SCORE GUIDE — OPTIONS PREMIUM SELLER

OVERVIEW

The Mega-Alpha score is a single number — 0 to 100% — that quantifies how favorable a stock is for selling options premium right now. It is the weighted average of seven signals, each normalized to [0, 1], each targeting a different dimension of premium-selling edge.

The score doesn't ask "will this stock go up?" It asks: "Are options on this stock systematically overpriced relative to how much the stock actually moves?" That gap — implied volatility exceeding realized volatility — is the Volatility Risk Premium (VRP), and it's the foundational edge the entire strategy is built on.

Mega-Alpha = Σ (signal_score × signal_weight)

Each signal_score ∈ [0.0, 1.0] · Higher = more favorable for selling premium
Weights sum to 1.0 · Score expressed as a percentage in the UI

≥ 60%

STRONG SETUP

Multiple signals aligned. Proceed with full position sizing and consider naked put or put credit spread.

45–60%

MODERATE

Partial alignment. Consider defined-risk structures (iron condor, strangle) with reduced size.

< 45%

MARGINAL / SKIP

Insufficient edge. No trade recommended. Wait for IV expansion or a better setup.

THE SEVEN SIGNALS

Signals are designed to be complementary — no two measure the same thing. VRP and IVP both relate to implied volatility but from different angles: VRP compares IV to recent realized vol; IVP compares IV to its own history. Together they confirm that options are not just expensive in absolute terms, but expensive relative to what the stock actually does.

VRP

Volatility Risk Premium

The core signal. Measures how much IV exceeds recent realized volatility — the spread you're capturing when you sell an option. When IV > RV, the option is priced above the stock's actual movement, and the seller systematically collects that excess. Academic literature consistently finds VRP positive on average across equities, which is the fundamental reason premium selling has a structural edge.

Score from: ATM IV ÷ HV30 · Ratio > 1.5 → max score · Ratio < 1.0 → zero

25%

IVP

IV Percentile

Timing signal. Measures where current ATM IV sits relative to its trailing 1-year range. Sell when IV is historically elevated, not just elevated in absolute terms. A stock with IV at 40% might be cheap if it usually trades at 60%; the same 40% is expensive if it usually trades at 20%. IVP captures this relative context that VRP misses.

Score from: (ATM_IV − IV_52w_low) ÷ (IV_52w_high − IV_52w_low) · Estimated from ATM IV vs long-run HV (Tier 1 limitation)

20%

SKEW

Put/Call IV Skew

Measures the imbalance between OTM put pricing and OTM call pricing. Elevated skew means institutions are paying up for downside protection — they're buying the puts you want to sell. High put demand inflates put premiums above what realized vol would justify, creating extra edge for put sellers and put spread sellers specifically. Low skew suggests the market isn't particularly fearful of the stock.

Score from: OTM put IV ÷ OTM call IV · Ratio > 1.4 → max score · Near 1.0 → neutral

15%

RVT

Realized Volatility Trend

Entry timing signal. Compares short-term realized vol (HV10) to medium-term (HV20). A compressing vol environment — where 10-day HV is falling below 20-day HV — is the cleanest trigger for entering a short premium position. When the stock has been moving less recently than it has been on average, the market's fear is receding and the stock is stabilizing. You want to enter before IV adjusts downward to match.

Score from: 1 − (HV10 ÷ HV20) · HV10 << HV20 → high score

15%

Mean Reversion

Price positioning signal. A stock that has pulled back below its 20-day moving average has a statistical tendency to revert upward, which reduces the downside risk on puts you've sold. This signal doesn't add edge to the premium — it reduces the tail risk. Selling puts on an oversold stock means you're getting paid to buy something the market already wants to buy back. Oversold is relative: scored from the z-score of price vs 20-day SMA.

Score from: −z_score where z = (price − SMA20) ÷ stdev · z < −1.5 → max score · z > 0 → near zero

10%

VAL

Valuation

Fundamental floor signal. A stock trading at a reasonable valuation (low PEG, low forward P/E) has a fundamental anchor that limits how far it falls on sentiment shifts. Expensive momentum stocks can retrace 40–60% in a correction; a stock trading at 10× earnings with solid FCF typically finds buyers well before that level. This doesn't mean cheap stocks can't drop — but it reduces the probability of a catastrophic put assignment.

Score from: PEG ratio or forward P/E (whichever available) · PEG < 1.0 → high score · PEG > 3.0 → near zero

10%

FLOW

Options Flow

Demand signal. Elevated put/call volume ratio indicates unusual hedging activity — institutions buying puts at scale — which inflates put premiums and improves fill quality for sellers. This is the weakest signal for two reasons: (1) it's correlated with IVP and SKEW, so it adds less new information; (2) high put flow can also signal well-informed directional bets, not just hedging. Carries the lowest weight for both reasons.

Score from: put/call volume ratio · Ratio > 1.5 → max score · Ratio < 0.5 → near zero

Note on signal weights: Weights are research-informed, not backtested. VRP and IVP lead because the academic evidence for the variance risk premium is robust across decades and markets. SKEW and RVT have strong theoretical and empirical support as entry filters. MR and VAL are tail-risk reducers, not edge generators. FLOW is noisy and correlated with the others. Equal-weighting (1/7 ≈ 14.3% each) is more robust to overfitting, but assigns the same importance to VRP as FLOW — which undersells the core thesis.

QUALITY GATES

Gates are hard pass/fail checks applied independently of the score. A ticker can score 80% Mega-Alpha and still be a bad premium sell candidate if it fails critical gates. Gates filter out names with binary event risk, weak fundamentals, or illiquid options — conditions that invalidate the Kelly sizing assumptions.

Gates failing due to data errors default to False (conservative). The tool would rather cause you to miss a trade than enter before an undetected earnings announcement.

GATE	CRITERION	WHY IT MATTERS
ROIC	ROE > 12%	Quality filter (ROE used as ROIC proxy). Low-quality businesses with poor returns on capital tend to deteriorate gradually — their stock decays in ways that don't show up in short-term IV. They also lack pricing power to recover from drawdowns.
FCF	Free Cash Flow > 0	Cash-burning companies have binary event risk every quarter: any miss on the path to profitability can gap the stock 20–40%. Positive FCF means the business doesn't depend on capital markets to survive — a key floor when you're short puts.
DEBT	Debt/Equity < 1.5×	Over-leveraged balance sheets are vulnerable to credit events, rate moves, and covenant triggers. When credit conditions tighten, highly levered stocks get hit harder than the business fundamentals justify — the kind of gap that overwhelms short-put positions.
MARGIN	Gross Margin > 40%	High-margin businesses have pricing power and variable-cost flexibility. They hold up better in downturns because their profitability isn't erased by modest revenue declines. Low-margin businesses (retail, hardware) can swing from profitable to loss-making quickly.
VALUE	Forward P/E < 25×	Expensive stocks (high-growth, momentum-driven) have further to fall when sentiment shifts. A stock at 60× forward earnings needs things to go right for years — any disappointment compresses the multiple, not just the earnings. Cheaper stocks have a nearer fundamental floor.
LIQUIDITY	Options Volume > 1,000/day	Minimum liquidity for fair execution. Low-volume options have wide bid/ask spreads that erode the theoretical premium before you even execute. You need enough activity to get close to mid-market on entries and exits.
NO BINARY	No earnings within 35 days	The most important gate. Earnings announcements regularly move stocks 5–15% overnight. This is a known binary event with an unknown direction — it's not a risk that IV compensation covers because the realized move often exceeds the implied move. Never hold short premium through earnings.

TRADE STRUCTURE SELECTION

The tool selects a trade structure automatically based on Mega-Alpha score and IVP score. Higher alpha + higher IV percentile = more aggressive structure. The logic: when IV is historically elevated (high IVP), naked or near-naked structures have more cushion because the IV crush on a trade that goes right is larger. When IV is moderate, defined-risk structures protect against the scenario where IV expands further against you.

CONDITION	STRUCTURE	DELTA TARGET	RATIONALE
Alpha ≥ 60% AND IVP ≥ 70%	Naked Put / CSP	25–30Δ	Strongest setup with elevated IV. Maximum premium collection. Full exposure to downside if wrong, so quality gates matter most here.
Alpha ≥ 60%	Put Credit Spread	20–25Δ	Strong setup but IV not elevated enough to justify unlimited risk. Defined downside with good premium. Best risk-adjusted structure in most markets.
Alpha ≥ 45% AND IVP ≥ 60%	Short Strangle	15–20Δ	Moderate setup with elevated IV. Collects premium on both sides. Higher risk than a spread — requires vigilance on both the upside and downside.
Alpha ≥ 45%	Iron Condor	15Δ	Moderate setup, average IV. Fully defined risk. Collects premium on both sides with wings that cap the loss. Ideal when IV is just elevated enough to make a condor worthwhile.
Alpha ≥ 35%	Wide Iron Condor	10Δ	Marginal setup. Very wide wings to minimize assignment risk. Low credit but defined risk. Only worth considering for highly liquid names.
Alpha < 35%	No Trade	—	Insufficient edge. The credit collected doesn't justify the risk. Wait for an IV expansion event or look elsewhere.

KELLY CRITERION & POSITION SIZING

Kelly criterion answers: "What fraction of your portfolio should you risk to maximize the long-run growth rate of your capital?" Over-betting Kelly guarantees eventual ruin. Under-betting is suboptimal but safe. The tool applies a 40% safety discount and hard cap to account for model uncertainty.

KELLY FRACTION

f* = (p × b − q) ÷ b

p = win probability (option expires worthless)
q = 1 − p (loss probability)
b = net premium ÷ net max loss
f* < 0 means no edge at these terms

EMPIRICAL KELLY

empirical = min(f* × 0.6, 5%)

40% safety discount on raw Kelly
Hard cap at 5% of portfolio
Applied because p is model-estimated,
not empirically calibrated

Position sizing inputs are computed automatically using Black-Scholes (~30 DTE). The tool finds the put/call strikes matching your delta target via binary search, prices those options, and computes net credit and max loss per the structure's loss assumptions. Wing width for spreads = 5% of stock price, rounded to nearest $5.

When you see "NO EDGE": This is mathematically correct, not a bug. It means the raw Kelly fraction is negative — your win probability doesn't justify the reward/risk ratio at these terms. Common causes: (1) IV is low → premium is thin → b ratio is small → even a 70%+ win rate doesn't generate positive expected growth; (2) the spread is too narrow relative to the stock price. The fix is to wait for IV to expand, widen the spread, or find a different name.

Black-Scholes assumptions: The pricer uses ATM IV uniformly across strikes (flat vol surface). In practice, OTM puts trade at higher IV than ATM due to skew, so estimated premium for put strikes is slightly understated. Use the auto-computed sizing as a starting framework, then adjust based on your actual option chain quotes.

KNOWN LIMITATIONS

The tool is a research and sizing aid, not a trading system. Understanding what it can't do is as important as understanding what it can.

LIMITATION	DETAIL
IVP Approximation	True IV percentile requires a historical IV time series. The tool estimates IVP from ATM IV vs long-run historical vol — a proxy, not a true percentile rank. A Tier 2 data source (Tradier, CBOE) would improve this significantly.
p is model-estimated	Win probability comes from the AI or mock profiles, not from historical outcomes on this strategy. It encodes reasonable assumptions but isn't calibrated to actual trade P&L. Treat sizing as directional guidance, not precision.
Flat vol surface	Black-Scholes pricing uses ATM IV for all strikes. The real vol surface is skewed — puts are priced higher than ATM. OTM put premium estimates are slightly understated; OTM call estimates slightly overstated.
Weights are opinion	Signal weights (VRP 25%, IVP 20%, etc.) are grounded in research but not empirically optimized to backtested P&L. The tier structure is well-supported academically. The specific percentages are judgment calls.
15-min delayed data	All market data comes from yfinance (free tier, 15-minute delay). Real-time execution requires live quotes from a broker. Never place orders based solely on tool output without checking current prices.