How to Set Options Trading Goals

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As traders many times we tend to only look to the short term and what trades we have on or are about to enter. To be successful with any longer term goal you not only have to know where you are headed but how best to get there. Having a plan and setting mile posts to mark progress along the way is fundamental to a successful trading business.

First, we want to determine our long term goal. To give two trading examples perhaps you either want to generate a certain monthly income or build a certain dollar value in your account. Whichever of these you choose, it is important to set a monthly goal to track how you are doing in reaching the goal. That way if things are getting off track you can address any problems before you get too far off your success path.

Secondly, setting realistic goals is key. Let’s say for instance that you want to generate a monthly income of $5000. If you are trying to reach that amount using a $100k account size, it will be easier than trying to reach it with $20k account size. A simple illustration to understand is: The lower the percentage of your return on capital you require, the easier it will be to succeed. So be realistic in what you set for goals to give them a better chance of attainment.

Finally, what trading strategies and portfolio allocation of them will I use each month? With option trading you can utilize both monthly and weekly option expiration chains in your plan. You may for instance want to do a weekly calendar or butterfly as well as a monthly calendar or butterfly and also employ iron condors, etc as part of your over all strategy.  Try to have a mixture of these strategies each month to take advantage or hedge the changing volatilities in the marketplace.  To properly understand and have good risk management, as well as deployment of a plan, you will find that proper education from an experienced mentor and trading education program can help reduce your learning curve and give you better accountably in your trading business. Taking advantage of the trial and error that another experienced trader has been through, helps you avoid many pitfalls traders often fall prey to. Putting all of this together is what separates the successful trading business from the failed one.

Mark Fenton
Senior Mentor

Interesting VIX Trade

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If you believe that the VIX is going to go a lot higher from here, one interesting trade is to sell a put vertical to help lower your cost of buying calls. Over the next, month I don’t think it is a stretch to say that the VIX could go a lot higher, as the market appears to be topping out and ready for a pullback.

An interesting trade, currently, is selling two put verticals, selling the 14 strike and buying the 12 strike on the VIX for the September expiration 42 days from now, and then using that money to buy two calls at the 17 strike for September. You could put this trade on for about $626 for a two lot on each, and you have great potential for reward on the upside while limited downside. See the graph attached for how this play would look in an analysis screen. You have limited downside and unlimited upside. Consider something like this, if you think the market will have increased volatility over the next month, as we head into September.

Mark Fenton
Senior Mentor

Protecting Portfolio for Downside Moves

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    Sometimes in a long bull market trend as we’ve been experiencing it is easy to overlook protecting options trades and stock portfolios against downside moves. It is easy to get complacent whenever you see the market shake off any negative news and maybe only with a pause it goes back up, but eventually the market will have a correction it always has.  Of course one of the best ways to protect yourself is to have some protective measures on head of time and not beginning to scramble to protect yourself once the move is in play. In my mind one of the best ways to do this is to consider purchasing long verticals or long calls in the VIX options two to three months out in time. Considering VIX options currently in September or October or even November I think can be attractive. What I like to do is maybe wait for a day whenever the VIX pulls back a bit and then look at buying options at maybe 2 to 3 points out of the money and maybe a few more points out of the money for instance the VIX is at 11, you may want to consider buying 13 call options and also calls at maybe 17 or 18. I think that those are all attractive levels to look at to protect yourself. You will see the Vicks moves very quickly whenever the market makes down moves and often you have many chances to be profitable in these options on the market pullback, particularly a quick one. And you can do this by either purchasing long calls or long call verticals, your choice. Of course long call verticals can lower the cost of the trade but with slightly more brokerage fees.

          When you have individual strategy option plays on such as butterflies or calendars you can also consider buying an out of the money put below a position to protect yourself some if the market makes a quick pullback. Once the down move is underway look for an opportunity for a slight pause or like I said a pullback in the VIX to make your entry, you can still protect yourself even on some slight spikes. And this is just a few of the ways you can give yourself some peace of mind against the coming downtrend or a quick bearish market move. We at Sheridan Options Mentoring are prepared to help with this and further developing your options trading business.

-Mark Fenton
Senior Mentor
Mark@SheridanMentoring.com

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