Table of Contents
This interview features Erik Smolinski of Outlier Trading—Marine Corps veteran turned derivatives-focused trader—breaking down how he builds a durable, low-stress trading business. Filmed on a practical, no-hype podcast, Erik explains why he prioritizes robustness over raw growth, and how that mindset has produced some of his best years while keeping risk in check. He matters because he actually trades for primary income, runs options and futures across multiple timeframes, and treats wealth like a system—so his playbook is immediately applicable for real traders.
You’ll learn how Erik separates “market effects” from monetizable “profit mechanisms,” then builds a core vs. speculative allocation to capture steady baseline returns and layer opportunistic trades on top. We’ll cover his go-to options structures (like covered strangles, ratio diagonals, synthetics), his simple baseline target approach, and how he uses Delta-one hedges when markets flip. You’ll also see how tax-aware diversification (e.g., real estate) reduces single-point-of-failure risk, plus his “outlier mindset” for structuring a one-year learning roadmap so beginners stop spinning and start compounding.
Erik Smolinski Playbook & Strategy: How He Actually Trades
Outlier mindset: what he optimizes for
This is a trading business, not a thrill-ride. The focus is robust, repeatable returns with minimal drama, so you can stick around for decades. Think systems, not hero trades; cash flow first, compounding always.
- Optimize for robustness over max growth; prefer a smooth equity curve to a spiky one.
- Measure success by annual cash flow and drawdown control, not single-trade P&L.
- Keep the playbook small and practiced; remove any tactic you can’t explain in 30 seconds.
Account structure & allocations
He separates “steady engine” trades from opportunistic shots. That way, the base keeps compounding while the speculative side hunts outliers without wrecking the ship.
- Split capital: 70–85% core (income/hedged options), 15–30% satellite (directional or event-driven).
- Keep cash available (10–30%) to adjust, hedge, and redeploy into volatility.
- Never let any single idea threaten more than -1% of equity if it fails.
Instruments he actually uses
You don’t need exotic products. A tight toolkit used well beats a messy arsenal used poorly.
- Primary: index ETFs, liquid large-cap equities, selected futures for hedging; options as the main engine.
- Only trade underlyings with tight spreads, deep options chains, and reliable borrow.
- Avoid illiquid tickers and “story” names unless volatility is both priced and hedgeable.
Core income engine: covered strangles & collars
The bread-and-butter is short premium wrapped in defined risk. It prints a steady cash flow and is easy to manage.
- Trade covered strangles on liquid tickers: short OTM call + short OTM put against long shares.
- Target 25–45 DTE; sell around 15–25Δ each side; collect ≥1% of notional per 30 days.
- Convert to a collar on spikes: add a protective put when IV is cheap or the trend weakens.
- Roll losers early (at -2× credit) or when tested; harvest winners at 50–65% max profit.
Synthetic wheel for efficient capital
Same wheel logic, less capital. Use options to mimic stock so you can scale entries and exits precisely.
- Start with cash-secured short puts at 20–30Δ; accept assignment only at pre-defined “business-owner” prices.
- Replace shares with synthetic stock (long call + short put, same strike/DTE) when rates or margins favor options.
- Finance synthetics by selling far OTM calls for a covered strangle feel; cap risk with cheap wings when IV is low.
Ratio diagonals for trend with cushion
When there’s a directional bias but you still want theta working for you, ratio diagonals shine.
- Buy a longer-dated call (or put) ~0.35–0.45Δ; sell 1–2 nearer-dated options ~0.15–0.25Δ against it.
- Structure for positive theta, modest vega, and defined max loss; avoid calendar overlap into major events.
- Take base profits on short legs at 50%; roll with the trend, keep the long anchor 60–120 DTE.
Earnings & event plays (only when the math works)
Event trades are optional, not mandatory. Take them only when pricing is obviously off.
- Skip binary events unless expected move pricing offers ≥1.3× edge versus historical realized.
- Prefer iron flies/iron condors around liquid, boring earners; exit at 30–50% profit pre- or immediately post-print.
- If long-vol bias, use cheap debit diagonals 2–3 weeks out and monetize the short leg quickly.
Risk management: hard guards that never move
Survival is the strategy. These are the non-negotiables that keep compounding intact.
- Max portfolio heat: keep total worst-case loss of open positions ≤5–7% of equity.
- Per-position risk: ≤0.5–1.0% of equity at entry, proven by stress-testing greeks and gap scenarios.
- Daily loss stop: if down 1.5% equity on closed + open PnL, flatten risk and stop trading for the day.
- Drawdown protocol: at -5%, cut size in half; at -10%, trade core only until back to -3%.
Adjustments & exits you can actually follow
Make the plan once; execute it many times. Adjustments are pre-planned, rules-based, and quick.
- Tested short strike? Roll out in time for net credit while keeping strikes outside 15–25Δ.
- -2× credit adverse move? Roll/close—no “waiting to get back.”
- 50–65% profit on short premium? Take it; redeploy to fresh premium.
- Theta flips negative or net delta breaches limits? Hedge or reduce immediately.
Delta, theta, vega: simple bands to stay sane
Greek management is portfolio-level first, position-level second. Keep the dials inside bands.
- Keep portfolio net delta between -0.25 and +0.25 per $100 of notional; hedge with futures or long options if breached.
- Maintain positive net theta most days; if theta turns negative, prune long-premium and re-center.
- Don’t let net vega go heavily short into macro catalysts; buy cheap wings or diagonalize to soften shocks.
Position sizing that compounds without pain
Sizing is where most traders blow up. Pre-commit rules so the market can’t negotiate with you.
- Base unit size: what loses 0.5% of equity if the worst realistic day happens.
- Add one unit per favorable expansion only after realized profit >2× unit risk.
- Cap correlated exposure: no more than 3 units across names that move >0.7 together.
Weekly routine that keeps you consistent
Consistency is built between trades. A light, repeatable cadence protects your focus and your edge.
- Weekend: update heat, check regime, set next week’s target DTEs and strikes; archive all exited trades with notes.
- Midweek: tighten or harvest winners, re-center delta, and top up income books only if heat allows.
- Friday: reduce event risk, close near-expiry shorts, and reset bands for the following Monday.
Market regime switches & how to respond.
Different tapes reward different tactics. Flip the switch deliberately, not emotionally.
- Low IV / grinding uptrend: favor covered strangles with conservative puts, diagonals for trend.
- High IV / choppy: widen strikes, shorten DTE, sell smaller size more often; use iron structures to define risk.
- Bear trend: collar core holdings, run smaller synthetics, add long puts or put spreads when delta creeps.
Tax- and stress-aware wealth building
The endgame is durable wealth and a clear head. Structure the business so it’s livable.
- Prefer frequent singles over home runs; smooth income reduces behavior errors.
- Diversify your “life P&L”: allocate some profits to non-market cash flow so drawdowns don’t feel existential.
- Track after-tax returns and friction costs; if a tactic lags a simple index after-tax, remove it.
A one-year learning roadmap to get competent
Skill compounds like capital. Here’s a tight path to becoming functional with this playbook.
- Months 1–3: paper-trade covered strangles and simple collars; log every adjustment and result.
- Months 4–6: size tiny (0.25–0.5% risk), add ratio diagonals; enforce 50–65% profit taking.
- Months 7–12: introduce synthetics, portfolio delta bands, and heat caps; expand to 0.5–1.0% risk only after 90+ days of discipline.
Daily checklist before you click
A simple pre-flight stops impulse trades and keeps you honest.
- Verify portfolio heat, net delta, and theta are within bands.
- Confirm today’s catalysts; reduce negative-vega into known bombs.
- Place only trades with pre-written exit/adjust rules; queue GTC profit targets at entry.
- Log rationale, size, strikes, DTE, and the specific “kill switch” that gets you out.
Size risk first: cap portfolio heat and per-trade loss limits
Erik Smolinski is very blunt about this: if you don’t size risk, you don’t have a strategy. He treats risk like a budget, not a feeling. That means before he cares about setups, or direction, or even premium collected, he defines exactly how much damage any single position is allowed to do to his total account. If a trade can realistically take more than about one percent of his total equity in a bad scenario, it’s already too big. That rule forces respect for drawdown and keeps him in the game long enough to let compounding do its work instead of getting nuked by one “confident” idea.
He also looks at total portfolio heat, not just one trade in isolation. Erik Smolinski will cap worst-case open risk across all positions so that even if multiple things go wrong at once, the total hit is still survivable. When heat gets near that limit, he stops adding new trades and starts taking risk off, even if there’s still “opportunity” in the market. That is the discipline part: your sizing rules are supposed to override your urges. The lesson is simple, but most traders ignore it — you don’t earn the right to scale size until you’ve proven you can control losses at your current size.
Allocate by volatility: widen strikes, shorten duration, scale into spikes.
Erik Smolinski frames allocation around the tape’s realized and implied volatility, not gut feel. When volatility expands, he widens strikes, reduces DTE, and cuts unit size so adverse moves hurt less while premiums pay more. In quiet markets, he narrows strikes, extends DTE, and lets theta do the heavy lifting. The key is letting volatility dictate how much exposure you carry and where you place it, instead of forcing the same size in every regime.
Erik Smolinski also scales in during volatility spikes rather than chasing fills in calm conditions. He preplans add-levels: first tranche on the initial spike, second after a defined IV jump or price extension, and final only if portfolio heat remains within limits. Exits are similarly rules-based—harvest at 50–65% of max profit and recycle into fresher premium. By tying allocation to volatility bands, he keeps the equity curve smoother while still capturing the best-paying days.
Diversify across underlying, strategy, and trade duration to smooth equity.
Erik Smolinski spreads risk so no single ticker, tactic, or time frame can sink him. He caps correlated exposure across indexes and sectors, then mixes mean-reversion income trades with directional runners so the book isn’t one bet in disguise. He also staggers entries across multiple expiries—near, mid, and far—so winners and losers don’t cluster on the same day. The point is simple: varied engines create steadier cash flow and fewer portfolio potholes.
Practically, Erik Smolinski limits any one underlying to a small slice of equity, rotates strategies (covered strangles, collars, diagonals, synthetics) based on regime, and ladders DTE to diversify time risk. If two names move together above ~0.7 correlation, he treats them as one and cuts the combined size. He replaces overlapping trades rather than stacking duplicates, keeping total portfolio heat inside fixed limits. This way, even when a theme misfires, the rest of the book keeps grinding forward.
Mechanics overprediction: rule-based entries, exits, and automatic adjustments
Erik Smolinski keeps forecasts in the back seat and lets mechanics drive the car. He defines entry conditions in advance—volatility band, DTE window, delta range—then fires only when those boxes are checked. If the market moves against him, the next steps are already scripted: roll, hedge, trim, or close at pre-set thresholds. Because the rules are written before emotions show up, execution stays consistent across good and bad tapes.
Erik Smolinski also automates as much of the workflow as possible with standing orders and preloaded adjustments. Profit targets trigger at 50–65%, stopouts kick in at -2× credit or breach of delta bands, and portfolio heat limits freeze new adds until risk cools. He journals the same way: note the rule used, not the story told. Over time, this rule-first approach compounds discipline, cuts decision fatigue, and makes performance traceable and repeatable.
Choose defined or undefined risk deliberately; preplan hedges and kill-switches
Erik Smolinski treats risk type like a conscious purchase, not an accident. If he sells undefined risk, it’s only on liquid underlyings with strict size caps and pre-written adjustments; he expects occasional sharp losses and prices them into the business. When he needs tighter guardrails or a macro landmine looms, he flips to defined risk—iron structures, debit spreads, or synthetics with protective wings—accepting smaller expectancy for cleaner tail control. Hedges are not afterthoughts: he’ll carry long puts, calendars, or small futures to neutralize creeping delta or event risk. The point is to decide the downside shape before the trade exists, so the market can’t choose it for you.
Erik Smolinski also runs hard kill-switches that ignore ego. Breach of delta bands, a -2× credit adverse move, or a portfolio heat limit means close or roll now, not “later.” If volatility explodes, he narrows size, shortens DTE, and converts undefined exposure to defined risk on the next adjustment cycle. By pairing deliberate risk type with preplanned hedges and non-negotiable exits, he keeps the book survivable—and survivability is what lets all the good days count.
Erik Smolinski’s core lesson is to build a robust trading business that compounds steadily, not a thrill-ride that depends on perfect calls. He keeps a tight, options-centric toolkit—covered strangles, ratio diagonals, synthetics—run across multiple timeframes from zero-DTE to longer swings, and splits his book into a conservative core and a selective speculative sleeve so the base keeps working while he hunts outliers. He stresses the difference between “market effects” and true “profit mechanisms,” focusing only on edges a retail trader can actually monetize after fees. When the tape flips, he doesn’t guess—he pivots with preplanned mechanics, including opportunistic delta-one hedges via futures to dampen portfolio swings without abandoning his core. The throughline is simple: small suite, clear rules, and sizing that survives the bad days so the good ones still count.
Practically, that means a core allocation anchored in index covered strangles, with the speculative side reserved for targeted plays—earnings, short-volatility, momentum, correlation/pairs—only as needed to hit monthly targets. He widens strikes and shortens DTE into higher volatility, staggers expiries to avoid clustered risk, and caps portfolio heat so multiple bad outcomes remain survivable. The performance goal is consistency: a reliable baseline return (he’s cited 15% as a formative target) that outpaces broad indexes over a full cycle by avoiding deep drawdowns, then layering selective shots on top when conditions allow. In short, structure first, mechanics over prediction, and a risk budget that never negotiates—this is how he actually trades.
