You’ve heard about option trading and you believe it could be right for your portfolio and investing style. But every time you try to have a serious conversation about Option trading, you get a barrage of idiotic comments ranging from:
“You’ll lose all your money trading options”, or “Options are too risky for you”, or some such nonsense. And, if you survive their harangue and ask them, if they have ever traded options, the most common answer is, “Well, no. I’ve never traded options. My adviser doesn’t believe in options so I don’t believe in them either.
Well, here is a little secret –
Options are NOT too risky
In fact, the probability of profit in many, if not most options strategies, is higher than outright stock ownership!! Stocks are a 50/50 bet. They go up or they go down. That’s it.
So,the next time someone tells you they don’t believe in options, tell them that options trading is not al the religious experience.
“Options trading” at its core
- is a means of reducing risk
- improving cost basis on stoxks already owned
- and reducing overall volatility in your portfolio.
This may not have much impact, but at least it will put you back on an even keel and maybe even bring some equilibrium back to the discussion.
Certainly, options have their challenges. There are many moving parts that need to be considered, but it is not an impossible subject to learn. See my post on basic options trading consideration for building a trade.
Here are a few more ideas you should think about, when building a trade. Click here for my Top 4 metrics for trading options.
Since I began this blog, I have gotten many requests about whether I offer option trading coaching. And the answer is a qualified Yes!. I do not offer a paid coaching service at this time. That is not my focus. But I do love to talk about options with people who have a strong interest in learning. Since you are probably new to options, you more than likely have many questions about the best way to get started. And I would like to help you answer those questions.
Please Leave a cooment at the bottom send me an email about current or potential trade ideas. Your question will be given top priority and I promise to get back to you with my opinion as soon as I can.
Keep learning and happy trading!!
I would like to know what Deltas and IVR you would emphasize for bull and bear defined risk vertical spreads. In addition anything else one should be looking at. I would also love to see your rules for adjustments.
Thank you
Great to hear from you Dennis. The mechanics for trades center around Time and Volatility. With defined risk credit spreads, since we are looking for volatility to contract, we can use the days to expiration (DTE) and IVR as a guide for Opportunity. More time = more opportunity. Also, high IVR is synonymous with higher premium (credit). Presumably you put on a credit spread at a time when volatility was high and your time frame was optimal (between 45 – 60 DTE). So, the rules say, for defined risk trades, if there are less than 21 DTE, and the IVR is below 30, if the position is at a loss, hold until expiration. Let the probabilities play out. If the trade is profitable or a scratch, close the position. To continue to hold out at this point, leaves you open to volatility expansion, which can take your trade from scratch to loss . If there are less than 21 DTE, and IVR is high ( above 30), roll the position int the next expiration cycle. Longer time implies more opportunity. Lastly, if there are more than 21 DTE in the current trade, leave it alone until 21 DTE and evaluate it then.
To your other point about Delta, for defined risk credit spreads, we are looking for the short strike to be between 20 – 30 delta and for the width of the spread to be $5.00 wide. Also, it is best to try and collect 1/3 the width of the strikes. In this case about $1.65. For a $5 wide credit spread, Finally, on my website under the Management Mechanics, there is a tab Mechanics of rolling. That should help, too. Write back any time. Let me know, if I can help in any other way.
Thank You.
I want to make sure I answered your questions completely. As far as IVR goes, The research shows that selling premium when IVR is high (greater than 30) is optimal. and,when IVR is below 20, we are not in the best position to be selling premium. When IVR is high for a given security, the underlying has either fallen or is experiencing an event such as earnings. If the price has fallen to a low marker such as all time low, then having a bullish directional bias would be appropriate. In his case a short Put vertical could be a choice.(Short OTM put/ long farther OTM Put. This spread is bullish and entered for a credit that should be close to 1/3 the width of the strikes. Please let me know, if this answers your question. If not, please comment again and we can continue the dialogue.