OAP 110: Become A Better Options Trader By NOT Watching The Market

Download The "Ultimate" Options Strategy Guide

Why do we still believe that magically someday we'll have some inside scoop or tip that alerts us to market tops and bottoms? As hopefully rationale adults we often get lured into a false sense of understanding in the financial markets brought on mainly by the media and talking heads. Today I want to help you become a better options trader by not watching the market, focusing and more systematic trading setups, and providing the single most important case study in market prediction in the last two decades. If you pay attention closely I think you'll come to the realization that not knowing what's going on in the markets, and simply adjusting quickly along the way, is much more profitable.

Key Points from Today's Show:

  • You can become 110% better at trading by not doing 90% of the things you are currently doing. 
  • There is nothing that someone can say in the media that really has any true insight into the markets.
  • As an options trader, since you operate on a 30 or 60 day timeframe you have the luxury of not having to choose a direction as the markets change.
  • The reality is, a lot of people do listen to the markets even when it serves no purpose at all. 
  • This is the definition of a "herd mentality" because people simply want to be in the know.
  • The media is in the business of attracting attention, and keep your focus there.
  • When you stop listening to the markets, it frees you, makes you more creative and a lot more patient.

Example:

  • The Fed is the premier example of why you should not listen to the markets.
  • In May of 2007, Ben Bernanke gave a speech that had a significant impact.
  • However, to this day, the Fed has never correctly picked a market top or bottom.
  • In his speech he said:

"Importantly, we see no serious spillover to banks or thrift institutions from the problems in the sub-prime market. The trouble lenders or for the most part, have not been institutions with Federally insured deposits." — Ben Bernanke

"All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the sub-prime sector on broader housing market will likely be limited and we do not expect significant or any spillover from sub-prime market to the rest of the economy or the financial system. The vast majority of mortgages, including even sub-prime mortgages, continue to perform well. Past gains in the housing prices have left most homeowners with significant amounts of home equity and growth in jobs and incomes, which should help keep the financial obligations of most households manageable." — Ben Bernanke

  • If you read this four months before the market collapsed, you would have thought everything was fine. 
  • Bernanke pointed to the fact that most of the loans done were still done in prime lending.
  • However, the sub-prime market led to a broader collapse in real estate, prime lending, job growth, etc. 
  • This shows, again, that even the people who seem to have all the information still cannot predict the market.

Takeaways:

  • Not watching the markets can actually be better for your trading.
  • Disconnect yourself and go cold turkey on it if you really want to see a difference.
  • Make your own assumptions and your own opinions based on the facts you gather, and stay systematic.
  • Don't assume that you know more about the markets than anybody else.

Strategy to Stay Up to Date:

  • Glance through the headlines to get a feel for the market, without getting sucked into the rabbit hole. 
  • Realize that you have no ability to change the market outcome. 
  • As an options trader you have the luxury to quickly adjust and adapt your portfolio to the market.
  • So if you want to become a better options trader, cut 90% of the market watching out of your life.

Option Alpha Podcast Show Notes[FREE Download] Podcast Show Notes & Transcript PDF: No time to read the show notes right now? We've made it incredibly easy for you to save time by giving you instant access to the complete digital version of today's show. Click Here to Download Your FREE Copy

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/ Julian

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 Julian, who asks:

On the current list of high implied volatility stocks, there are only seven listed, all of which have earnings coming up very shortly. My understanding is that one should not sell any credit spreads in these seven stocks and the only trading one should do with regard to these is around the earnings calendar with the buying of earnings and selling on the volatility crush. Is this correct? In other words, when high implied volatility is the market and earnings are coming up, do you trade the security or do you wait for the earnings event?

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!

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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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.