Do you have a preset way to scan for new trades?
Yes. But first you have to understand that there are millions of ways to scan for different trades, and there is no one-size-fits-all approach. At Option Alpha, we always prefer to scan for the “low hanging fruit” first before anything else. This means we are looking for four types of things to alert us to possible trades. First, big percentage moves. Which stocks are moving up or down the most on a given day? Does that present a trading opportunity? Second, highest IV rank stocks first. Which securities give us the greatest edge for implied volatility and hence are the best candidates for option selling? Did this list change from yesterday - are there new stocks we haven’t traded yet? Third, earnings candidate. Are there any stocks which have earnings today or tomorrow with great IV rank that could present a unique one-day opportunity for us? Finally, technically oversold/overbought. Noticeably this is last and least important for us. Which stocks have reached new technical signal levels that we could take semi-directional bets on moving forward. You can do all the scanning you want but at the end of the day you just need to narrow and streamline your focus in finding the setups that you want to trade for your account. You can learn more about how we can help streamline your process for finding good trades as well as suggested options strategies based on IV rank by checking out the Option Alpha watchlist.
How can I use technical analysis to help find better trades?
As we've outlined in our ground-breaking research SIGNALS, which backtested 20 years of technical analysis data, we believe that technical analysis is a decent tool for finding trades on a long term basis. It has very little predictability in a short term or day trading range, but you can use the signals we found in this research report to help determine and uncover better trading opportunities. Namely, the most consistent and profitable signal setups were found when using targeted momentum and price oscillators.
Is it more important to get the direction right or the option strategy?
Hands down, without a doubt, the option strategy that you choose is much more important than choosing the direction of a stock correctly. On a stock picking basis, we are all going to be 50-50 traders long term. Even the biggest banks and more widely “respected” investment firms are no better than 50-50 in their stock picks, so what makes you think that you’ll be any better? We have absolutely no long term edge in picking the direction of a stock and the sooner you realize that your edge as an options trader is in implied volatility and the option strategy that you select, the more successful you'll become. For this reason, we put most of our emphasis on options strategy selection based on where IV rank is currently.
How often should I be placing new trades each week or month?
We suggest that you should be as active as possible. This also means that you should not be forcing trades into the market just for the sake of trading and being active, but rather whenever the market is favorable and implied volatility is high your activity level, or the number of trades you should be placing, will increase considerably. And of course, on the other hand, this means that when the market is experiencing low implied volatility or sideways movements, you should be less active and not placing as many trades as our edge is not great as when implied volatility is low.
When should you not make a trade and sit on the sidelines?
When you have no defined edge. There are a lot of scenarios in which you should not make a trade but if I could summarize the top two scenarios it would have to be when implied volatility is low and when you do not have an assumption on the future direction of the stock. If you are unable to get some directional assumption (bullish/bearish) AND if the underlying IV rank is low, then your best trade is NO trade at all and to sit in cash. It’s always a smart move to remain on the sidelines during times like these because over trading when your edge is low always leads to unhealthy portfolios.
What do you look for when scanning for new trades on your watch list?
The first thing I look for are stocks that have recently crossed over the 50th IV rank level. Any new stocks that recently saw a rise in implied volatility are immediate candidates for a new trade - again, because this is where our edge is as options traders. The next thing that I look for is big moves in the underlying stock. What are stocks moving up big today or down big today that my present a good opportunity to make a trade? Sometimes these outliers can lead us into making a trade around the recent news event that caused the jump/drop. These are the two main things I look for each day when I go hunting for new trades. Otherwise, I stay away from most setups that don’t offer the “low hanging fruit” we are seeking.
Should you trade options heading into an earnings event?
Depends. We believe that you can trade the options at the actual earnings event or the day before but prefer not to trade short premium or short volatility strategies heading into an earnings event. We see a rise in implied volatility heading into earnings events and although it might seem that you could trade long volatility strategies, we do not often find that this works because not all of the time will you see that rise in implied volatility happen at consistently the same level heading into the announcement. Instead, we prefer to be more focused and targeted on our strategy and only trade the earnings implied volatility crash that we know will happen after the company announces earnings. This also means that we're in the trade for shorter durations (or time) and have less money exposed to the market.
How do you determine which option strategy is best to use for a particular situation?
This is a very tough question to answer, a one that we have detailed in many video training and inside of our ultimate options strategy guide. At Option Alpha, we determine strategy by looking at two things. First, which direction do you assume the stock is going; bullish, bearish, or neutral? Second, where is implied volatility currently; high or low? By answering these two questions, we can narrow down the huge universe of possible strategies to just those that work best in that particular situation. For example, if you believe that a stock is heading higher (bullish assumption) and implied volatility is currently high, you can narrow the universe of possible strategies down to either a bullish put credit spread, bullish skewed butterfly or a short naked put below the market. All of these strategies may be suitable choices for this particular setup, and each one will vary depending on your individual account and risk profile. For more information, please check out our ultimate strategy guide and register for one of our upcoming webinars on the option strategy selection process.