Why We Ladder or Stack Options Trades Over Time & Price

For years we’ve talked about the need for increasing your trading frequency. In today’s podcast, we want to re-introduce the concept of stacking or laddering option trades over time and price.

Key points from the show:

• A sequential trading model can put you in a position where direction, pricing, and timing becomes incredibly important.
• However, more frequency and more activity reduce the directional aspect of the market; This is where a laddering model comes into play.
• If you break down monthly trades into small components, making small trades every single day, you are averaging around the market.
• Making one trade a day reduces the impact of any one big directional movement in the market because as the market moves, so do your positions with the market.
• With this high-frequency trading model, you are able to keep the same distance or buffer between your position and the market.

Example:

Went through a series of ladder trades in FXE where we Spread our trade entry out in FXE over the course of three weeks. As FXE moved, we added more positions. So the initial position in FXE for February was centered around 100, with an iron butterfly around 100. A couple days later, FXE moved up to 103. We now centered the next laddered position around 103. Had we done our entire original position at 100, we would have never made that second trade. FXE continued to move higher and we continued to do more trades.

The trade was broken up into four pieces: the first centered around 100, the next around 103, then 104, and the final was centered around 105. As FXE continued to move, so did our positions. We kept moving along with the market and using the same structures we created three other positions that could be winners instead of being stuck with the 100 position that might end up being a losing trade.

Back-Testing Methods.

1. Sequential trades: managing one trade at a time until the end, with no overlapping trades.
2. Weekly trades: entered a trade every single week, regardless of whether there was an open position or not.
3. Daily basis: overlapping trades on the smallest scale, adding and laddering trades on top of each other almost every single day.

Results:

• The daily entry model beat weekly entry models across the board.
• Entering trades on a weekly basis beat out the sequential model as well.

Conclusion

• The key is breaking down trades into small bite-sized components, which ultimately ends up outperforming the sequential model.
• There is no exact methodology; it is just the general concept of breaking down your trades into more bite-sized components and spreading your entry out over time and price.