Five years ago I decided that the best approach to investing was to utilize DITM (Deep In The Money) Vertical Bull Spreads. Now, I still firmly believe in that approach. In the past couple of years, I and every other surviving self investor have learned a few things. This thread will document the things I've learned (or at least my current thoughts), and am still learning. The lessons rise out of the ashes of the market from late 2007 through early 2009. Mostly, my accounts have recovered, most are ahead of their peaks in 2007, a couple have not yet recovered. Earlier I started two threads on ET, âMethodology of the DITM Vertical Bull Call Spreadâ (posted 2/04/07) and âConservative Options Strategyâ (posted 5/12/08). They may not be around anymore. The threads sparked some good debate and also pointed out every single flaw of my methodology (mostly the lack of a working exit strategy, but there were other deficiencies as well). I've worked hard to reduce the deficiencies, improve the methodology, and hope to document some progress here. I am still an options novice. I am not an options expert. I am not a teacher. Below are methods that have helped me invest my money and my family's money successfully enough that nobody is yet gunning for me. GENERAL PRINCIPLES (considering present economic conditions) Enter the market when it is oversold. There are only a few times a year when the opportunity to enter spreads is optimal. Chasing a bull market works fine for some types of trading, but not long term option spreads. Enter these positions when slow stochastics and volume indicate that a significant correction has occurred and the market is starting to come out of it. The more confident you feel in the timing, the more spreads you enter. This all requires patience, doesn't work for everybody. I keep 25 to 40 percent of the portfolio in cash (40% while waiting for a correction, 25% after buying spreads). Maybe 25 to 35% in long positions (if I can find something, cash if I can't, - gold and silver ETFs now). I average 30 to 45% of the portfolio in my DITM spreads. I look for spreads that yield 25% to 35% annualized yield. I want as deep ITM spreads as I can humanly get, given my yield target. I want spreads that are well under major support levels that have held up for months. If I can buy the spreads when prices are at these support levels, that's just perfect, and I can get even deeper ITM. I want spreads that âfeelâ as safe at CD's. As I said above, market timing helps me âfeelâ safe. I want spreads in major corporations from sectors I like for the extended future. This is one of the most import criteria. I want low P/Es if I have a choice, but I think price action trumps P/E. I want high open interest, decently high volatility. (JNJ, GE, Wallmart doesn't cut it.) n order to get all the characteristics I want, considering todays economy, I look for the following spreads specifically: I look for verticals that are 9 to 18 months till expiration, in order to get lots of time value helping my yield, while still diving deep ITM for safety. I love certain characteristics of these long-term option spreads: They weather short term fluctuations well. If the nature of a company changes quickly, the spread value doesn't take as huge a hit as short term spreads would. They frequently allow you to close out a successful position months early for 60 to 80% of max yield. They allow you lots of time to weather the lows of stochastic charts, or to decide to exit the position when you no longer consider it a good spread. Frequently if the price of a stock drops, enough time has passed that time value gains equal the loss of intrinsic value, and the position can be exited at little or no loss. I constantly evaluate my portfolios to reduce overall risk and sell unfavorable positions to raise cash for future opportunities. Also with such long term spreads, risk of unexpected early execution is very low So, if 35% of my portfolio can yield 35% annual return, the overall portfolio earns about 12%. If you consider that too conservative, you may think I have major âtrustâ issues. You are correct. I still have unhealed burn marks on my butt from 2008. I am listing several of the positions I presently hold as examples, purchased at various times: AEM JAN11 35/40 (bto jan11 35 call & sto jan11 40 call) @ 3.2 (cost of spread is X100), 56% (max yield, not annualized) GLD JAN11 95/100 @ 3.8 , 31% EWZ JAN11 45/50 @ 3.6, 38% FCX JAN11 50/55 @ 3.25, 53% GDX JAN11 30/35 @ 3.57, 40% SLB JAN12 42.5/47.5 @ 3.1, 61% DO JAN12 45/50 @ 3.58, 40% FCX JAN12 40/45 @ 3.2, 56% RIG JAN12 35/40 @ 2.75, 82% My intention in this thread is to post approximately weekly, or as new thoughts hit. This is not a daily journal, but I'll try to answer questions.