3 Options Trading Secrets
Today I will review three option trading secrets that everyone should know…
These are the keys to your success! They may seem very basic, but are frequently overlooked, to the extent that traders miss critical information, which could cost them in their trading.
Secret #1- ALWAYS have a plan!
It is very important before you place any options trade, to have a plan. The plan would include:
- a profit target
- a max loss exit target
- a plan for repairing the trade (if it begins to go against you)
If the trade starts to go against you, one repairing technique would be to stay in the trade a little longer to see if it will work for you. Without a plan, emotion begins to take over and traders make very poor trading decisions. Fear and Greed are a traders worst enemies!
Secret #2- Place the proper size trades for your account.
Basically like the old phrase, “don’t put all your eggs in one basket,” try placing trades that are small. A single trade should be no more than 5 to 10% of your trading capital. Further, you might consider diversifying them a bit for volatility changes. Sometimes when traders have initial success, they get too big, too fast and then over trade and blow up their account. If you always use proper money-management you can avoid this pitfall.
Secret #3- Keep a trading diary and regularly review your trades.
It is always good to go back over every trade you do to see what you did right, what you may have done wrong, or improvements that you can make. Sometimes, you can notice patterns that have led to either successful or unsuccessful trades. Try to learn and grow from yourself as a trader.
I am confident that if you follow these three simple “secrets” you will improve your option trading business. Happy Trading, and Remember, if you need help, look to Sheridan Options Mentoring.
-Mark Fenton
Options Trading the Monthly Jobs Report
One monthly report that generally moves the stock market is the NFP or Nonfarm Payroll Report that is issued the first Friday of every month.
The report is issued at 8:30 am ET and 7:30 am CT, before the market opens. When the market opens, often the market will make a hard move one way and then come back the other way over the next hour or so. This can make for an interesting speculative play using options.
This is not normal, non-directional income style options trading.
The way to play these moves with options is to wait for the initial move to move hard in one direction and then sell option verticals above or below. Then, whenever the market moves back the other direction, you can close those option verticals that you sold profitably or continue with them if the market stabilizes. Often the market will move one way and then the other and continue to sway the rest of the day. For instance, if the market opens up, you could sell call verticals in a broad-based index like SPX. Once it is moved up about 10 to 15 minutes, watch for a market reversal in order to buy those back, or you may be able to continue with a market reversal the rest of the day.
Conversely, if the market opens down, you could sell put verticals on SPX or a broad-based index and when the market stabilizes or if it goes the other direction, cover those verticals. You could even continue with them the rest of the day. This is often easier to do than buying a straddle, where you buy an at-the-money call and put the day before. Often, the volatility will come out of that straddle, which will crush the profitability of the play.
There is also an income style trade that could possibly be set up using these moves. You would simply sell the vertical in the SPX calls or puts, depending on which way the market opened. When it goes back the other way, sell the other vertical and you should have a fairly broad structured iron condor. Of course, this is not without risk, and this kind of move needs to be done small and practiced a lot on paper before trying it live. Whether you sold just the verticals or are creating an iron condor, I would sell my shorts at a delta between 14 and 18, so that you are far enough away from the market and not too close.
Practice both of these on paper tomorrow when the jobs report will come out and see what you think.
Mark Fenton, Senior Options Mentor.
Email him at info@SheridanMentoring.com
Option Trading with the “Greeks”
A very popular method of managing options trades, particularly complex ones, is to use the Greeks…
The “Greeks” that we use are Delta, Gamma, Theta and Vega.
- Delta tells us the rate of change and the profit and loss of our position for the next point move in our underlying. It gives us a number that tells us what that change will be.
- Gamma tells us how much the Delta will change after one point and can also be beneficial in letting us know how fast things may be moving for or against us.
- Theta, which is popular in the Sheridan Community [theta positive], shows the effect of time in either benefiting or detracting from your option position Profit/Loss.
- Vega monitors the volatility of our position and the effects that implied volatility changes will have on our position. It also is a number that tells us how much profit or loss our position will have with a one point move in the implied volatility of the options that we are trading.
There is more to trading and managing options than just using the Greeks. Many times I’ve seen traders who thought they could look at the Greeks alone and manage a position, which often leads to problems.
Using the Greeks
Certainly, we would use the Greeks, but you also would want to have a risk graph to monitor your P&L position and the effects of where you are if the trade goes against you.
This concept is very important to understand because, if for instance, we were going for a 10% profit, you really would not want your position to go against you more than 6-7% before you made an adjustment.
Greeks are Vital
As you can see, the Greeks are vital, because we can use them to tell 1) where we are at in a position and 2) where we are going to be in a position.
Further, the Greeks can also be helpful if you do want to adjust the position. One popular technique is to just cut the Delta of your position.
For instance, if your Delta was -1000, you know that if the underlying went up one point you would lose a thousand dollars, so in this instance, you may want to cut that risk down by buying extra options.
Cut the Loss
This move would cut the loss, perhaps, to where you only lose $250 with the next point, thereby cutting by 75% you risk. This is just one of many possible moves to make in this scenario.
Just remember to incorporate Greeks, P&L and a risk graph into your position management and do not rely on any one component to make all of your trading decisions.
Mark Fenton, Senior Options Mentor
Questions? info@SheridanMentoring.com
For more on Managing by the Greeks, Check out a Free Webinar by Clicking HERE!
Iron Condor or Iron Butterfly, which is better?
Often I am asked as an option-trading mentor, “Which is better, the Iron Condor or the Iron Butterfly?” These are both short Vega trades, meaning that they benefit from volatility lowering, however, the structure is different and the pros and cons of each are different.
The Iron Condor is perhaps the most popular option spread trade. The structure is selling a call vertical and a put vertical out of the money, usually by several strikes. This is what you might call a “strangle”.
The benefit to this strategy is that it is one short volatility and also it has a wider range for the price to move around, up or down, before you get into any trouble with the trade.
This is a good trade for higher volatility markets and if you feel you need more room for the price to roam.
Which is Better?
The Iron Condor would be better than the more narrow strike Iron Butterfly. The downside of using an Iron Condor is that when it does go against you, it is more difficult to repair and/or you can lose more money because you took in less premium, by selling options that were further from the money.
Overall, though, it does have a good probability of profit greater than that of the Iron Butterfly.
The Iron Butterfly is also a trade that benefits from lowering volatility. It is structured by selling an at-the-money call vertical and an at-the-money put vertical with varying long wing widths.
Risk-To-Reward
The Iron Butterfly has more narrow structures than the Iron Condor, however, it has a better risk-to-reward, because your return can be so much higher on-the-money at risk than with the Iron Condor.
This is because you received more premium selling the at-the-money options. Because it has this greater risk/reward, the Iron Butterfly can be put on in a wider range of markets, both lower volatility and higher volatility.
Volatility
Even though it is short volatility, it still performs well, even in lower volatility markets because of the risk reward.
Of course, both of these trades, require that the price stay inside of a range for the trade to be profitable. The Iron Condor gives you more room and the Iron Butterfly gives you less room for the price to roam. However, overall in most markets, I preferred the Iron Butterfly, because of the increase risk reward.
Questions?
Email Mark Fenton: info@SheridanMentoring.com