Discover the Tom King 112 Income Options Strategy, a structured and conservative approach to generating consistent income through options trading. Designed for traders seeking reliable returns with controlled risk, this method combines defined-risk elements with premium-selling techniques to create a robust income-generating framework.
Unlike aggressive strategies that expose traders to unlimited risk on both sides, the 1-1-2 strategy focuses on downside-defined risk while eliminating upside exposure—making it ideal for neutral-to-bullish market environments.
This guide breaks down the core mechanics, trade structure, risk management rules, and real-world application of the 1-1-2 strategy. Whether you're building a steady income portfolio or exploring advanced options tactics, this deep dive delivers actionable insights.
Understanding the 1-1-2 Strategy Structure
The Tom King 112 Income Options Strategy—often referred to as the "1-1-2" due to its position composition—consists of three key components:
- One long out-of-the-money (OTM) put
- One short OTM put at a lower strike
- Two additional short OTM puts further below
This creates a net credit position with no upside risk, meaning gains are capped on the high end but protected from losses if the underlying asset rises.
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The strategy is typically applied to liquid assets like SPY (S&P 500 ETF) or futures contracts, where bid-ask spreads are tight and assignment risks are manageable. The goal is not to speculate on direction but to collect premium while maintaining a safety buffer.
Why Use This Strategy?
- Generates regular income via credit collection
- Eliminates upside risk through hedging
- Offers higher profit potential in a targeted price zone (“the trap”)
- Works well in sideways or mildly bullish markets
Because the two short puts are often placed at or near the 5-delta level, the theoretical probability of profit can reach up to 95%, assuming expiration occurs outside the loss zone.
However, as with any short premium strategy, there is unlimited downside risk if the market crashes severely—though the long put helps delay significant losses.
Trade Example: SPY 1-1-2 Setup
Let’s walk through a practical example using SPY data from mid-2023.
Trade Details
- Date: June 23, 2023
- Underlying: SPY @ $433
- Expiration: September 15 (81 days to expiration)
Positions:
- Buy 1 SPY $415 put @ $5.06
- Sell 1 SPY $410 put @ $4.34
- Sell 2 SPY $360 puts @ $1.10 each
Net Credit Received: $147
This net credit is crucial—it ensures the trade starts profitable and has no upside risk. If SPY closes above $415 at expiration, all options expire worthless, and the trader keeps the full $147.
If SPY settles between $360 and $410 at expiration—within the "profit trap"—the strategy can return up to $650, roughly 4x the initial credit.
Despite its conservative appearance, this example was intentionally scaled down for risk management in a bearish environment. Tom King typically targets 3% monthly returns (36% annualized), which would require adjusting strike selection or using higher-volatility assets.
Buying Power & Return Metrics
- Estimated buying power reduction: ~$7,273
- Return on capital: 2% over 81 days (~9% annualized)
While modest compared to King’s target, this configuration prioritizes capital preservation—a smart move during uncertain market conditions.
Flexible Adjustments Based on Market Outlook
One of the strengths of the 1-1-2 strategy is its flexibility. Traders can tweak strike prices based on their market bias:
- Bullish Bias: Widen the upper spread to increase the "tail" credit (upside profit zone).
- Bearish Caution: Expand the lower strikes to widen the "trap" and capture larger moves downward.
- Neutral Market: Balance both zones for maximum probability of small-to-moderate gains.
You can also view this trade as selling premium via short puts, hedged by a bull put spread (debit spread). This hedge reduces risk compared to naked short puts, though it slightly lowers maximum return potential.
Risk Management: Exit Rules & Assignment Planning
Effective risk control separates successful traders from the rest. Here’s how to manage the 1-1-2:
Exit Loss Trigger
Close the trade if losses equal the maximum potential profit within the trap. For instance, if your best-case gain is $650, exit when you’ve lost around that amount—unless you’re willing to accept assignment.
Assignment Considerations
Since two short puts are involved, assignment is possible if SPY drops below $360. However:
- Most brokers require cash-secured accounts for such trades.
- Assignment at $360 means buying SPY shares at a steep discount—potentially favorable for long-term investors.
- Once assigned, you can transition into a covered call strategy (the Wheel) or sell the stock outright.
Rolling for Credit
To avoid assignment or extend time decay benefits, consider rolling the short puts to a later expiration—for a credit, if possible. This resets the clock and may allow recovery if the market rebounds.
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How Does the 1-1-2 Compare to Other Strategies?
Understanding contrasts helps clarify when to use this approach.
vs. Short Strangle
| Feature | Short Strangle | 1-1-2 Strategy |
|---|---|---|
| Risk Profile | Unlimited on both sides | No upside risk |
| Return Efficiency | Higher income per capital used | Lower due to hedge |
| Hedging | None | Includes long put as hedge |
| Best For | High-volatility, range-bound markets | Conservative income seekers |
While strangles generate more premium, they lack protection. The 1-1-2 sacrifices some efficiency for safety.
vs. Cash-Secured Put
Both have undefined downside risk, but:
- Cash-Secured Put: Single short put; full liability if stock plunges.
- 1-1-2: Includes a long put hedge, pushing catastrophic loss further down.
Thus, the 1-1-2 offers a wider margin of error before severe losses occur.
vs. Put Ratio Spread
Very similar in structure, but:
- A classic ratio spread has a sharp triangular payoff peak.
- The 1-1-2 flattens this peak into a broader "profit trap," increasing the range of profitability at the cost of peak return.
This makes it more of an income-focused adaptation of the ratio spread.
Frequently Asked Questions
Q: What is the main advantage of the Tom King 112 Income Options Strategy?
A: It eliminates upside risk while allowing traders to collect premium with a high probability of success—ideal for neutral-to-bullish markets.
Q: Is this strategy suitable for beginners?
A: Due to its multi-leg complexity and assignment risks, it's best suited for intermediate to advanced traders familiar with options mechanics.
Q: Can I use this on individual stocks?
A: Yes, but only on highly liquid stocks with tight spreads. ETFs like SPY or QQQ are safer choices than low-volume equities.
Q: What happens if I get assigned on the short puts?
A: You’ll be obligated to buy shares at the strike price. If cash-secured, treat it as buying at a discount—or start writing covered calls.
Q: How often should I run this trade?
A: Tom King recommends no more than 2% risk per trade and caps strategy allocation at 30% of trading capital.
Q: Does this work in volatile markets?
A: With caution. High volatility increases credit received but also raises tail-risk exposure. Adjust strike placement accordingly.
Final Thoughts: A Conservative Edge in Income Trading
The Tom King 112 Income Options Strategy stands out as a disciplined, rules-based method for generating consistent returns. By combining premium selling with strategic hedging, it balances opportunity and protection—a rare trait in income-focused options systems.
Key takeaways:
- Aim for net credit with every setup
- Prioritize liquidity and assignment readiness
- Use strict exit triggers and position sizing
- Adapt strikes based on market outlook
While not immune to black swan events, proper risk controls make this one of the more resilient non-directional strategies available.
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As Tom King emphasizes: never risk more than 2% per trade, use only half your account for active trading, and diversify across strategies. Discipline isn't just helpful—it's essential.
Whether you're enhancing an existing portfolio or building a new income stream, the 1-1-2 offers a repeatable framework grounded in probability and patience.