Strategy Source

• Creator: Tom King
• Published Date: June 19, 2023
• URL: https://www.youtube.com/watch?v=kYJv-nO7CgQ

Trade Setup

The strategy involves selling a “naked” strangle on futures. This is a delta-neutral, income-generating strategy where you sell an out-of-the-money (OTM) call and an OTM put with the same expiration.

Action (Sell (-))	Leg	DTE	Strike Price / Delta Target	Width
–	Put Option	80–100	~7 Delta	N/A
–	Call Option	80–100	~6 Delta	N/A

• Total Capital Required: The creator suggests allocating no more than 30% of your available trading buying power to this strategy. Because futures use SPAN (Standard Portfolio Analysis of Risk) margin, the capital requirement is dynamic and based on total portfolio risk rather than fixed percentages.

Execution Context: This video serves as an educational model describing the creator’s systematic approach to trading futures strangles.

Strategy Application

The goal of this trade is to profit from the underlying asset staying within a specific price range until expiration.

• Strike Selection: The creator uses a mechanical approach, targeting approximately a 7 Delta for the put and a 6 Delta for the call. Delta (the “probability of success” metric) acts as the boundary here, keeping the strikes far away from the current price.
• Time Differential: The trade is entered 80 to 100 days out (with 90 days as the ideal). This timeline is selected because the Theta (the “time decay” that works in the seller’s favor) remains strong, and the trade avoids Gamma(the “accelerated risk near expiration”) that often plagues shorter-term trades.
• Market Environment: This strategy is designed for environments where the trader expects mean reversion. Because the positions are low Delta, they perform well when the underlying remains range-bound or returns to its historical average.

Risk Profile

• Wing Widths: As a naked strangle, there are no “wings” or protective options. The trade is naked, meaning there is no defined risk through offsetting legs.
• Maximum Loss: The creator defines the maximum loss scenario as a 2x multiple of the credit received.
• Capital Preservation:
  • Portfolio Cap: Never risk more than 2% of the total portfolio value on a single trade.
  • Buying Power: Monitor SPAN margin closely. In a significant market sell-off, margin requirements can double, potentially leading to forced liquidations if the account is over-leveraged.
  • Assignment Risk: If the underlying moves past a strike, you may be assigned the underlying future, which would then require active management (e.g., “wheeling” or closing the position).

Expected Outcome

The strategy targets a 50% profit of the initial credit received, typically occurring around 30 days into the trade.

1. Management & Exit Triggers

• Profit Target: Close the trade at 50% of the maximum potential profit.
• Stop Loss: Close the trade if the loss reaches 2x the credit received.
• Time Stop: If the trade is still open, exit at 21 DTE to avoid the increased volatility and Gamma risk associated with the final weeks of an option’s life.
• No Adjustments: The creator explicitly avoids “rolling” or inverting the trade when tested, preferring to accept the loss and move on to a fresh setup rather than compounding risk.

As you look to implement this, how do you currently calculate your total portfolio buying power to ensure you stay within the recommended 30% allocation?

The strategy was later updated on April 9, 2024

Massive Strangle Strategy Update! We Also Hit New ATHs in Portfolio Today!

While the core mechanics—selling ~7 Delta puts and ~6 Delta calls around 90 days out—remain the same, his updates are designed to reduce the frustration of large losses and improve overall win rates.

Here is a breakdown of exactly what is different from the original strategy playbook:

1. A Tighter Stop Loss (From 2x down to 1.5x)

• The Original: Stop loss was rigidly set at a 200% loss (2x the initial credit received).
• The Update: Tom is adjusting his stop loss down to 150% (1.5x the credit).
• The “Why”: While his backtesting showed the 200% stop loss historically resulted in a slightly higher annual return, taking a 200% loss is psychologically difficult because a single loser wipes out roughly four 50% winners. Dialing the stop loss back to 150% slightly increases the frequency of getting stopped out, but limits the damage so a loss only wipes out about three winners. It makes the strategy less frustrating to trade emotionally.

2. Introducing a Technical Filter (RSI Boundaries)

• The Original: Purely mechanical entry based strictly on DTE and Delta targets, regardless of chart setup.
• The Update: Tom is now filtering his entries using the Relative Strength Index (RSI) to gauge momentum.
• The “Why”: After backtesting implied volatility (which surprisingly hurt the strategy), he found that restricting entries to when the daily RSI is between 35 and 65 significantly improved results. This ensures you aren’t selling premium when the market is at overbought or oversold extremes, keeping the underlying asset closer to its 21-day moving average. This single tweak bumped his backtested win rate up to nearly 89%.

3. Extremely Rigid Trade Sizing Guidelines

• The Original: Broad capital preservation rules (e.g., max 2% of portfolio per trade, max 30% total buying power).
• The Update: A new, strict emphasis that every single strangle must be sized identically in terms of premium collected, regardless of what underlying asset you are trading.
• The “Why”: Tom notes he sizes his trades to collect roughly $3,000 in premium each time. If you trade different sizes (e.g., 4 contracts on one asset and 1 on another), a single loss on a heavily weighted trade could wipe out the positive expectancy of your smaller winners. Identical sizing ensures the math of your win/loss ratio holds up perfectly over time.

4. Opportunistic Early Exits

• The Original: Wait for the trade to hit exactly 50% of maximum profit.
• The Update: Flexibility to take profits early on rapid moves.
• The “Why”: Tom admits to closing out trades if they hit a 10% to 20% profit within just two or three days. While he notes this is technically a “no-no” that can slightly skew your long-term math (because you need those full 50% wins to offset your 150% losses), locking in a quick 20% return in 48 hours frees up capital and eliminates risk so efficiently that he takes the money and runs.