5 Principles of an Options Portfolio: How Dan Sheridan Builds One on SPX

Dan Sheridan thinks about options trades as a portfolio, not one position at a time. In this video he builds four SPX trades in the model, about $2,000 of capital each, and ends up with close to $8,000 at work, about $263 of positive theta a day, and only about five deltas of directional exposure.

His goal was to walk through the basics: five principles he uses when building a portfolio of options trades, and the things he thinks about as each piece goes on. Dan focused more on the principles than on exactly how he picks each trade. He builds everything live in the Option Omega modeling tool, with trades from 10 to 31 days to expiration.

The setup

SPX was around 6820. Dan described the last few days as volatile, with VIX a little higher, around 23, and coming down. All four trades are mostly range-bound and close to non-directional per contract.

Trade	Days to expiration	Legs	Contracts
Butterfly (calls)	23	Buy 6780, sell 2× 6850, buy 6920	3
Calendar	10 (short) / 14 (long)	Sell and buy the 6820	2
Put credit spread	About 17	Sell 6510, buy 6490 (20 wide)	—
Iron condor	31	Puts: sell 6470, buy 6460. Calls: sell 7090, buy 7100	3

Trade 1: the butterfly and the vega-delta pairing

The first trade is a 70-point balanced call butterfly. The short strikes at 6850 sit about 30 points above the market, with long calls 70 points below and 70 points above. Equal distance on both sides is what makes it balanced. With three contracts, the max loss was about $1,740, close to the $2,000 target.

The butterfly is short vega and a little short delta, about 4.5 deltas across three contracts, or a bit over one delta per contract. That pairing is deliberate. Dan sees price and volatility as an options trader’s two biggest risks, and he likes them to offset:

• Short vega, a little short delta. When the market falls, volatility usually rises and hurts a short-vega trade. A little short delta helps on that same move. His rough math: a 40-point drop times about four deltas is about $160 gained.
• Long vega, a little long delta. On a rally, VIX usually falls, which hurts a long-vega trade. A little long delta offsets that.

In the model, even 120 points lower, near 6700, the butterfly was still short delta (about -1.4) and the P&L held up on the downside. Dan’s read was that the balanced butterfly could handle a lot of room on the downside.

Principle 1: diversify your entry days

Dan does not put every trade on the same day just because he has a couple of free hours on a Tuesday. He spreads entries across days, for example Monday, Wednesday and Thursday, to diversify price risk. In his words, he does not want to be a Chicago fireman putting out all the fires in one day. He also suggests using backtesting to see whether some days are better than others for a given trade.

Trade 2: the calendar, and principles 2 and 3

Next, Dan adds two at-the-money calendars at the 6820 strike, selling the 10-day option and buying the 14-day. With the butterfly, the combined max loss was about $3,900.

The calendar is long vega. As Dan explained, $2,000 of calendars carries more long vega than $2,000 of butterflies carries short vega, so the portfolio tipped slightly long vega. He pointed out that this broke his own preference for the moment: short delta and long vega means a rally hurts on price and falling volatility hurts too. With VIX over 20, he generally wants to be somewhat short vega.

He also showed why he was comfortable with a little short delta against this much theta. If theta is around $200 and the portfolio is about four deltas short, a 30-point rally costs about $120. In his view, theta can absorb that.

Principle 2: diversify strategies. Dan mixes trades that tend to benefit when volatility falls (short vega: butterflies, iron condors, credit spreads) with trades that tend to benefit when it rises (long vega: calendars, double calendars, double diagonals). Someone who trades only one strategy, such as double calendars, can still diversify by duration and entry day, he said.

Principle 3: diversify durations. As Dan puts it, further out gives more price protection and closer in gives more theta. Combining a 23-day butterfly with a 10-day calendar gets some of both.

Trade 3: the put credit spread

Dan adds a 20-wide put credit spread about 17 days out, selling the 6510 put and buying the 6490. He generally tries to use a Friday expiration. With three trades on, total margin used was near $6,000, the portfolio was about three deltas short, and vega was a little long but close to neutral.

Dan pointed out that the portfolio’s graph tends to look most like the shortest-duration trade, here the 10-day calendar. That’s the one he pays the most attention to.

Trade 4: the iron condor, and principle 4

The last piece is a 31-day iron condor, three contracts: sell the 6470 put and buy the 6460, sell the 7090 call and buy the 7100. Dan noted that 7,000 had been the top of SPX’s range so far in 2026 at the time of recording, so the short call sits well above it.

Dan says each piece he adds depends on how it meshes with the rest: what the market is doing, where volatility is, and how the market is moving. “Each day I’m letting the market say which trade we should do.”

Principle 4: diversify deltas. If Dan is already short deltas, he may want the next trade to lean a bit long. He doesn’t need zero, but he doesn’t want the number to get “too out of whack.”

The full portfolio

As modeled at entry:

Measure	Result
Capital	Close to $8,000 (about $2,000 per trade)
Theta	About $263–$265 per day
Delta	About five short
Vega	Close to neutral, a little short

Dan said he wouldn’t want to go much more than five deltas short here. At about five deltas and $265 of theta, the model showed a 30-point rally losing about $150, which in his view theta could offset. The model also showed the red area on the upside shrinking just a few days into the trade as theta did its work. Lowering volatility on the upside, as tends to happen in a rally, also turned more of the graph green. The modeling tool lets users change the volatility of each expiration separately.

Principle 5: diversify theta, then stress test the whole thing

Theta comes with duration. In this portfolio, the 31-day iron condor and the 23-day butterfly carry less positive theta than the 10-day calendar and 17-day spread. As Dan put it, as you diversify your duration, you’ll diversify your theta.

Once the portfolio is built, Dan looks at it as a whole and runs what-if scenarios:

• SPX down 5% with volatility up 20%
• SPX up 5%
• Volatility down 10%

That helps him see whether he needs put protection or another hedge. If the graph’s slope starts to turn against him a couple of days in, he might buy a few calls or tweak a piece. What leads his decisions is the portfolio’s P&L and its deltas at all times. Even with only two or three trades on, he says it is still worth looking at the whole portfolio.

Key takeaways

1. Dan diversifies entry days so his price risk is not all set on one day.
2. He diversifies strategies across short-vega and long-vega trades.
3. He diversifies durations to balance price protection against theta.
4. He diversifies deltas. Dan kept this modeled $8,000 portfolio around five deltas short.
5. He diversifies theta, then stress tests the whole portfolio for big moves and volatility changes.
6. He pairs vega and delta: short vega with a little short delta, long vega with a little long delta.

Build and test your own portfolio

You can build each of these trades in Option Omega’s modeling tool, then backtest them to compare how different entry days and durations performed historically. For how Dan manages a portfolio like this as the market moves, see managing an SPX options portfolio by the Greeks. For more on individual pieces, see his iron condor framework and his high VIX trades.

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Watch the full video: 5 Key Principles of an Options Portfolio.

Trades in this post were modeled, not backtested. It is educational only, and options trading involves substantial risk.