THE 1-1-2 OPTIONS STRATEGY: MASTER PLAYBOOK

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🎯 SYSTEM OVERVIEW

ComponentDescription
Strategy TypeVolatility Risk Premium (VRP) Harvest System
Structure1 Put Debit Spread + 2 Short Puts
StyleDefined-risk short vol with crash buffer
Market TypeLiquid Index Options Only (SPX / NDX / /ES)
ObjectiveCollect premium while surviving volatility regime shifts

🧱 I. POSITION STRUCTURE (THE TRADE)

📦 1-1-2 CONFIGURATION

LegTypeStrike SelectionPurpose
1Put Debit Spread (Hedge)Long 25Δ / Short 20ΔCrash buffer
2Short Put~5Δ OTMIncome generation
3Short Put~3Δ OTMTail premium layer

📅 EXPIRATION RULES

RuleRequirement
DTE Range60–120 days
Minimum DTE to hold shorts≥ 7 days
Early exit preference>50% profit capture
No trading exceptionsEvents override entries

📊 II. ENTRY FILTERS (TRADE / NO TRADE)

🟢 MARKET REGIME CHECK

IndicatorGreen (Trade)Yellow (Reduce Size)Red (No Trade)
Term StructureContangoFlat / FlatteningBackwardation
IV vs RVIV > RVIV ≈ RVRV > IV
IV Percentile> 30%15–30%< 15%
LiquiditySpread < 5%5–10%> 10%
Event RiskNoneMinor dataFOMC / CPI / Shock

🚫 HARD NO-TRADE CONDITIONS

ConditionRule
BackwardationDo not trade
IlliquiditySpread > 10%
High event riskCPI / FOMC window
Low IV regimeNo premium edge

🧮 III. DETERMINISTIC SIZING ENGINE

📐 POSITION SIZE FORMULA

N=⌊AccountEquity×0.023×UnitNetCredit⌋N = \left\lfloor \frac{AccountEquity \times 0.02}{3 \times UnitNetCredit} \right\rfloorN=⌊3×UnitNetCreditAccountEquity×0.02​⌋


📦 SIZING RULES

RuleConstraint
Risk per trade~2% max equity
RoundingAlways round down
Minimum sizeIf N < 1 → NO TRADE
Regime adjustmentYellow = 50% size

📉 EXPOSURE LIMITS

ConstraintLimit
Correlated index exposureMax 2 units
Concentration ruleSPX / NDX / ES treated as same
Equity exposureNot allowed

⚠️ IV. PORTFOLIO RISK CONTROLS

🧨 VOLATILITY SHOCK RULE

ConditionAction
Portfolio Vega ↑ > 25% in 1 sessionReduce exposure 33%
Execution priorityClose 5Δ puts first
GoalReduce gamma exposure fast

📊 RISK CAPS

MetricLimit
Portfolio Vega≤ $250 per $100k
Correlation spikeIf ~1.0 → reduce 50% exposure

🧠 V. STATE MACHINE (TRADE MANAGEMENT)


🟢 STATE 1 — HARVEST (NORMAL CONDITIONS)

RuleAction
Standard exitClose at 50% profit
Yellow regimeClose at 30% profit
Profit lock≥35% + regime shift → EXIT
Efficiency stop<25% profit at 50% DTE → EXIT

🟡 STATE 2 — DEFENSE MODE

TriggerCondition
Velocity5Δ short put doubles in <48h
DriftDelta rising 3 sessions + ≥40% move

ACTION TABLE

ActionResponse
Immediate stepClose 5Δ short put
ResultConvert to 1-1-1 structure
No rollingForbidden in stress mode

🔴 STATE 3 — CRISIS MODE

📉 GAP RULE

ConditionAction
SPX gap ≥ 3%Wait 15 min
No bounceExit immediately

⚡ CASCADE OVERRIDE

ConditionAction
Continuous selloff after openImmediate exit
No liquidity recoveryFull de-risk

💀 LIQUIDITY COLLAPSE

ConditionAction
Spread > 5× normal for 60 minStructural exit

☠️ ABANDONMENT RULE

ConditionAction
Loss = 3× creditClose all positions

🧯 VI. POST-EVENT SYSTEM CONTROL

❄️ COOL-DOWN RULE

EventRule
Abandonment or 5% drawdown5 trading day pause

📉 RE-ENTRY LADDER

PhaseAllowed Size
Days 1–550% size only (Green regime)
Day 6+Full size allowed

🧾 MANDATORY POST-TRADE TAGGING

FieldOptions
RegimeGreen / Yellow / Red
TriggerHarvest / Drift / Velocity / Gap / Abandonment
ExecutionClean / Slipped / Partial / Failed
CauseModel / Market / Behavioral

🧱 VII. CORE RULES (IMMUTABLE)

🚫 HARD LIMITS

RuleDescription
No interpretationRules are binary
No equity tradesIndices only
No <7 DTE shortsAbsolute prohibition
No rolling in crisisForbidden
No trading if N < 1System blocks entry

🧠 SYSTEM INTENT

🎯 WHAT THIS IS

LayerMeaning
StrategyVRP harvesting system
Risk modelDeterministic exposure control
ExecutionRule-based state machine
ObjectiveSurvive volatility regimes, not predict them

⚠️ REALITY NOTE (IMPORTANT)

Risk TypeStill Exists
Overnight gap riskYes
Liquidity collapseYes
IV shock repricingYes
Broker margin changesYes

This system:

does NOT eliminate risk — it controls when and how risk is allowed to expand

📚 1-1-2 Strategy: Digital Resources & Bibliography

Primary 1-1-2 Video Deep-Dives

1-1-2 Articles & Strategic Documentation

Quantitative & Institutional Research (The “Why” behind 1-1-2)

  • VRP & Skew: The Volatility Risk Premium in Ratio Spreads (Emerald Insight)
  • The 1-1-2 Stress Test: Managing Double-Naked Put Exposure in SPAN Margin Environments (BIS Bulletin)
  • Market Mechanics: Beating the Financial Futures Markets (Ratio Strategies) – Collins (2006)