What we try to do with our income trade

We create our income trades by initiating a  CALL credit spread and a PUT credit spread on the same stock or index. We try to pick our strike prices to be at least two standard deviations from the current prevailing price. We also set up our positions with enough time before expiration, so we are selling time premium. Our instrument of choice is almost always an index and there are a lot of indicators we factor in before we initiate the trade including the volatility index - VIX.

Our instrument of choice is always an index because at the very least we want to eliminate the "Problem of the Lemon" - Which states that the person selling you a used car always knows more about the used car than the buyer can ever know.Why is this relevant to stocks - the individual investor in a stock is always faced with the problem of the Lemon, Despite all the securities laws and enforcement- corporate insiders, wall street analyst and hedge funds with their extensive network of informants are always going to know more about a stock and react faster than the individual can ever know. When you coupled that with the prevalence  of High Frequency Trading (HFT) the individual investor is fully disadvantaged trying to trade individual stocks . (please google HFT and read all you can on High Frequency Trading). We there fore structure our index trades utilizing indexes like the Russell 2000 index (RUT) - The RUT is an index that contains 2000 stocks and we eliminate the Lemon Problem because it will be virtually impossible for any one to have inside information on 2000 stocks at any point in time. It is also a diversification solution, which is basically the only free lunch you can get in finance and in investment. The other instrument of choice is also the S&P 500, which is an index containing 500 stocks of the leading companies.

Finally, we treat our income trades like an insurance business, where we are basically writing catastrophic insurance on indexes. So like any insurance company there is a chance though slim that once in a while a catastrophe might hit, so we closely monitor our positions and readjust or re insure the position if the indexes begin to move with extreme volatility. The goal is never to take a catastrophic loss.