We get a lot of emails each day – I’m talking hundreds of emails. Naturally, seeing so many questions and comments come through the system, we found that these 17 top questions keep coming up again and again. So, in an effort to help you, and our team reduce the support inquiries, I’m recording answers to each of these questions in today’s show.
Key Points from Today’s Show:
1. How do you determine which ticker symbols to trade? [See Show 143]
- You want to generally stay as mechanical as possible when it comes to choosing ticker symbols.
- Trade many of the same tickers as a core portfolio.
- Highly liquid ETFs and Index ETFs that you continue to trade on an on-going basis.
- Including, SPY, DIA, EWW, FXE, FXI, USO, XOP.
- Choosing the ticker symbols to trade starts with high IV, high liquidity, and offer portfolio diversity.
- Start by filtering for high IV, but also diversify the tickers that you are trading.
- If you have to sacrifice some IV level for more diversity, that is okay.
- Diversity Core: EEM, EFA, FXI, GDX, IYR, Q’s, SMH, TLT, XHB, XLB, XLE, XLV.
2. When do you adjust, versus roll, versus close?
- It is preferable to adjust a position in the current expiration month first – so always try to adjust first.
- If you can adjust a position in the current expiration month, that means you don’t have to extend the trade to the next month or the month after.
- Our research shows that holding a position a little bit longer towards expiration, it ends up working out better.
- So even when positions get challenged early on, still don’t start making adjustments until you get into the month of expiration.
- If adjustments in the current month don’t work, roll the position out to the next month for a credit.
- If you can’t roll the position out for a credit, then simply close the position.
- Finally, if you can’t adjust and can’t roll for a credit, then it’s time to close to expiration.
- There’s no point in taking a position that is going to be a loss and making it an even bigger loss by rolling it to the next month and paying a debit to do so.
- Rather just take the loss, and reset the probabilities – which is where position size and diversity comes into play.
3. Why do we enter trades with less than 70% probability of success? [See show 138]
- Many times the initial probabilities that you see on brokerage platforms would suggest that we’re entering the trade with less than 70% chance of success.
- The reality is, that is accurate for trade entry – based on how the probabilities are set up at trade entry.
- However, this does not account for things like IV’s over expectation, early profit-taking, etc.
- So when you actually look at what a win rate is on a trade after accounting for IV’s over expectation, the trade might have an additional win rate of 7-8%.
- This describes the expected probability paradox – the initial probabilities of success do not account for other factors that happen after trade entry.
4. Why do we trade tickers with low IV?
- Even tickers with low IV still have a positive expected return when selling options.
- In fact, our most profitable ticker over the last couple of years has been TLT, which has had some of the lowest IV.
- This does not generally happen, but when you are trading low IV, you can still generate positive expected returns.
- The problem that most people have when trading low IV tickers is that they tend to over-allocate during those situations.
- When there is low IV, you should scale back your position sizing.
- Other reasons to trade low IV tickers is for portfolio diversification purposes.
- There’s no point in trading all high IV tickers if all the tickets are in one sector or industry.
- Rather trade a low IV ticker to protect your portfolio and give yourself diversity.
5. How much money do I need to generate X amount of income?
- On the very low end, you should be able to make 4% withdraws from your account without depleting or significantly hurting your account moving forward in the future.
- Take the amount you need to generate at the end of the year, divide it by 5% or 10% (your withdrawals), and that’s how much you will need.
- This does not include fluctuations, variants, or portfolio volatility.
- You could easily go through a period of 3-6 years of sub-par or average returns.
- That doesn’t mean that the system is broken and that it won’t make money; it’s just how the sequence of returns are starting to develop.
- If you are taking 10% out of your account for the next 5 years and you go through a random sequence of flat returns, you could really set yourself back in a hole.
6. How do you keep up with adjustments and rolling?
- When you have a position you adjust, take the original credit and add the existing credit.
- Keep track of each adjustment or roll by writing it down.
- Take your time, and keep track of all your debits and credits.
7. Why can’t I find perfect pricing? [See show 138]
- Getting perfect pricing on trades is no longer the requirement.
- Research and backtesting shows that when you get less than perfect pricing, you are still compensated because of other factors like the ability to close early, ability to roll contracts and adjust, IV’s over expectation.
- These factors allow you to get less than perfect pricing on trade entry and still generate a positive expected return.
- Although perfect pricing is the goal, you don’t want to inhibit yourself from trading by skipping out on trades that don’t have perfect pricing.
8. Is there any formula for laddering into trades?
- No, there is no perfect formula for this.
- Backtesting research shows weekly trades performed better than sequential (one-by-one).
- Breaking your trades into at least a weekly entry did generally better than sequential trading.
- Beyond that, daily performance across the board was better than weekly performance.
- On average, you want to be entering at least a trade or so per day.
- That does not mean it has to be in the same ticker symbol; you can spread it out.
- Enter a new laddered position when the existing position moves from your center point.
- Since we do a lot of neutral trading, if you enter an iron butterfly at 50 and the stock is trading at 50, if the stock never moves outside of 50 in the next 5 days, don’t enter a new position.
- If the stock moves up to 53 or 54, at that point you can enter the next set of laddered entries.
- Therefore, simply wait for the stock to start moving before entering a new set of laddered entries.
9. What do you do if you are assigned?
- Assignment is part of the trading business and is bound to happen.
- For the most part, assignment is random and you don’t know when it will happen.
- However, we do know that assignments come towards the end of the expiration cycle.
- The first question to ask when you get assigned is, “What can you portfolio handle?”
- If you have a portfolio that can’t handle the assignment, then the immediate answer is to close the assignment.
- This might not be an ideal time to close, but it’s better than taking on too much risk for your portfolio.
- If you portfolio does have the capacity to handle the position, then the next question is, “Where is the stock?”
- Next, look at the technicals: do they suggest you’re at the bottom end of the range, or potentially towards the top?
- If you are toward the top and you just got assigned shares and technicals are flashing sell signals, sell your stock.
- Definitely lean on the technicals to determine whether to hold on to an assignment or to dump it.
- From there, if you decide to hold the position, the next question is, “Can you sell any options against this?”
- In almost every case you should be able to sell options against the assignment.
- This helps to reduce or increase cost basis, which helps to bring you back to a win or reduced loss on the position.
10. What is portfolio balance and how do you determine it?
- The best way to determine your portfolio balance is to Beta-weight your portfolio.
- Just looking at the raw Deltas does not help, completely.
- You have to look at the Beta-weighted portfolio curve of all of your positions.
- The reason you want to use Beta-weighting is because bonds and stocks are going to move differently together than bonds and oil, or real estate, etc.
- All of these things have different Beta equivalents to the market, and they will behave potentially different.
- Generally, bonds will move in the opposite direction of stocks.
- You want to make sure that you are getting one true look at the portfolio compared to a Beta-weighted index.
- From there, look for asymmetric payoff diagram with the index you are Beta-weighting in the middle.
11. Why not just trade one ticker that backtested well?
- The tradeoff you have when trading only one ticker is that you are highly susceptible to the variants and volatility of that particular ticker symbol.
- If that ticker symbol goes through a random black swan event that has a draw-down of 30%, that means your portfolio immediately goes through a drawdown of 30%.
- Rather trade a little bit more complex portfolio construction for the ability to neutralize the variants in your account.
- Instead of having one ticker symbol that trades really well, trade a couple and deal with the complexity of having multiple positions in your account in exchange for having less volatility.
12. How can you get a higher trading approval level? [See show 48]
- Generally, you have to work up the approval process.
- You can get a high trading approval level right out of the gate, just make sure to check the right boxes when you do your brokerage application – growth, speculation, experience.
- That said, you can quickly move up the different levels.
- The reason that brokers have these levels is that they want to make sure people are aware of and understand the risks of trading more complex options strategies.
- You can show proof that you won’t blow up your account and understand the risk to get a higher level.
- However, if you can’t get a higher level at one broker, move to another broker.
13. Why don’t we trade more weekly options strategies?
- Weekly options strategies backtesting really well in our profit matrix research.
- The reason we don’t trade them as often now is that we plan to do them once the auto-trading platform is launched.
- Weekly options require a lot of management, but allow you to reduce a bit of the variance in your account.
- Monthly trades make the same or more than weekly strategies, and require a lot less activity and churn for commissions.
14. Why don’t we place many earnings trades anymore?
- We haven’t been placing a lot of earnings trades, because we’ve been finishing up a lot of research on earnings.
- We’ve done a lot of research on earnings strategies, we backtested all types of tickers, sectors, and industries.
- The data on earnings have now been compiled and we are now combing through it.
- Until we finish up the analysis, earnings trades are on pause for the time being.
15. Why do we trade so many iron butterflies?
- The main reason is that they do backtest really well as straddle synthetics – they are straddles at their core.
- When you look at the profit matrix, the strategies that do the best overall are straddles are short strangle synthetics.
- Straddles are highly capital intensive, a lot of margin is required.
- Conceptually they represent neutral, pure options selling, and are easy to adjust, have fast time decay and fast time until profit-taking.
- Trading iron butterflies allow us to trade straddle synthetics.
- Essentially, we are trading straddles and then choosing to buy insanely cheap protection on the wings to help reduce margin exposure, keep ourselves in a risk-defined format, and reduce volatility in our account.
16. When’s the new platform rolling out?
- We have new updates that we are pushing to the platform on the backend every single day.
- We hope to have something out in V1 here in the next couple of months.
- The platform will be rolled out in various version, going through this agile framework.
- All updates and sneak peeks are on videos inside of Facebook.
- Adjustments and iterations to the platform will be made immediately from V1 feedback.
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/ Patrick
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 Patrick.
My question is regarding the two remaining out of the money iron butterflies or iron condors when the position has been closed in the other legs, that were in the money; do you roll them for out of the money credits?
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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