Everyone loves a good options trading checklist right? Well, here are the 7 questions you should ask yourself before you put on an options trade. Answer each one over the next week and you’ll build a strong habit that will keep your positions and portfolio in check before you put your hard earned money at risk.
Key Points from Today’s Show:
1. Does This Fit My Portfolio?
- A lot of people get hung up on adding trades because the trade looks good.
- However, it might not fit what your portfolio needs at the moment.
- Instead, make sure to add positions that interact favorably with your current positions.
- You want to add positions that are complimentary of each other.
Ex: If you have 10 bearish trades on, you do not want to add another bearish trade, no matter how good it looks. What you need instead is a bullish trade; something that will balance out your existing positions.
2. Does the Ticker Symbol or Contract You are Trading Have Enough Liquidity?
- If the trade doesn’t have enough liquidity on an on-going basis, then why trade it?
- You cannot scale a trade that doesn’t have enough liquidity.
- There is no point in trading something if it only has 10 contracts of open interest.
- Instead, you want to see on-going high liquidity and open interest so that you can scale up with your portfolio in the future.
3. Where is Implied Volatility Rank?
- When looking at IV rank, you need an understanding of IV of the individual ticker as well as the overall market IV.
- Any of the volatility products can give you a good idea of where overall market volatility.
- It is important to know the environment that you are trading in.
- Keep overall allocations and individual ticker allocations low during low IV.
- This will hedge against the inevitable spike in IV that will come.
4. Which Expiration Are You Trading?
- Monthly contracts do a good enough job without the frequent reoccurring need to sell premium on a weekly basis.
- So, we target most of our positions on the monthly expiration.
- Again, this does not mean that you can’t trade weekly, they just need more checking and frequency to make as much money as the monthly contract.
- Typically, we start building out our positions around 60 days out from expiration and stop building in that expiration period once it gets to around 25 days until expiration.
- Between that time period, we are building and laddering positions and working our portfolio out on the time horizon.
5. What Strategy Should You Be Using?
- By default, you should be using mostly options selling strategies.
- This does not mean that you can’t use an option buying strategy, but it is more of a hedging technique.
- When you look at options trading holistically, what you want to be doing is net selling options premium.
- This means you should be doing straddles, strangles, iron butterflies, iron condors, credit spreads, etc.
- You just have to decide which side of the market you ultimately want to be on.
6. Have You Double Checked Your Position Size?
- When you get through the list of checks, double check your position size right before you enter the trade.
- This is one of the last things to do, and you should know intuitively where you position size should be.
- Look at the order screen to see what your maximum risk is, or what the margin is that is required to carry the position.
- Position sizing is ultimately one of the things that will lead to most people failing in options trading.
7. What If?
- This is the most important question to ask after you’ve placed the trade.
- Once the trade is placed, start going through all the “what if” scenarios.
- Explore how you would adjust or hedge the position if the worst-case scenario happened.
- Prepare for each scenario by doing research and choosing strategies to prevent major losses.
- This will help you when the time comes to make an adjustment and allow you to react faster.
Free Options Trading Courses:
- Options Basics [20 Videos]: Whether you’re a completely new trader or an experienced trader, you’ll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
- Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an “edge” in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
- Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We’ll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
- Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You’ll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
- Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we’ll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
- Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can’t seem to get answered, then this section will help you.
- Portfolio Management [16 Videos]: When I say “portfolio management” some people automatically assume you need a Masters from MIT to understand the concept and strategies – that is NOT the case. And in this module, you’ll see why managing your risk trading options is actually quite simple.
- Trade Adjustments/Hedges [15 Videos]: In this popular module, we’ll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we’ll help you create an alert system to save time and make it more automatic.
- Professional Trading [14 Videos]: Honestly, this module isn’t just for professional traders; it’s for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.
Option Trader Q&A w/ Erik
Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. Today’s question comes from Erik.
How many option trades do we have to place to see profits? When laddering options trades, is there a big difference between trading the same underlying consistently versus trading different underlying with the same probability? For example, if I open a TLT trade every week versus opening IWM this week, NFLX next week, or FXY the week after all with the same setup and probability, will they still yield the same results?
Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.
PDF Guides & Checklists:
- The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
- Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
- Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
- Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
- When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we’ll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
- 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.
Real-Money, LIVE Trading:
- EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
- VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
- DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we’ll discuss why I’m adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
- COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
- TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
- MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
- IBB Call Debit Spread (Opening Trade): We’ll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
- TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly – even still the drop in implied volatility helped generate a $330 profit for us.
- XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
- COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
- EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
- IBM Iron Condor (Earnings Trade): Shortly after the market opened you’ll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
- SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.
Thank You for Listening!
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