The Diamonds
Foundations Guide
Everything you need to understand options — from first principles to spreads, margin, and buying power — before stepping into the Diamonds training.
What Options Actually Are
Start here — no prior knowledge assumedAn option is a contract that gives the buyer the right — but not the obligation — to buy or sell an asset at a specific price before a specific date. That one sentence contains everything. Let's unpack it word by word until it's completely clear.
The Four Key Words
| Word | What It Really Means |
|---|---|
| Contract | An option is not a share of stock. It is a legal agreement between two parties — a buyer and a seller. Like any contract, it has specific terms: a price, a date, and an underlying asset. |
| Right | The buyer of an option has a right — they can choose to use it or not. This is the critical difference from a futures contract, where both parties are obligated to complete the transaction. |
| Not the obligation | The buyer never has to exercise. If the option would result in a loss, they simply let it expire worthless. Maximum loss for the buyer is always limited to what they paid for the option. |
| Specific price / specific date | Every option contract specifies exactly what price the transaction would occur at (the strike price) and exactly when the right expires (the expiration date). After expiration, the contract no longer exists. |
The Two Types of Options
📈 Call Option
A call gives the buyer the right to buy the underlying asset at the strike price. Call buyers are betting the price will go up. The word "call" is a way to remember: you are "calling" the asset to you — buying it.
- Profitable when the underlying goes UP
- Buyer profits if price exceeds the strike
- Seller profits if price stays below the strike
📉 Put Option
A put gives the buyer the right to sell the underlying asset at the strike price. Put buyers are betting the price will go down. The word "put" means you are "putting" the asset to someone else — selling it to them.
- Profitable when the underlying goes DOWN
- Buyer profits if price falls below the strike
- Seller profits if price stays above the strike
Buying vs. Selling — The Two Sides of Every Contract
Every option has exactly two parties: a buyer and a seller. What the buyer gains, the seller loses — and vice versa. This is a zero-sum transaction between those two parties (before fees).
| Role | Also Called | What You Pay or Receive | Your Obligation |
|---|---|---|---|
| Buyer | Long / Holder / Owner | Pays the premium — money OUT of your account | None. You can exercise or let it expire. |
| Seller | Short / Writer | Receives the premium — money INTO your account immediately | Must fulfill the contract if the buyer exercises. This creates risk — and margin requirements. |
This is the fundamental insight that makes the Diamonds system work: Alex is almost always the seller of options, not the buyer. He collects premium upfront and profits from time decay. The buyer's right is the seller's obligation — and the seller gets paid for taking on that obligation. In most market conditions, that is the more profitable side to be on.
Options vs. Stocks — The Key Differences
| Feature | Stock | Option |
|---|---|---|
| What you own | A share of the company — permanent ownership until sold | A contract with a specific expiration date — it ceases to exist after expiry |
| Cost | Full share price (e.g., $580 for one share of SPY) | A fraction of the underlying — the premium (e.g., $2.25 per share) |
| Expiration | None — you can hold forever | Every option has a specific expiration date. After that date, worthless. |
| Leverage | 1:1 — $1 invested = $1 of exposure | High leverage — small premium controls a large position |
| Income | Dividends (if any) — passive | Sellers collect premium immediately — active income |
| Margin | Can be bought on margin (50% down) | Sellers must post margin as collateral — central to understanding position sizing |
The Underlying Asset
An option always derives its value from something — the underlying asset. Stock options track individual company stocks. Index options track entire market indexes. In the Diamonds system, the underlying assets are:
SPX — S&P 500 Index
The S&P 500 index itself. One point of SPX movement = $100 per option contract. SPX options are cash-settled (no shares change hands) and are European-style (cannot be exercised early). Requires $200,000+ and Portfolio Margin to trade in the Diamonds system.
XSP — Mini S&P 500
Exactly 1/10th the size of SPX. One point of XSP movement = $10 per option contract. Same European-style, cash-settled characteristics. The recommended instrument for accounts under $200,000. XSP 580 = SPX 5800.
Essential Vocabulary
The language of options — used in every email Alex sendsYou cannot understand Alex's daily emails without this vocabulary. Every term below appears regularly in trade alerts and discussions. Master these before moving to the mechanics.
Price & Value Terms
Moneyness — Where Is the Strike Relative to the Market?
Time Terms
Order Terms
Margin & Capital Terms
How Premiums Work
What makes an option expensive or cheap — and why it mattersThe Two Components of Every Premium
Every option premium is made up of two parts. Understanding their difference is fundamental to everything Alex does:
Intrinsic Value
The real, tangible value of the option if you exercised it right now. Calculated as: how far is the strike in the money?
- A 5700 put when SPX = 5650: $50 intrinsic value
- A 5700 put when SPX = 5750: $0 intrinsic value (OTM)
- Intrinsic value cannot be negative — minimum is zero
Extrinsic Value (Time Value)
Everything else in the premium beyond intrinsic value. This is what decays to zero by expiration — and what sellers capture as profit.
- Includes payment for time remaining
- Includes payment for volatility uncertainty
- An OTM option is 100% extrinsic value
- This is what theta eats every single day
The Three Forces That Move Premiums
| Force | Greek Name | Effect on Premium | Diamonds Impact |
|---|---|---|---|
| Price Movement | Delta (Δ) | Market moves up → call premiums rise, put premiums fall. Market moves down → put premiums rise, call premiums fall. The magnitude depends on how close the option is to ATM. | Down days hurt short puts, help short calls. Up days help short puts, hurt short calls. The balanced portfolio partially offsets this each direction. |
| Time Passing | Theta (Θ) | Every day that passes, ALL option premiums lose value — the extrinsic value decays toward zero. This decay accelerates dramatically inside 30 DTE. Earns for sellers, costs buyers. | The engine of the entire system. Alex's portfolio generates $25,000–$30,000/day in theta at full size — every single day, regardless of market direction. |
| Volatility | Vega (V) | Rising VIX inflates ALL premiums. Falling VIX deflates ALL premiums. High volatility = expensive options = more premium for sellers. Low volatility = cheap options = less premium. | Alex sells options when VIX is elevated (more premium). Vol crush after fear events is a major profit source — premiums deflate rapidly when fear subsides. |
Time Decay — The Seller's Best Friend
Time decay is the most reliable force in options. Unlike price movement (which is unpredictable) and volatility (which can spike suddenly), time only moves in one direction — forward. Every day that passes without the option being exercised, the seller keeps a portion of the premium. This predictability is the foundation of the Diamonds income strategy.
The market didn't need to move at all. Time simply passed, the premium eroded, and the GTC close triggered automatically. This is theta at work.
Why Sellers Have the Edge
Options are priced with a built-in advantage for sellers. The market charges buyers a slight premium above pure mathematical value — this "vol risk premium" exists because buyers are willing to pay extra for protection or speculation, and sellers require compensation for taking on obligation. Studies consistently show that implied volatility (what options cost) exceeds realized volatility (how much the market actually moves) over time — meaning options are systematically slightly overpriced, benefiting sellers in the long run.
The seller's edge in plain language: If you sell enough options, across enough time, at a consistent process — the market will pay you more than the actual risk you take on. This is not a guarantee on any single trade. But it is a statistical edge that compounds over time — which is exactly how Alex has generated 100%+ annual returns.
Margin & Buying Power
The capital engine — understanding this unlocks everything elseMargin is the most misunderstood concept in options trading — and the most important one for the Diamonds system. When you sell an option, you are creating an obligation. Your broker requires you to set aside capital as collateral — this is margin. You don't lose this money unless the trade goes against you, but it is unavailable for other trades while reserved. Managing this capital efficiently is the entire skill of position sizing.
What Margin Actually Is
Think of margin like a deposit on a rental property. The landlord (your broker) doesn't take the deposit — they hold it to protect against potential damage (losses). If you return the property in good condition (the option expires worthless), you get the full deposit back. The deposit amount depends on how risky the property is — a short put close to the money requires a larger deposit than one far out of the money.
Naked Short Put — The Margin Reality
You received $225 in premium but tied up $15,000+ in buying power. That's a very low return on capital deployed — and it's why naked short puts are not ideal for capital efficiency.
Why This Matters — The Buying Power Problem
If every short put required $15,000 in margin, a $100,000 account could only hold 6–7 positions before running out of buying power. Alex runs 40–50 Money Press sets at full size — that's only possible because he uses spreads (which cap both risk and margin), Portfolio Margin (which calculates margin more efficiently), and careful sizing to stay within BP limits.
The Two Margin Systems
Reg-T Margin (Standard)
Available to all accounts. Fixed percentage rules:
- Naked short put: ~20% of underlying value
- Short call: ~20% of underlying value
- Spreads: capped at the spread width (the max loss)
- Short calls add to BP used — every one costs capital
Best for: Accounts under $125,000, beginners learning the system.
Portfolio Margin (PM)
Available at $125,000+ at Tastytrade. Risk-based calculation:
- Margin based on net portfolio risk, not per-position rules
- Short calls can reduce overall portfolio BP usage
- Dramatically more capital-efficient at scale
- Enables Alex's 40–50 MP set operation
Required for: SPX trading and full-scale Diamonds operation.
Alex's Buying Power Rules
| BP Usage Level | Status | What It Means |
|---|---|---|
| 60% used / 40% available | CONSERVATIVE | Very safe. Maximum room for unexpected moves and long put roll debits. Beginners should stay here initially. |
| 70–75% used / 25–30% available | IDEAL | Alex's operating target. Enough positions running to generate meaningful theta. Enough reserve to manage any position. |
| 80% used / 20% available | AGGRESSIVE MAX | Only acceptable short-term if roll credits will restore BP the same week. Do not add new positions here. |
| 85%+ used | STOP — CRITICAL | Emergency mode. No new trades. Rolls only. Identify what is consuming the most BP and reduce it. |
The 25–30% reserve is not optional. It is the capital that allows you to roll positions when the market moves against you, fund long put renewals when they approach expiration, and absorb unexpected volatility without being forced to close positions at the worst possible prices. Trading at 95% BP usage is not being aggressive — it is being trapped.
Long Call
Buying the right to profit from an upward moveWhen Alex Uses Long Calls — The LEAP
Alex buys long calls in one specific scenario: during significant market corrections (5–10%+ below ATH), after a confirmed bounce signal, as a long-dated position to capture the eventual recovery. He then sells short-dated calls against the long call weekly to generate income that pays off the LEAP cost. The long call provides unlimited upside participation; the short calls reduce the cost basis each week.
Long calls require NO margin — you pay for them in full upfront. The maximum loss is limited to what you paid. This is one of the few positions in the system where buying power is simply the purchase price, not a margin calculation.
Short Call
Selling the right — collecting premium and taking on obligationThe Portfolio Margin Superpower on Short Calls
On a Portfolio Margin account, short calls often require zero additional buying power — and can actually free up BP — because they add negative delta that offsets the positive delta of existing long positions (Money Press short puts). The broker sees a more balanced portfolio and reduces the overall margin requirement. This is why Alex can run significant short call positions at scale without BP concerns on his PM account.
Long Put
Buying protection — the insurance leg of the systemThe Long Put's Role in the Money Press
In the Diamonds system, the long put is the protection leg of the Money Press — always purchased further out in time (typically 90–180 days) than the short put. It does not match dollar-for-dollar with the short put because it has a different expiration and therefore different delta and gamma. This mismatch creates the "gap" between the two legs — the window of exposure that Gap Insurance is designed to cover in a large correction.
An important subtlety: The long put in a Money Press is NOT a fixed pair with any specific short put. It is independent inventory — bought to provide general portfolio protection, not tied to any single short. Alex can roll either leg independently at any time. This inventory-based thinking is one of the most important mindset shifts in the Diamonds system.
Short Put
The core of the Money Press — the income engineWhy Short Puts are Never Closed for Profit in the Money Press
The Money Press short put is never closed for profit — it is always rolled to the next week for fresh credit. This is counterintuitive but powerful. Closing a profitable short put releases the margin it was consuming and removes it from the portfolio. Rolling instead keeps the position alive, collects new credit for the following week, and maintains the continuous income stream. The position is only ever "closed" as part of a roll — simultaneously opening a new one at the same time.
The Margin Challenge of Naked Short Puts
A naked short put requires roughly $15,000–$20,000 in buying power per SPX contract. To run 10 short puts would require $150,000–$200,000 in margin — a massive capital commitment for just 10 positions. This is why the Money Press pairs every short put with a long put (creating a spread structure) and why Portfolio Margin is so valuable at scale: it reduces the per-position requirement based on overall portfolio risk rather than per-position rules.
What Is a Spread?
The key to capital efficiency — and the core structure of the Diamonds systemA spread is any position that involves buying one option and selling another option on the same underlying at the same time. The two options partially offset each other — the one you sell generates income and the one you buy provides protection. This combination does three crucial things simultaneously: limits your maximum loss, reduces your margin requirement, and allows you to be more capital-efficient.
The Spread Advantage — Three Benefits at Once
1. Defined Maximum Loss
Without a spread, a naked short put has theoretically unlimited loss (the market can crash). With a spread, the long put you buy caps your loss at the difference between the two strikes — no matter what the market does. Your worst case is known in advance.
2. Dramatically Reduced Margin
A broker sees a spread as a contained risk — the most you can lose is the spread width. Margin is calculated on that maximum loss, not the naked position value. A 15-point spread has a $1,500 maximum loss → $1,275 net margin (after credit). Compare to $15,000+ for naked.
3. Capital Efficiency at Scale
With naked short puts requiring $15,000 per position, a $100,000 account holds 6–7 positions. With 15-point spreads requiring $1,275 each, the same account holds 78 positions. That's more than 10× the income-generating capacity from the same amount of capital. This is why spreads — not naked options — are the foundation of any professional options income strategy.
Spread Structure — How It Works
Same directional bet as a naked short put — but 10× more capital-efficient. The bought 5685 put costs $100 but saves ~$13,000+ in margin.
The Margin Comparison — Naked vs. Spread
Naked Short Put
Bull Put Credit Spread
Bull Put Credit Spread
Profit when the market holds or rises — the Money Press core structureA bull put credit spread is constructed by selling a higher-strike put and buying a lower-strike put on the same expiration. You collect more from the sell than you pay for the buy — resulting in a net credit into your account. You profit when the market stays above your sold put strike.
| Component | Action | Effect |
|---|---|---|
| Sold put (higher strike) | Sell to Open — collect premium | The income leg — closer to the money, more expensive, generates the credit |
| Bought put (lower strike) | Buy to Open — pay premium | The protection leg — further OTM, cheaper, caps maximum loss and reduces margin |
| Net result | Credit received (sell > buy) | Premium into your account. Maximum loss defined. Margin = spread width minus net credit. |
Bear Call Credit Spread
Profit when the market holds or falls — the daily diamond CCSA bear call credit spread is constructed by selling a lower-strike call and buying a higher-strike call on the same expiration. You collect a net credit. You profit when the market stays below your sold call strike. It is the mirror image of the bull put spread.
| Component | Action | Effect |
|---|---|---|
| Sold call (lower strike) | Sell to Open — collect premium | The income leg — closer to the money, more expensive, generates the credit |
| Bought call (higher strike) | Buy to Open — pay premium | The protection leg — further OTM, cheaper, caps maximum loss and reduces margin |
| Net result | Credit received (sell > buy) | Premium into your account. Maximum loss defined. Same margin calculation as bull put spread. |
Notice the symmetry: The bull put spread profits when the market stays above the sold put strike. The bear call spread profits when the market stays below the sold call strike. Both have the same margin structure. Combine them and you have an Iron Condor — profitable in a range, from both directions simultaneously.
The Iron Condor
The "double dip" — collecting premium from both sides simultaneouslyAn Iron Condor is simply a Bull Put Credit Spread and a Bear Call Credit Spread placed simultaneously on the same expiration. You are selling a put spread below the market AND a call spread above the market at the same time. You collect two credits. You profit when the market stays within the range between your two sold strikes.
The Double Dip — Why ICs Are More Capital Efficient Than Singles
This is the most important margin insight in spread trading: when you place both sides of an iron condor simultaneously, your broker does NOT require margin for both sides. Because it is mathematically impossible for both a put spread and a call spread to hit maximum loss at the same time (the market cannot simultaneously be above your call strike and below your put strike), the broker only requires margin for one side — the wider or more dangerous one.
Two Separate Spreads
Iron Condor (Combined)
Managing a Breached Iron Condor Side
When one side of an IC gets breached, Alex does not close the entire position — he rolls the threatened side further out in time and further in the favorable direction for additional credit. The breached side transitions from an income trade into a hedge. Meanwhile the profitable side is closed via GTC. "Win a little or win a lot — either way the portfolio benefits."
Into the Diamonds System
How everything you just learned maps directly to Alex's tradesYou now have the foundation. Every concept in this guide appears in Alex's daily emails. This final section maps each foundational concept directly to its Diamonds application — so that when you open the Master Reference Summary, the Decision Trees, or Alex's first email, you are not encountering unfamiliar language. You are seeing things you already understand in a new context.
Concept to Diamonds — The Complete Bridge
Short Put — selling a put option, collecting premium, obligated if market drops below strike.
The weekly income leg of the Money Press. Sold every week at a strike below the market, rolled at 3:30pm on expiration day. Never closed for profit — always rolled for fresh credit. The primary cash flow engine.
Long Put — buying a put, paying premium, profits if market drops significantly.
The protection leg of the Money Press. Purchased far out in time (90–180 DTE). Rolled before 30 DTE. Independent inventory — not paired with any specific short put. Partially offsets short put losses in corrections.
Bull Put Credit Spread — sell higher put, buy lower put, profit if market stays above sold strike.
The Daily Diamond PCS (Put Credit Spread) — an income trade. GTC close at .65 debit placed immediately on fill. Becomes a hedge if breached. The Money Press itself is structured as a wide bull put spread (short put + long put).
Bear Call Credit Spread — sell lower call, buy higher call, profit if market stays below sold strike.
The Daily Diamond CCS (Call Credit Spread) — same structure, same GTC rule. Also used as a standalone short call delta hedge — sold when portfolio delta is too long. Converts to hedge if market rallies through the strike.
Iron Condor — bull put spread + bear call spread simultaneously. Double credit, single side margin.
The Daily Diamond IC — Alex's signature income trade on event days, rangebound markets, and OPEX weeks. The "double dip." GTC close at .65 on combined 4-leg order in calm conditions, split to two separate GTCs in high-volatility markets.
Long Put Spread (bear put spread) — buy higher put, sell lower put. Profits if market drops to the bought strike level.
Gap Insurance (GI) — the portfolio protection layer. Bought when the market is extended (ATH, 3 ATR, 4.5% above 50 SMA, 4–5 days at 2 ATR). The spread structure reduces cost from ~$9,000 (naked put) to ~$2,000 per contract. Rolled forward to current month when a correction begins to maximize gamma response.
Long Call (LEAP) — buy far-dated call. Profits if market rises significantly above strike over time.
Deployed during corrections (5–10%+ below ATH) after bounce confirmation. Short-dated calls sold against it weekly — reducing cost basis until the LEAP is effectively free. Hard exit: market closes 2.5%+ below 200 SMA on a Friday.
Margin & Buying Power — capital reserved as collateral. Spreads dramatically reduce it vs. naked positions.
The Three-Legged Stool: Buying Power is checked first before every decision. Target: 25–30% always available. Every trade is evaluated for its BPR. Portfolio Margin at $125k+ (Tastytrade) unlocks the full system. SPX requires $200k AND Portfolio Margin — $1 less means XSP only.
Theta (time decay) — premium decays every day, working for sellers and against buyers.
The engine of everything. Alex's theta at full size: ~$25,000–$30,000 per day — earned 24/7 including nights and weekends. The entire system is architected to maximize theta collection while keeping delta and vega balanced enough that neither can cause catastrophic loss.
Rolling — closing one option and simultaneously opening a new one at a different strike or expiration.
The primary management tool. Short puts are rolled every week on expiration day (never closed for profit). Breached spreads are rolled out in time and in the favorable direction for credit. Long puts are rolled before 30 DTE. Rolling UP when bullish, FLAT when cautious, DOWN when defensive.
The Three-Department Framework — Now You Can See It
With this foundation in place, Alex's Three-Department Business Framework now makes complete sense:
- Department 1 — The Money Press: Short puts (weekly income) + long puts (protection) = a wide bull put spread structure rolled weekly. The primary cash flow engine. Bullish to neutral bias.
- Department 2 — Daily Diamonds: Short-dated bull put spreads, bear call spreads, and iron condors. Pure theta income that automatically becomes a hedge if breached. GTC close at .65 immediately on every fill.
- Department 3 — Gap Insurance: Long put spreads (bear put spreads) purchased at technical extremes. The insurance layer that activates in a large correction. The one place where theta works against you — accepted as the cost of doing business.
My assets are my inventory. I acquire assets that I then turn into a profitable machine. My short puts, my long put protection, my gap insurance — these are all inventory items within my business, placed in different positions depending on where the market is going.
— Alex RodriguezWhat to Read Next
| Document | What It Covers | Read After This Guide Because... |
|---|---|---|
| Master Reference Summary | The complete Diamonds system — all rules, all trade types, 21 weeks of history, TA framework, philosophy | You now understand every term and concept it uses. The vocabulary is no longer a barrier. |
| Decision Trees | Real-time if/then decision guides for every trading scenario | You understand what each position type is, so the decisions make logical sense rather than feeling like rules to memorize. |
| TA Education Guide | Alex's complete technical analysis framework — candlesticks, moving averages, Keltner, squeeze, VIX, delta, theta, gamma | You now know what options ARE — the TA guide teaches you how Alex decides when and where to place them. |
| Flowcharts | Visual versions of the decision trees | Use alongside the decision trees for a different visual representation of the same logic. |
| Mindset Document | Alex's trading psychology — how he thinks, how he handles drawdowns, emotional discipline | Read this any time you feel stressed about a position. The strategy works — the mind is the variable. |