Trade long enough and save enough money and eventually you’ll need to make a couple small tweaks to your options strategy as you start managing larger trading accounts. Today’s show is all about transitioning your options strategy in a way that optimizes the increased capital you have to invest. If you’re not yet at the “large account” level we talk about, don’t worry. One, you’ll get there over time if you stay committed. Two, the concepts are important for all traders to understand so that you can start planning ahead as your account grows and as you add more funds in the future.
Key Points from Today’s Show:
- When you move past $500,000, you can start to consider yourself a large account trader.
- Once you start crossing multiple hundreds of thousands of dollars, begin looking at transitioning to higher-end strategies.
- However, having more money in your account does not mean you have a bigger chance of success.
- Your ability to generate positive expected returns and consistent cash flow in your account has nothing to do with account size.
- Although having a larger account makes it easier to get into more trades, it also makes it harder to allocate everything.
- Filling the buckets becomes exceptionally hard the more money that you trade.
- Although you are limited with a small account, anything you do in a small account can move the needle.
- As you start trading a larger account, filling the bucket becomes harder — you have to allocate a lot more money to make sure that you keep up with the returns and profit you want to draw from your account.
1. Incorporate Higher Value Products
- As you transition to a larger trading account, move towards larger products in general.
- Start transitioning to larger index products such as SPX, RUT, and NDX, and higher value/price point stocks such as Google, Apple, and Tesla.
- With higher price point stocks you don’t have to sell as many contracts to get enough premium and allocate your funds quickly.
Example 1: Google is at $1,170, but since it is such an expensive stock that means that a single options contract in Google could be $2,000 or $3,000. This is good because then you don’t have to get 15 or 20 contracts of something else for what you could get in one single position in Google. This means that in some cases you have to specialize a bit more, focusing more of your portfolio on these bigger products.
Example 2: USO is a large ETF, with a low price point ($12 security). There is just not that much pricing in there, so the at the money straddle in USO right now is only $70. So if you’re trading half a million or over a million dollars, trading USO should probably not be on your watchlist.
2. Gravitate Towards Undefined Risk Spreads
- Undefined risk spreads include straddles and strangles — iron butterflies, iron condors.
- With much more capital at your disposal, you want to trade those higher premium positions.
- This strategy may introduce more volatility, but that doesn’t necessarily mean it’s a bad thing.
- If you are trading in an IRA or Roth IRA or SEP IRA and you have a larger account balance, you want to make the spreads as wide as possible.
- Go as wide as you can so you buy inexpensive options on the further end of the spectrum.
Example: If $10 out is the limit, and at $10 out the option contracts are $2 or $3 a piece, that’s where you stop. Don’t go to $20 out just because you want to make it wide — go as wide as possible, within reason. Be logical about the trade, pay an okay premium for your long strikes, but try to mimic straddles and strangles synthetically as much as possible. This is especially important in a margin or portfolio margin account, you want to be trading straddles and strangles as much as you possibly can.
*Keep at least 50% of your account in cash to withstand any margin pushback you may get.
3. Fill In Your Gaps
- Fill in the gaps with a lot of high IV ETF’s and uncorrelated underlyings.
- In larger trading accounts you have core strategies surrounding the larger products.
- With more capital at your disposal, you can now fill in the gaps in your portfolio with other ETFs.
- You may not trade as much in those ETFs as you would in the core grouping of positions, but it can give you more diversity in your exposure.
- This will smooth out your returns with a lot of uncorrelated underlyings, filling in the gaps.
Example: You trade 100 contracts of SPX (core positions) to match your larger account size. Then you trade 20 contracts of both FXE and XLE, spreading out the rest of your portfolio in smaller positions in these other ETFs. These help your portfolio to withstands the general ups and downs of the market. The ETFs you trade can vary from month to month.
*Look for those low hanging fruit opportunities to grab high IV ETFs or any other uncorrelated underlying or stock to fill in your gaps.
4. Trade More Synthetic Covered Call Positions
- If you find that you have a lot of capital available and you cannot get it all allocated every month, do more synthetic covered call positions.
- Synthetic: you can replicate a stock position with much less capital and much less risk using options.
- Look at trades you truly want to hold long-term — big industry ETFs that have really been beaten down — and do synthetic covered calls against them.
- This includes leap options on the call side to replicate stock, and selling front month call options against it to give you a synthetic covered call position.
- The strategy allows you to allocate more of your capital and reduce cost base at the same time.
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/ Vin
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 Vin, who asks:
I have been a member at Option Alpha for about a year now. Just wanted to know your opinion on all of the cryptocurrency mania that is sweeping the world at the moment, and what you think the direction of it is? More importantly, what do you think this means for conventional financial markets around the world? How do you think markets are going to adapt? What do you see happening? Keen to hear your thoughts on the matter.
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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