I have a very large account and want to be conservative - how much should I allocate per trade?
1-2% of your equity per trade. Now, of course, you should allocate as little as possible to each trade, but this is a good guidepost to use. Remember that this business is all about making lots of trades so that the probabilities work themselves out over many occurrences. The higher the number of smaller trades you can make the more closely your targeted probability of success will be at the end of the year to the actual probability level you are shooting for. At Option Alpha, we trade a multiple six-figure account, and we currently allocate 1-2% of funds per trade. You’ll always see us reference the 1-5% allocation range throughout the website, but if you specifically have a larger account, you need to be more on the bottom end of this spectrum. 3-5% allocation ranges are typically needed for smaller accounts that have to allocation more per trade to get started - though never more than 5% per trade.
What type of order entry should I use - DAY or GTC?
When entering new trades, we suggest using DAY orders. Day orders are only good for that particular trading day, so we prefer to use these types of orders when whenever we are getting into or adjusting a position because we want to be confident in knowing exactly what price we are willing to accept. At the end of that particular trading day, I'm okay letting these orders expire if they are not filled because on the next trading day I can reset the pricing based on the new opening movement of the stock. GTC orders are great when you are trying to exit a trade and allow give you an automatic price point for removing the trade or closing the position. We will typically place GTC orders right after we enter a position to put automatically in the order to close the trade at a predetermined profit level in the future.
How many days until expiration should I be placing my trades?
During low IV markets, we should be targeting approx. 60-90 days until expiration. The longer time frame gives us more premium and also more time to for our directional assumption to play out. When IV is high, we want to come a little closer in on the trading timeline and focus on trading 30-45 days out. These options will be more liquid and see tighter pricing. Unless we are making an earnings trade, we generally will not trade anything shorter than 15-20 days. Making trades between 25 and 60 days until expiration is ideal so anything sooner than that, unless it's an earnings trade, is probably too short a time frame to make a trade. The optimal point at which time decay is the fastest for the least amount of overall risk is 45 days from expiration, and that is our target entry level for nearly all of the option selling strategies that we do outside of earnings trades.
How much money should I allocate for each trade that I make as a percentage of my account blue?
You will want to allocate as little money per trade as possible. The smaller your trade size, the less risk you have overall in your portfolio. We suggest that your trade size should be on a sliding scale between 1-5%. When trading high probability strategies like credit spreads and iron condors you can allocate slightly more to that trade as opposed to low probability strategies like calendars or debit spreads. In either case, you should never allocate more than 5% of your capital to a single trade, or series of trades in the same underlying as this would put you in an extremely risky position overall.
Should I enter just one leg of a spread and then, later on, going back in and enter the second leg?
Legging into trades is not suggested as a general practice. Selling the short leg of a credit spread or debit spread is a risky proposition because you have unlimited risk to start, and there’s no assurance you can get into the long leg for favorable pricing in the future. If you enter the long leg first, you are buying options which never works out anyway in the long run and again there is no assurance you can sell the short leg for favorable pricing. Therefore, it's best that when trading any spreads (credit spreads, debits spreads, iron condors, strangles, straddles, etc.) to enter all legs at the same time with one order. It might take slightly longer to fill the order but once it’s in you’ll know exactly what price you got and where you stand.
What extra choices do you use on your orders - OCO, TrailingStop, TrailStopLimit, etc.?
For nearly all of the trading that we do here at Option Alpa will use limit orders. This is because we want to be 100% sure of the price that we are getting into or out of the trade at. However, if for some reason we are unavailable during a particular trading session, we will use other types of contingent orders that we cover in our video library. Trailing stops and trailing stop limit orders are mainly used for stock trading purpose and you there is no need to use them to be a success with options trading.
With my job I do not have access to trade options during market hours - how can I make trades without being in front of my computer during market hours?
One of the best ways to learn how to make trades without being in front of your computer during market hours is to learn how to trade with contingent orders. Contingent orders allow you to set predetermined requirements before trades are entered or exited during the day. It takes a little bit more time to set up in the morning and in the evening but it's worth the effort if you truly want to be successful trading options but don't have the ability to monitor positions all day. Since we are not day traders but rather position traders with options on a monthly basis, most of the spreads and strategies we enter move fairly slow meaning that the pricing is not going to be drastically different from one day to the next. This should give you comfort in knowing that you can place a contingency order when the markets are closed and still see a good chance of filling that order the next day while you are at work.
What things should I check before I make another trade?
We believe there are 7 things you should be looking at before making any option trade. In our 7 step trade entry checklist, which you can download from the “Guides and Checklists” page, we suggest you look at the following; portfolio fit, liquidity, IV percentile, option strategy, strikes/expiration, position size, and future moves. The PDF guide goes into each one of these 7 areas in more detail plus we frequently have webinars on the order entry process that you can sign up for from the main dashboard.