The false myth of Income Strategies

Making use of the holiday this is a good time to re-post my thoughts about option "strategies" in particular those that seek to generate "income" in a regular basic, like weekly time frames. This is what I wrote in the past about this subject:

Those strategies don't exist, they are just bogus claims from dishonest or inexperienced (or both) traders. If it were possible to extract money from the market, systematically, with little risk or effort all of us would be extremely wealthy already. Seeking those kind of strategies is like a rite of passage for everyone new to options as the moment that time decay is discovered is the moment that everyone starts thinking about ways to monetize it (by selling "premium" for instance). I have a video about the fallacy of time decay: (for those of you with the time to watch).

With that out the way I want to be clear that there are potential arbitrage opportunities in any market, including options, and by arbitrage I mean those kind of trades that carry little or no risk and where profit is almost guaranteed. So they do exist, in fact they happen all the time and there are lots of markets participants that only engage in this kind of trading. However the techniques used, the capital required and the small profit margins (it is a volume enterprise) make it beyond the realm of possibility for us retail traders. In fact arbitrage strategies that run constantly in the market is what makes the US markets so efficient, as any inefficiency is quickly monetized and removed from the market by the arbitrage funds.

That being said, there are certain structural inefficiencies in the options market that for some reason persist to this day. The linked video talks about one the them called the Variance Risk Premium and some ways of extracting it from the market. There are many other inefficiencies in index options (SPX options) and we exploit them in this room for time to time:

1. Under-pricing of certain binary calls: The Naive strategy and the DLA profit from this.

2. Persistent contango of the SPX term structure: The very successful (but rare) VIX contango trade that we do here in the room from time to time profits from it (so far we have a 100% rate of success on that one).

3. Mean reversion of the volatility space after perturbations: We use the short term VXX contango trade for this.

4. Persistent and heavy negative skew in SPX options: This gives an edge to short binary risk reversals in SPX, sadly the market seems to be moving up forever and these kind of trades are for playing downside.

And many more!

So don't despair folks event though here in the G.O room we don't do any of the "income" strategies that you will see on the internet we try to take advantage as much as we can of all options inefficiencies that we can find. Our trades are mostly opportunistic so always keep an eye for the notifications and keep asking questions and generating trade requests. The fact that there are no free lunches in the market doesn't mean we can't make money out of it.

Leo Valencia hosts the Gamma Optimizer options service at