OAP 170: The 5 Critical Factors for ANY Trading Strategy

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Factor-based strategies and trading systems are all the rage these days. We've been promoting these for many years now but it seems that more and more investors are catching on. As a result, we wanted to cover the 5 critical factors that your trading strategy should have. To us, these serve as the foundational elements for choosing which investing vehicles, indicators, or systems most appropriately fit your portfolio.

Key Points from Today's Show:

1. Persistent

  • Whatever factor you are using has to be persistent.
  • Persistency means that it holds across a lot of different time periods and a lot of different regimes in the market. 
  • The ability for an options trader to generate income using option selling strategies, in particular, is very persistent
  • Capturing IV risk premium, the edge that goes to an option seller for selling premium and taking on the risk that an option buyer doesn't want to take on is profitable over a long period of time.

2. Pervasive

  • The pervasiveness of a strategy means it has to hold across different sectors and asset classes.
  • Often times, when something works in one place, it doesn't necessarily work in another place. 
  • However, when trading options - whether on US indices, foreign indices, commodities, volatility products, or emerging markets - it is still profitable.
  • Options, as an investment vehicle, has a wide range of different asset classes from which you can move in and out of.
  • Essentially, you can move your entire portfolio from one asset class to another asset class and have a reasonable level of confidence that it still will generally create a profitable outcome.

3. Robust

  • A robust strategy means that it holds for various definitions.
  • With options trading, you can generate money in various different ways. 
  • You can mold and create the options strategy that you want to use - options trading is not one-directional.

4. Investable

  • Compared to a few years ago, the trading cost has gone significantly down.
  • For most options traders, the investability of options has never been easier. 
  • The next leap in the investing world for options trading is going to be breaking down geography barriers - breaking down the borders between countries so that we have a truly global market for traders.

5. Intuitive

  • When trading options, it has to make logical sense why there is a tradeoff between risk and reward, and between the behavior of the buyer and the seller. 
  • Options trading is essentially a transfer of risk - very intuitive. 
  • The exchange of value and the transfer of risk is something that everyone does automatically — a very logical-based, intuitive reason why options trading will continue to exist moving forward in the future.

Option Trader Q&A w/ Dan

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 Dan:

One of the other websites said we should try to choose options with less than a 10% spread, and I'd like to compare this to implied volatility to volume, and I'm sure they're all related. Which one is the most important one to look at; spread, IV, or volume? Or do you need to look at all three, or just two of those?

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.

Thank You for Listening!

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. 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 three children.