The 1% Plan: A Love Story
Last week I laid out the origin of the blog and the 1% plan. I looked at covered calls but didn’t dive too deeply into Index Trading, which is what started it all. Why not? Because it’s complicated and slightly overwhelming, which is probably why I made so many mistakes over the years that led me here. It’s worth looking at the origins of it all, so let’s take a step back in time a few years. In this week’s installment, I will dive into the world of index option trading and learn how it can simplify your investment strategy and reduce mistakes.
From 2017-2021 I owned a small business in the fitness/recovery space of stretching. One of my regular clients, we’ll call him Jeff (since that’s his name) had a standing 6am appointment. Over time that became 6:30 and 6:30 became 6:40, he was always a bit rushed at 6:40. One day I asked him why and that question led to weeks of conversation in which he introduced me to the concept of Index Options during Covid. See what Jeff was doing between 6:30am and 6:40am on Monday mornings was placing his trades – most for the week, some for the month and over the next few months he laid it all out for me.
He told me how he was making money every month essentially betting that the Russell 2000 (think Dow Jones for small companies) would not go up too high or too low each month. He had been trading inside of a retirement account with a fixed amount of money he could lose. And he was printing money. Between the monthly RUT options as well as weekly covered calls on Southwest Airlines (LUV) he was making 4 to 5 figures per month. And he showed me how.
For sake of argument say the Russell 2000 (RUT) is trading at 2000.
Last week of May: Trade a Call Credit Spread on the Russell at 2100-2110 that expires the 3rd Friday of June. You receive $3 per contract (each contract is 100, so you receive $300 automatically). Remember, it is at 2000 when you place this trade, so you are betting it won’t go up 100 points. If it doesn’t go above 2000, you keep your $300. If it does go above 2000, your maximum loss is $1000 (100 x the difference between 2100-2110, hence the term spread).
First or Second Week of June: Place a Put Credit Spread on the Russell at 1900-1890. So now he’s betting that not only won’t the Russell go above 2100, but also that it won’t go below 1900. Typically for a trade like this, placed later in the month, he may receive $1 (which equates to $100, or $1 x 100). So now he has collected $400. If the RUT stays above 1900, he collects the $100. If the RUT drops below 1900, his maximum loss is $1000 (100 x the difference between 1900-1890, hence the term spread).
Third Week of June: These contracts all expire on the 3rd Friday of June; so if the Russell stays somewhere between 1900-2100, he collects $400.
It bears mentioning here that this would be $400 for each contract he traded; he has a lot more money than me and he would trade 20 or 30 contracts at a time, meaning he would generate $8000-$12000 per month. That also means he was risking $24,000 per month.
For years, he printed money doing this. The stock market has some fairly predictable patterns over a long enough timeline, and he just happened to land on the Russell 2000. I cannot tell you with any certainty if the Russell is any easier to predict than say its cousins the Dow or Nasdaq, but I can tell you that after 5 years of my own Russell trading I learned a few things, the primary being:
Beginning in late 2000, I took on Russell 2000 trading with vigor, creating spreadsheets, taking courses, tracking historical data and creating a hypothetical (non-financial) trading account to place trades.
The RUT does not just trade Monthly, it trades Daily. In the beginning as you look to build up your nest egg, you have to be willing to take a bit more risk and spend a bit more time on it. Here is a sample day:
This example shows a $340 profit in two hours, trading 5 RUT 2250/2260 contracts. Get in at 9am when the contracts were $1 each (remember each contract is 100, so that’s $100) and get out at 11am when the contracts have dropped to $.32 each ($32). Take $.68 profit ($68) x 5 contracts, that’s $340 in 2 hours.
So now that we’ve covered the basics let me tell you a bit about April 2, 2025 and how I came up with what I call Primary Trade Theory (PTT).
The 1% Plan, Part Two: Liberation Day, Loss Recovery & Primary Trade Theory
April 2, 2025 did not go how I planned. Not how I planned at all. April 2, 2025 would cost me over $8,000.
On the other hand, April 2, 2025 would be the last bad trading day I would ever have. So far.
April 2 was so-called Liberation Day, referring to the announcement of a package of tariffs rolled out by the White House. At 4pm eastern, an important plot point.
When Liberation Day was announced a few weeks prior, I was convinced – and I mean convinced in the way that one can be convinced by something so completely obvious – that the stock market would crater at the announcement. I mean I am not an economist but I do know that most Americans know enough to know that slapping a 20-200% surcharge on the goods that they use everyday – from avocados to cars and everything in between – is bound to scare people and cause panic selling of their stocks as they look to stockpile cash.
So on the morning of April 2, 2025, I woke up intent to make a lot of money with a highly-leveraged trade that required nothing more than the Russell 2000 not going up more than 40 points that day. That’s it, just don’t go up more than 40 points, which at the time was around 2%. Don’t go up more than 2%. I didn’t even say that it needed to go down, I didn’t say it needed to move sideways, no it just couldn’t go up more than 40 points. Easy enough, right?
The Russell opened at 1998 that morning. A 40 point move would require it go up over 2% on a day that should be up there with Covid-era market drops. I placed my trade at 6:35 and if I told you that it went up, I would need to tell you that it never stopped going up, never. At one point it was up over 60 points, before it landed up 50 points. I am skipping the part where I sat glued to a screen on my PTO day watching over $8,000 disappear for 6 hours and just telling you that I watched over $8,000 disappear.
The chart below tells the story of the day; the RUT went up and never stopped. I lost $8,000.
And just to add insult to injury, at 1pm that day – the announcement was made – and guess what? The entire market cratered and continued to crater for the next week. There was a little solace in the fact that I was right in my prediction, just wrong in my timing, but very little solace. Like $8.00 worth of solace, not $8,000.
But I learned a valuable lesson that day – don’t deviate from a system that works. Also, that anything can happen because the stock market – and by extension, people – are unpredictable.
The other lesson I learned is to hold myself accountable for my mistakes. This led me to the Loss Recovery concept, that basically refers to the notion that when I lose money, it’s because of something that I did wrong and I need to repay myself. So in my weekly tracker I created a column for Loss Recovery. Whether I deposit $20 or $200, I need to track my progress towards repaying myself that $8,000. If you want a surefire method to not deviate from your system and to not lose money, hold yourself accountable for your losses. It’s one thing if you lose money because an outlier occurred and your system didn’t work that day, but when you are the problem – you’d better pay yourself back.
So what is my RUT system? Well after that Liberation Day massacre, I went back through the data and looked at every “primary trade” I made on the RUT, as well as any non-primary trades.
What’s a Primary Trade?
As described above, my RUT trading system is based on placing a low stakes trade early on in the day that the RUT won’t go too high or too low on any given day. This is the primary trade.
A primary trade is a trade based on these criteria (1) Trade between 7- 7:30am. The RUT usually needs about 30 minutes to show its trend for the day by 7-715. (2) Aim to make $140-$200, usually 3-5 contracts. Keeping it small enables you to back out of the trade for a minimal loss ($200 or less) if things go bad. (3) Define your maximum loss and if the trade turns against you, get out.
Primary Trade Theory is based on the supposition that only executing the primary trade will result in a net positive over a long enough timeline. It is the secondary trade that results in a net negative.
Why?
Primary Trades are smaller, can be exited and are further OTM.
Secondary Trades are trades that I place later in the trading day. They tend to be larger, closer to the money, more volatility (thus less predictability) and cannot be exited without substantial losses, not to mention the psychological resistance to exit.
What I found when I looked back on the data was that Primary Trade Theory (PTT) trades fail 2% of the time. Secondary trades fail 11% of the time.
| 2023 | 2024 | 2025 | |
| Trading Days | 250 | 85 | 112 |
| Losses | 29 | 8 | 6 |
| PTT Losses | 7 | 1 | 4 |
| Non-PTT Losses | 22 | 7 | 2 |
| Primary Spread | $500 | $2000 | $1500 |
| Typical Hold (in seconds) | 6 | 8 | 9 |
So what’s changed since I made this discovery? First, I stopped looking just at the Win-Loss and began focusing on the Profit-Loss. If I can be right that often why am I not netting more profit? Because, as I discovered, it only takes a few losses to wipe out all of the gains – and then some.
So I turned it on its head and shifted focus to the Profit-Loss. Aimed for $100-150 per day only. Stopped all trades except for the Primary Trades and watched my profits grow quickly. It can be boring and it takes discipline but if you’re willing to stick to the system, you will be rewarded.
It’s been a few months since I locked in this PTT system and the sample size is modest but consistent and growing – approximately 94% of the time the RUT stays within a predictable band and I can count on around $150 per day. It’s slow compared to the days of 000’s and 0,000’s of dollar profits in one day, but I don’t suffer massive losses any more either. Nor do I sit and stare at a computer screen all day as though doing controls or changes anything,.
Now as referenced above, cash-secured spreads (that’s what these trades are called because they are secured by cash as opposed ot being secured by a stock underneath them), cash-secured spreads are inherently risky and my intent is to continue to decrease my reliance on them until the day I can phase them out completely.
There have been too many days where I was hijacked by a trade, spending my time literally sweating the outcome of a ticket going up and down. I cannot – and will not – live like that. The whole point here is to live a better life – the life I want and deserve and the 1% Plan can get me there – but not reliance on cash-secured spreads. As my account grows and I can afford more stocks to trade options against, I won’t need to essentially bet $5000 to make $150, but it took me years to get there.
So over the course of 18 (really 17.5 at this point) months, I will be posting my weekly trades and you will see a decreased reliance on RUT trading as I begin to hold more and more stocks to trade against. And behind the scenes that will make for a much happier life..
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