique to Butcher’s Row.

This methodology was originally designed to replace salaried income. It has the potential to generate between 1% and 3% (or more) of invested capital per week; though much depends on the discipline of the investor/trader. Therefore, commitment to the strategy with a nominal portfolio of $100k can generate between $1,000 and $3,000 per week in income BEFORE TAXES. Since this is income, it is taxable at the ordinary income rate.

Capital gains are possible with this strategy, but not the objective of the strategy. As we shall see, focusing on capital gains defeats the ability to generate consistent income.

As with all strategies in Butcher’s Row, it is designed to be part of a portfolio of strategies that work together to maximize total returns. And as with all strategies within the methodology, it is designed to be diversified in every way.

A set of tools within the Brokenstock Application support the strategy.

Philosophy (Detailed)

It is well known that premium yields are most advantageous at the money (ATM) and that for some symbols the weekly premium yield 7 days out can be 3% or more. Why more traders/investors do not use this strategy is likely due to several factors including:

• Lack of understanding of options trading mechanics
• Fear of missing out on large stock price swings
• Getting stuck in long dated rolls and not knowledgeable on exit techniques
• Lack of accessibility of tools to understand and manage profits and exit conditions
• Lack of appropriate mindset

Mindset

In fact, it is this author’s POV that short option strategies fail mostly due to the last factor, the mindset of the trader/investor. This is true of many if not all strategies, but when stock traders get into options it is compounded. Retail stock investors tend to be Buy and Hold investors, and this mindset is not appropriate. It may seem counterintuitive that holding a profitable short option to expiration isn’t always the best strategy, and hopefully the reader will understand why as they read on.

Rinse and Repeat is an income strategy as it generates income, but it is really a Lending Strategy. The trader/investor needs to look at their Rinse and Repeat positions as loans to the market in the form of stock or cash in return for a premium. Only in thinking about the strategy in this way can the trader/investor be successful and reap the accumulated 1% to 3%+ per week.

In terms of being a Lending Strategy, the reserved cash or stock is a principle, and the option premium is the lending yield. It differs from a conventional loan in that the principle can be variable, but the yield is fixed. For short calls, the principle is variable because the value of the owned stock can change, while for short puts the principle is variable if assignment leads to stock ownership.

Once the trader/investor has transitioned to thinking like a lender, the future value of the underlying principle is important only in terms of not losing capital. The focus is on the premium. Of course, there can be underlying capital appreciation (and depreciation) — and if the stock takes on some momentum the trader/investor may miss out on larger gains or incur losses — at least on paper. But again, the focus is on lending.

If the focus is on lending, then the measurement of it is the premium received as expressed by annualized yield. Why annualized yield? Because if one can repeatedly make 2% per week, that’s 104% per year; if one is content with 2% over an unspecified timeframe, say 3 months, then that’s only 36% per year if easily repeatable. Said another way, $200 premium in one week over $10,000 invested is 2% for the week. It seems rather small compared to say $1000 over 3 months on $10,000, which is 10% for 3 months. The latter is market beating; so is the former. The difference is the former will yield 104% per year if repeatable, while the latter yields only 40% per year. The potential as measured by annualized yield should be clear, and is what matters.

Therefore, in Rinse and Repeat, the trader/investor thinks of themselves as a lender, and focuses the Rinse and Repeat portfolio capital on generating 1% to 3% per week.

Occasionally though, either greed, fear, common sense or analysis will lead the trader/investor to deviate from lending, and they will make decisions based on stock price movement. There are times when this is acceptable, and we have a numerical way of helping make those decisions.

It is acceptable because if we can increase the margin of safety (reduced cost basis) on principle and still continue to leverage the stock as a periodic lending vehicle, we will have greatly reduced risk.

It is also acceptable because stock price may have taken a dip with normal market dynamics, and the trader/investor needs to risk a lower strike price to capture the premium yield, one that could potentially be below cost basis. This is part of the strategy, but it does not mean that one will let oneself be assigned at a loss.

Tools

The Rinse and Repeat strategy requires tools that are not commonly available, certainly not with brokers where their positions are held.

Generally speaking, brokers provide only the profitability of the current option position; if one rolls options which is frequent with Rinse and Repeat, actual profitability (and annualized yield) becomes obscure quickly.

The first tool that the successful Rinse and Repeat trader/investor needs is an overall probability tool of a complex trade that may include underlying stock, inner trades, dividends, short calls and short options. Typically, we consider a trade started for a given underlying in a portfolio when the initial opening purchase whether an equity purchased, shorted (going long or short) or an option bought/sold to open. The trade is considered closed only when all positions are closed; inner trades occur when positions are added, closed, rolled, assigned or expired or when a unary event such as dividends occurs. But the overall trade stays open until the last equity quantity or option is closed. Thinking about “trades” in this way is essential to Rinse and Repeat.

But how does one measure the overall profitability of the “trade” or any “inner trade”? One can use the Brokenstock Application or track necessary transactions in a spreadsheet. We recommend the former, as the latter sounds simple but gets complicated very quickly. Try it…

Another tool that is essential is a market scanner that will find options with the yield desired. It is a casual observation that including ETFs, there are a limited number of equities that have, say weekly options with 1% or more premium yield for a given market cap and price range. There may be adequate option scanners out there, but again, Brokenstock offers such a scanner for the very purpose of this strategy.

Since this is an income strategy, tools that measure overall income per unit time (weeks preferably, but also months, quarters and years) are needed to determine the regular income generated by the strategy. Again, Brokenstock provides such tools, both raw income but also adjusted for overall position closure (Sometimes, we make a decision to close a position which can be profitable overall, but which may appear as an income loss — we want to exclude that from regular income calculations. For example this can happen when one has massive capital gains, but for some reason has an overall loss on option positions. The combined yield may be profitable, but the closure will contribute negatively to income when that is not the intent).

Another tool that is useful, and provided by the Brokenstock Application, is a calendar of dollar amounts to be expired, which we will call the Expiration Ladder. This is useful to spread effective principle over weeks into the future, another form of diversification. One does not want their short options obligations to all expire in the next week, or on any given week, but rather over a period of time.

Prerequisites (Detailed)

The prerequisites identified as a whole for the Butcher’s Row methodology is understood to be in place. In addition, this methodology has additional prerequisites.

Options Trading Basics

This is a short options strategy. Therefore, within this strategy the trader/investor will be writing calls, selling puts, rolling options for credit (and possibly, rarely for debits), having options expire, being assigned and at times closing entire positions.

Therefore, it is imperative that the trader/investor understand the mechanics of options trading insofar as the above is concerned. Advanced options such as spreads/multi-legged options are not used in this strategy, so the specifics of advanced option strategies are not required.

(In some future edition, the required option trading basics will be explained here.)

The remaining part of this strategy uses the above terms fluently. Know them.

Options Trading Level (Brokerage)

Your brokerage will undoubtedly have a level system for options trading. Typically, this strategy requires at least Level 2 options trading, which allows for covered calls. Some brokerages may require Level 3 or higher for selling puts, so check with your brokerage to ensure you have the appropriate level of options trading enabled. The early options levels are usually granted by attesting to a certain amount of experience as well as a certain level or risk tolerance. This strategy should not require the highest level of options trading, where brokerages usually have stipulations.

If you cannot be granted the ability to short puts, you can still execute this strategy with covered calls only. However, there are instances where selling puts is advantageous, and in the extreme, the only alternative.

Generally speaking, selling puts does not immediately put the trader/investor at risk of a wash sale on the underlying, since until assignment no underlying is purchased. In some market situations particularly bearish ones, it is psychologically advantageous to sell puts; also the premium on selling puts may be larger in some circumstances. However, in moderately bullish or neutral market, writing calls tends to have higher premiums.

For the purposes of income, there is little psychological difference between selling puts and writing calls near the money. One tends to go with the better yield alternative. On the one hand (unless your brokerage allows naked puts on margin), selling puts will reserve cash equal to the strike price of the put, which may limit the amount of capital available for other trades. On the other hand, writing calls will require ownership of the underlying asset, which may also limit capital availability.

Strategy Execution Overview

In this strategy, one seeks to sell options ATM or close to it, in near dated expirations, typically on weeklies, against quality assets. At steady state, the week begins with expirations and assignments from the prior week, plus any excess cash, as well as existing positions that either did not expire/get assigned the prior week or were rolled forward. Depending on market conditions the trader/investor sells options (sells puts, writes calls, or sells covered calls) throughout the week and possibly rolls positions forward. Excess cash is used to write new calls or sell puts, while prior expirations have new calls sold against the underlying.

Care must be taken based on market and underlying price direction, especially with rolling. There are pitfalls documented later that require special handling to exit profitably or at least at minimal loss (Butcher’s Row rarely accepts a loss).

It is critical that one puts aside the usual investor’s mindset with this strategy. To think like an investor here is to fail. Therefore, we cover the philosophy of this strategy in detail below.

Lending Philosophy

Butcher’s Row strategies are each based on a certain philosophy. The Rinse and Repeat strategy is based on lending. That’s right, it is not trading or investing, but lending. Until the portfolio owner understands this, they will struggle with making this strategy consistently successful.

A banker loans a fixed amount for a fixed or variable rate for a period of time. The loan can usually be repaid at any time, eliminating some of the yield.

In the Rinse and Repeat strategy, the philosophy is that the portfolio owner is lending a principle to the market for a premium or yield. The difference with the banker is that the principle here has a variable value, and the term of the loan is determined by the expiration date. It can of course be paid back through assignment or closed at any time by returning some of the premium (buying back the option).

Why is this philosophy so important? Because until the portfolio owner understands that they are lending and not investing, they will make various decisions like an investor versus a lender. A lender does not worry about missing out on future principle growth, they are instead focused on the yield for the loan.

For example, it is common for covered call writers to be concerned about missing out on future stock price appreciation. When they realize that they may be assigned or that they will miss out on significant capital appreciation, traders often decide to buy back the option at a loss or roll it blindly forward and up, not fully taking in the consequences.

A lender on the other hand, is not primarily focused on capital appreciation, but rather on the yield of the loan. The primary job is to secure the yield that was initially expected. Thus, the lender will tend to be more patient and consider all factors before making a decision to close out the position, roll it forward or take assignment. This author can guarantee that often, it is far more lucrative to accept assignment on a Friday and perform a new buy-write on the following Monday than it is to roll the option forward and up.

So…the philosophy here is to think like a lender. Just as one cannot time the top on momentum strategies, one cannot know what the future holds. Rinse and Repeat is a strategy that is designed to generate consistent income over time and the best way is to think of the strategy as a lending strategy rather than an investing strategy.

Selection of Underlying Assets

Since this is an income strategy, careful selection of the underlying assets is important. Quality Assets should be selected for the time frames desired. Generally speaking a Quality Asset is an asset over a specific timeframe where the likelihood of massive losses is a minimum. For specific criteria, see the section on Quality Assets.

Additional criteria exist on top of Quality Assets for the Rinse and Repeat strategy. The underlying asset should have a high degree of liquidity, such that opening and closing positions, including options can be made at the median price or better. The option chain contains weeklies as the strategy operates on a weekly basis, but at times monthlies may be used for the Calendar Diversification or because there is an ideal entry point for a monthly.

Once these criteria have been established, sufficient volatility is needed (or at least option pricing) such that ATM premium yields 1 week out is a minimum of 1%, but more often at least 1.5% or higher on short calls or short puts. Remember, premium yield is the premium divided by the purchase price exclusive of any capital gains.