At Option Alpha we believe (and the research confirms) that the options trading possibilities for retail investors are nearly endless. Higher returns and better performance for your portfolio, but only if, you cross this one trading bridge first. So many newbie traders learn about options and the stock market and experience a rush of energy and motivation to jump in with both feet and start trading. Naturally, this jolt comes from the expectation of huge returns. But without the proper framework and understanding of how portfolios evolve, all that excitement can quickly turn into burnout and failure. My goal today is to help you cross this proverbial “trading bridge” and learn how to confidently analyze option strategies before putting money at risk.

Key Points from Today’s Show:

  • One issue that a lot of traders have is that they focus too much on ROI off the bat. 
  • However, you have to have some mental toughness and the right mindset first.
  • It is all about knowing what to expect, which is why back-testing trades is so important.
  • You do not always have to choose the strategy with the highest ROI, because that may not be the strategy that your mental toughness can withstand.
  • It is important to understand what the sequence of returns and what your portfolio could look like moving forward in the future.

IWM Case Study

Weekly trade setup in IWM, doing a short strangle where you sell a call option and you sell a put option. This strategy is mainly for margin accounts, though you can create an iron condor to do it in a risk-defined IRA or retirement account. There was 30% overall allocation in these trades, taking profits at 50%, and no stop-loss. The only time the trade was exited was either at expiration or when taking profits at 50%. There was also no IV rank, so when IV was high, the trade was made; if IV was mid-range, the trade was made — regardless of IV, a trade was made. In the short strangles, the short Deltas were at 20 (selling the 20 Delta calls and 20 Delta puts) targeting about 40 days to expiration. 


  • The short strangle had an annual CAGR of 9.45%, absolutely out-performing the S&P. 
  • The payoff diagram had an amazing return, the Sharpe ratio was 0.64, and the trade won 88% of the time. 
    • This is where we can start to prove that even though you are making a trade at a short strike of 20 on each side, which theoretically looks like you should be winning about 60% of the time, you are in fact winning 88% of the time. 
    • This proves the point that when you take trades off early and you factor in IV’s over expectation you win more often than the initial probabilities suggest.
  • There were 390 trades over a 10-year period and the max draw-down at any one point, peak to trough, was 42%.
    • This is where many traders get stuck because they do not have the mental toughness or mindset to work through the drawdown. 

How the PNL Diagram Evolved:

  • If you started trading $250,000 in 2007, in July of 2008 you went from a high in your portfolio of $384,000.
  • As the market starts to get into the depth of the correction, there was a drawn-down from $384,000 to $265,000.
    • At this point, 95% of traders quit and don’t continue on with trading. 
  • After the big draw-down, the market starts to recover and you regain the highs in your portfolio by January of 2011.
  • From that point, your portfolio continues on a steady curve up with no major market corrections. 
  • The key is to get over the major hurdle of the draw-down and stick with the long-game strategy. 
  • You cannot just focus on ROI; you have to have the stability, mental toughness and consistency factor that is required to get to these higher returns. 


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/ Kevin

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 Kevin, who asks:

I am a brand new trader, and I have only been doing this for a month. I was listening to podcast episode #106, that talked about the TLT trade in the Closing Bell section. It looks like IV rank is pretty low — it’s December 1st and IV rank is at 33% today and the guide says over 50% is the time for doing iron butterflies. I’m wondering if you could share your thoughts as to whether IV rank was higher at the time? If so, and IV rank was under 50% at the time, what the thought process is overall as to the iron butterfly trade on TLT? I’m really interested in TLT and looking forward to doing some trades on that. Thank you very much.

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to 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!

I’m humbled that you took the time out of your day to listen to our show, and I never take that for granted. If you have any tips, suggestions or comments about this episode or topics you’d like to hear me cover, just add your thoughts below in the comment section.

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