My Strategy in a Nutshell

This strategy assumes the Black-Scholes-Merton (BSM) view of price behavior: the continuous return \(r_t = \ln(S_t/S_{t-1})\) is normally distributed, so the price \(S_t\) is lognormally distributed.

At the center of the method is Implied Volatility (\(IV\)), often shortened to IV.¹ It measures the market’s expectation of future price movement, backed out from option prices. IV is typically quoted as an annual percentage.

To apply IV in daily trading, we convert it into Daily Volatility (\(DV\)). Since IV is based on closing prices (see Underlying Closing Price (\(S_{closing}\))), we are free to choose a reference point as the “mean” for the day. This strategy uses the Underlying Opening Price (\(S_{opening}\)) at the market open, because most intraday price movements are analyzed relative to the opening. During the session, the live price is noted as Spot Price (\(S_{spot}\)).

Once we have daily volatility, we get an expected price range that covers about 68% of outcomes—assuming IV equals one standard deviation, or \(\sigma\), in a normal distribution. Still, this is a wide range.

The Daily Volatility Scaler (\(DV_{scaler}\)) lets us tighten or widen this expected range to match different trading styles.

That’s where option deltas come in. Delta helps estimate the likelihood of an option trade being filled at a given price, providing more precision within the broad range defined by daily volatility. Even if you trade stocks without using options, learning to read option deltas is worthwhile—it helps you understand market expectations and price movement probabilities.

Together, daily volatility and option delta create a system for managing trade frequency. By focusing on trades with a low chance of execution, you can avoid wasting fees on trades that aren’t meaningful. This is especially useful for weekly covered calls, which generate consistent income and allow you to benefit from compounding over time.