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SPX 1-1-2-2 Strategy Rules
Official Playbook, Delta Selection & Stress Testing Engine

SPX 1-1-2-2 Strategy Rules & Stress Test Engine Specs

Complete specification defining core structure, Delta selection buckets, 7-scenario Stress Testing engine, Net Credit vs Net Debit rules, and mechanical exit triggers.

1. Strike & Greek Selection Mechanics (Δ, Θ, Γ, Vega)

Option chain puts are filtered into 4 delta search buckets. The structure's composite Greeks are evaluated continuously:

Net Delta Formula:
Δnet = (+1×ΔA) - (1×ΔB) - (2×ΔC) + (2×ΔD)
Target: -2.0 ≤ Δ ≤ +2.0 (Delta Neutral)
Net Theta Formula:
Θnet = (+1×ΘA) - (1×ΘB) - (2×ΘC) + (2×ΘD)
Target: Θ > $0.00 / day (Positive Decay)
Net Gamma Formula:
Γnet = (+1×ΓA) - (1×ΓB) - (2×ΓC) + (2×ΓD)
Target: 0.0 to -0.005 (Low Gamma Risk)
Net Vega Formula:
Veganet = (+1×VA) - (1×VB) - (2×VC) + (2×VD)
Target: Vega ≥ -15.0 (Vol Protection)
Leg Specifier Target Delta Bucket Theta Profile (Θ) Gamma Profile (Γ) Vega Profile (Vega) Role in Structure
Leg A (+1 Put) 0.20 – 0.35 Δ Negative (Time Drag) Positive (+Γ Buffer) Positive (+Vega Shield) Upper Debit Spread Long Put
Leg B (-1 Put) 0.15 – 0.30 Δ Positive (Funds Leg A) Negative (-Γ) Negative (-Vega) Upper Debit Spread Short Put
Leg C (-2 Puts) 0.05 – 0.15 Δ Strong Positive (+2Θ) Negative (-2Γ Primary Risk) Negative (-2Vega) Lower Credit Spread Short Puts (Income)
Leg D (+2 Puts) 0.02 – 0.08 Δ Mild Negative (-2Θ) Positive (+2Γ Crash Protection) Positive (+2Vega Tail Hedge) Lower Credit Spread Long Wings
2. Stress Test Engine Mechanics (7 Simulated Scenarios)

Every candidate is re-priced under Black-Scholes across 7 market shock scenarios in strategy/stress_test.py:

Scenario Name Market Shock Simulation Evaluated Metrics Hard Rejection Trigger
1. Down 1% Shock SPX −1.0% drop + IV +2.0 pts pop Stressed MTM P/L, Δ, Vega Reject if P/L < −$1,500, Vega < −30, or Δ > +8
2. Down 2% Shock SPX −2.0% drop + IV +4.0 pts pop Stressed MTM P/L, Δ, Vega Reject if MTM Loss < −$3,500
3. Down 3% Panic SPX −3.0% drop + IV +6.0 pts pop Max Downside Cushion & Breakeven Informational warning threshold
4. Up 1% Rally SPX +1.0% rally + IV −1.0 pt crush Retention of net credit/debit Evaluates upside theta retention
5. 7 Calendar Days Time forward +7 days (DTE − 7) Theta Decay P/L Gain Verifies positive daily decay
6. At 21 DTE Position aged to 21 DTE Position P/L at warning threshold Evaluates early exit profit
7. At 14 DTE Position aged to 14 DTE Position P/L at mandatory exit Verifies final exit margin
3. Option Greek Rules & Boundaries (Section 9 of Spec)
Option Greek Preferred Boundary Acceptable Range Warning Threshold Hard Rejection Trigger
Net Delta (Δ) -2.0 ≤ Δ ≤ +2.0 -5.0 ≤ Δ ≤ +5.0 |Δ| > 8.0 |Δ| > 10.0 (Instant Reject)
Net Theta (Θ) Θ > $0.00 / day Θ ≥ -$5.00 (if Vega > 0) High Θ via close C Θ < -$10.00 / day
Net Gamma (Γ) 0.0 to -0.005 -0.005 to -0.02 -0.02 to -0.05 Γ < -0.05 (Instant Reject)
Net Vega (Vega) Vega ≥ 0.0 0.0 to -15.0 Vega < -30.0 Vega < -50.0 (Instant Reject)
4. Net Credit vs. Net Debit Selection Rules
Market Factor Net DEBIT Trade ($-$) Net CREDIT Trade ($+$)
VIX / IV Regime High Volatility (VIX > 22) or IV Skew Spike Calm / Low Volatility (VIX < 20)
Market Outlook Mild Downside / Pullback / Consolidation Neutral / Bullish Drift / Flat Market
Short Put C Delta Deep OTM (0.05–0.07 Δ / 5–7 Delta) → Maximum Safety Standard OTM (0.08–0.12 Δ / 8–12 Delta)
Flat Market Outcome Small Loss (strictly capped at Net Debit paid) Keep 100% Net Credit Upfront
Pullback Outcome Explosive Max Profit Shelf (10×–15× Return) Fixed Profit Shelf
5. Strategy Payoff, Risk & Breakeven Formulas
Opened for CREDIT:
Max Profit = (Upper Width + Net Credit Points) × 100
Max Loss = (2 × Lower Width - Upper Width - Net Credit Points) × 100
Lower Breakeven = C - ((Upper Width + Net Credit Points) / 2)
Opened for DEBIT:
Max Profit = (Upper Width - Net Debit Points) × 100
Max Loss = (2 × Lower Width - Upper Width + Net Debit Points) × 100
Lower Breakeven = C - ((Upper Width - Net Debit Points) / 2)
5B. Standard Deviation (σ Cushion) Metric Calculation

The Standard Deviation Cushion (σ) quantifies how many 1-standard deviation expected market moves short Leg C (K_C) is placed away from current index spot (S_0), factoring in Black-Scholes implied volatility (σimplied) and Days to Expiration (DTE):

1-Std Dev Expected Move Formula:
Expected Move (1σ) = S0 × σimplied × √(DTE / 365.0)
Standard Deviation (σ) Cushion Formula:
σ Cushion = (S0 - KC) / Expected Move (1σ)
σ Cushion Range Probability of Safety Strategy Assessment Actionable Rule Recommendation
< 0.75σ Low (< 77%) HIGH RISK Short Leg C is dangerously close to 1-std dev move. REJECT.
0.75σ – 1.00σ Moderate (77% – 84%) ACCEPTABLE Standard 1-std dev buffer (~16% probability of touching short put).
> 1.00σ High (> 84%) OPTIMAL Deep safety buffer (> 1 standard deviation away). PREFERRED.
6. Mandatory Entry Filters
  • Target DTE: 35 – 50 DTE (Optimal ~45 DTE)
  • Delta Balance: -2.0 ≤ Net Delta ≤ +2.0 (Delta Neutral)
  • Net Theta: Positive Theta (> $0/day)
  • Net Vega: Net Vega > -$30/vol
  • Net Gamma: Net Gamma > -0.05
  • Max Loss Cap: Max Loss ≤ $50,000
7. Capital & Position Sizing Rules
  • Max Risk Cap: 1.0% of Total Account Equity per trade.
  • Max Positions: Maximum 2 concurrent trades.
  • Sizing Math: Max Contracts = ⌊ (Account × 0.01) / Trade Max Loss ⌋
8. Mechanical Exit Protocol
  • PROFIT TARGET Close trade at 30% of realistic max profit.
  • TIME WARNING At 21 DTE, freeze new entries; monitor daily.
  • TIME EXIT Mandatory exit at 14 DTE regardless of P/L.
  • RED ZONE STOP Close immediately if SPX breaches B - 0.50 × (B - C).
9. Volatility Term Structure & Skew Rules (Contango vs. Backwardation)

Rules governing trade selection under varying implied volatility term structure and 25-delta put skew conditions:

Term Structure State Market Condition SPX 1-1-2-2 Strategy Rule (45 DTE) Alternative Strategy Rules
Contango (Normal)
&text{Near IV} < \text{Long IV}		 Calm / Normal Market
($VIX < 18$)		 OPTIMAL. Sell Leg C ($8–12\delta$) for $1.00 – $2.50 Net Credit upfront. Benefit from steady theta decay. Double Calendars & Iron Condors work great under normal contango.
Backwardation (Inverted)
&text{Near IV} > \text{Long IV}		 Panic Spike / Shock
($VIX > 18$)		 EXCELLENT (at 45 DTE). Deep OTM put skew is peak inflated ($5–10\delta$). Volatility crush ($VIX \rightarrow 14$) accelerates profit. AVOID Double Calendars (Long Vega loss). AVOID 14 DTE 1-1-2-2 (high gamma). Stick to 45 DTE.
10. Multi-Horizon DTE Expansion & Detailed Exit Criteria

Comparative parameters, strike delta targets, and explicit multi-tier exit rules across 45 DTE, 21 DTE, and 14 DTE horizons:

DTE Horizon Window Gamma Risk (Γ) Short Leg C Delta Target Short C Distance Cushion Take-Profit Target Mandatory Time Exit
Baseline 45 DTE
(35 – 50 DTE)		 Very Low 0.08 – 0.12 Δ 100 – 140 pts (~10%–12%) 30% Max Profit 14 DTE Time Exit
Intermediate 21 DTE
(18 – 28 DTE)		 Moderate 0.05 – 0.08 Δ 70 – 100 pts (~7%–9%) 40% Max Profit 7 DTE Time Exit
Short 14 DTE
(10 – 17 DTE)		 HIGH Gamma 0.03 – 0.05 Δ 50 – 80 pts (~5%–7%) 50% Max Profit 3 DTE Time Exit (Never 0-2d)

Comprehensive Multi-Tier Exit Protocol Rules:

Tier 1: Take-Profit Exits
  • 45 DTE Setup: Exit at 30% of realistic max profit.
  • 21 DTE Setup: Exit at 40% of realistic max profit.
  • 14 DTE Setup: Exit at 50% of realistic max profit.
Tier 2: Mandatory Time Exits
  • 45 DTE Setup: Close at 14 DTE regardless of P/L.
  • 21 DTE Setup: Close at 7 DTE regardless of P/L.
  • 14 DTE Setup: Close at 3 DTE. Strictly forbidden to hold into 0–2 DTE.
Tier 3: Hard Stop-Loss Exits
  • Red Zone Breach: Exit immediately if SPX spot < B - 0.50 × (B - C).
  • Delta Threat Stop: Exit if short Leg C Delta exceeds 0.25 Δ.
  • Max Loss Stop: Exit if MTM loss reaches 10% of Max Loss Dollars or $3,500/contract.
Tier 4: Gamma Emergency Exits
  • Net Gamma Threshold: Exit if structure Net Gamma drops below -0.05.
  • 1-Day Shock Stop: Exit if 1-day MTM loss under 2% drop exceeds $3,500.
11. Call Broken Wing Butterfly (Call BWB) Strategy Rules

Structure formula: +1 Long Call (K1) / -2 Short Calls (K2) / +1 Long Call Wing (K3) where (K3 - K2) > (K2 - K1).

12. RUT & NDX Multi-Index 1-1-2-2 Adaptation & Rules

Comparative parameters and strike selection rules for adapting the 1-1-2-2 structure across SPX, RUT, and NDX:

Rule Parameter Execution Requirement Strategic Rationale
Net Entry Price Must be opened strictly for a NET CREDIT (+$0.50 to +$2.00) Ensures ZERO downside risk if SPX drops or stays flat.
Strike Placement K1 at 0.20 Δ (~60 pts OTM), K2 at 0.12 Δ, K3 at 0.04 Δ Aligns the peak profit tent at K2 for mild bullish drift.
Wing Width Ratio Lower width = 30–35 pts; Upper width = 50–60 pts Wider upper wing overcomes SPX call skew drag to generate net credit.
Risk Profile Zero Downside Risk; Capped Max Loss if SPX skyrockets > +5% Max loss capped strictly at (Upper Width - Lower Width - Net Credit) × 100.
Parameter / Rule SPX Baseline (S&P 500) RUT Adaptation (Russell 2000) NDX Adaptation (Nasdaq-100) Adaptation Rationale
Index Spot Level ~7,400 pts ~2,940 pts ~20,150 pts Strike point distances scale proportionally to index spot (~40% on RUT, ~270% on NDX).
Volatility Index Symbol VIX Index RVX Index (Russell Volatility) VXN Index (Nasdaq-100 Volatility) Benchmarks track index-specific implied volatility dynamics and risk regime limits.
Upper Debit Width (A - B) 25 – 50 pts 10 – 25 pts 100 – 200 pts Maintains consistent ~0.4%–0.8% debit spread geometry across all spot scales.
Lower Credit Width (C - D) 50 – 100 pts 20 – 50 pts 200 – 400 pts Proportionally sized lower wing financing and tail risk protection.
Short Leg C Delta Target 0.08 – 0.12 Δ 0.08 – 0.12 Δ 0.08 – 0.12 Δ Preserves probability of profit (~90%+) and safety distance regardless of underlying index.
Option Symbol & Settlement SPX / SPXW (Cash-Settled) RUT / RUTW (Cash-Settled) NDX / NDXP (Cash-Settled) European cash settlement avoids early assignment and pin risk across all three indices.
Contract Notional Scale ~$740,000 ~$294,000 ~$2,015,000 NDX requires higher account equity ($250k+ recommended) due to $2.0M+ contract notional.
13. 5-Point Quantitative Trade Critique Framework

Quantitative checklist for evaluating and grading any candidate 1-1-2-2 put structure prior to live execution:

Critique Dimension Target Metric Boundary Pass Condition (Green Flag) Risk Trigger (Red Flag)
1. σ Safety Cushion > 1.00σ Short Leg C is > 1.0 std dev away from spot < 0.75σ (Short put dangerously close)
2. Short Leg C Delta 0.08 – 0.10 Δ Deep OTM (> 10% distance on SPX / > 9% RUT) > 0.14 Δ (Severe Vega/Gamma risk on market drops)
3. Upfront Pricing +$1.00 to +$3.50 Credit Modest credit or low Net Debit (≤ $0.50) > +$5.00 Credit (High credit trap trade)
4. Stressed Down 2% MTM Loss < $3,500 Passes Black-Scholes -2% shock test Loss > $3,500 (Accelerating negative gamma)
5. Net Vega & Gamma Vega ≥ -30, Γ ≥ -0.02 Vega-neutral / low gamma sensitivity Vega < -50, Γ < -0.05 (Unhedged tail risk)
14. High-Credit Trap vs. Optimal Sweet-Spot Credit Rules

Quantitative analysis explaining why chasing max upfront credit ruin win rates, and why the sweet-spot credit yields optimal returns:

Trade Approach Upfront Net Credit Short Leg C Delta Cushion to Spot σ Cushion Win Rate (≈) Strategy Rule Verdict
Chasing Max Credit +$15.00 – +$32.00 0.15 – 0.20 Δ Small (4% – 6.5%) < 0.75σ ~70% – 75% HIGH RISK TRAP (REJECT)
Optimal Sweet-Spot +$1.50 – +$3.50 0.08 – 0.10 Δ Deep (10% – 12%) > 1.00σ ~90% – 94% OPTIMAL (RECOMMENDED)
Net Debit / Zero-Cost -$0.50 to $0.00 0.05 – 0.07 Δ Maximum (12% – 15%) > 1.30σ ~96%+ EXCELLENT (in High Vol)