As with many things in life the 80/20 principle can help guide and focus our attention on the most important aspects of options trading. In particular, trade entry and executing an options order correctly is critical to your success. I’ve often said that great entries save you from having to be good at everything else, like adjustments and rolling contracts. Today, I want to help you avoid five of the big mistakes you can fall subject to when placing a new trade. Some are small fixes while others will require a little more work on your part, but ultimately help you reduce risk (hint: it’s the last tip in the show).
Key Points from Today’s Show:
- Order entry is such a big part of what we do as options traders.
- When looking at your options trading system, 80% of your focus should be on making the best possible order.
- If you take care of order entry and getting into the right positions, everything else will fall into place.
- Therefore, most of your execution and emphasis should be on order entry.
Fat Finger Trades
- This is when you get into a position and you enter a couple of extra contracts by accident.
- It can also be when you choose the wrong ticker symbol or the wrong direction
- Generally, it is when you enter a trade and you do not double check for any incorrect positions.
- Until you get more familiar with trading do one of two things:
- Paper trade a specific strategy as many times as possible, first — the repetition concept.
- Analyze every single one of your trades — add trade to portfolio Beta weighting curve to see overall impact.
Forcing Entries Because of Time
- Why do we need to rush to get trades on?
- Even when there is a time pressure, it does not mean that you need to force a trade or use market orders.
- We need to be patient with our entries and let the market “come to us”.
- Enter an oder and if it doesn’t get executed, adjust it and see if it still makes sense.
- There is no excuse for chasing the market for the sake of getting into a position.
- In some cases, it make work out in your favor to wait an extra day to get a good setup.
Checking the Order Type
- This is a very simple check, but prevents you from randomly entering market orders versus a limit order.
- Sometimes the type of order ends up being a GTC, which means that the order stays active until it is filled.
- Traders assume it’s a limit order for the same day, but then it doesn’t get filled until a few days later.
- Same thing on stop losses, make sure you understand and check the different terminology.
Market Maker Baiting
- If you enter an order to sell an iron condor for $100 and immediately when the order comes in, the price goes down to $98, then you enter another trade for $98.
- As soon as you enter the market for $98, the market price drops to $96.
- This creates a stream of baiting to draw traders in as the price adjusts.
- Instead of following the baiting stream, let the market trade around your price, wait for it to fill and see where the market truly is.
The Missing Strike Price Logic
Example: You are placing an iron condor trade where you are selling inside legs and buying outside legs. On the put side, you do a $5 widespread. On the call side, you also do a $5 widespread creating a balanced iron condor. In most cases when you do that and you don’t actually look at the pricing of each of the individual option contracts, sometimes you will find that the call-side options are much cheaper. This happens in low implied volatility markets. Even though you are doing a $5 widespread, the long call option that you bought $5 out is already practically worthless and very cheap insurance for your position.
*You might be able to get the exact same pricing two strikes in on the call side.
Example: If you are looking at a stock that is trading at $100 and you sell the 105 and buy the 110 on the call side. The 110 option may only cost you a $1 because it’s so far out and has a low likelihood of getting hit. If you look at the whole pricing table, what you might find is that the 108 call option is also $1. So if you arbitrarily build out a strategy that’s $5 wide on the call side, you’re missing a real opportunity to reduce risk for the same exact price, because in this case you can buy the 108 call option and effectively have a $3 widespread on the call side, which means that if the stock rallies, you only lose $3 on that side of the trade, reducing risk for the same amount of money.
*The missing strike price logic leads people to execute an order that could be much better if you took time to check strike prices.
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/ Ronnie
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 Ronnie, who asks:
How do you know when you are ready for the real world options market?
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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