Even after discussing and outlining the general process for how to pick the right stock options strategy in previous podcast and videos, I continue to get members who are confused about how it should work and the steps one should take. I ultimately believe that in most cases you might be over-thinking it, especially when it comes to choosing tickers and market direction.
Today's podcast should help clear the air while also giving you concrete examples using a simple Iron Condor strategy. Finally, we'll talk in-depth about the new requirement to have a dynamic approach to your trading via our Trade Optimization Software to tweak and perfect your entries.
Key Points from Today's Show:
- As a trader today, your approach has to be much more dynamic in the market.
- We have access to a lot more data, which requires a mindset shift.
- There is a big misconception that cheap premiums and limited profits lead to small returns.
- Limited profits and small returns do add up, as long as your trade setups are optimized.
- Your settings need to be adjusted and tweaked based on the market parameters.
General Framework for Picking the Right Strategy:
Start with liquid stocks and ETFs
- You cannot focus your time on securities that are not liquid.
- If it is not liquid, it will not generate enough consistent returns and trades.
- Pricing is not reliable when the security is not liquid.
Pick a stock, then pick a direction
- Question: is this security good for my portfolio?
- Goal is to get a good mixture of underlying securities.
- There is no perfect mixture; depends on how you want to set it up.
- Pick a direction: bullish, bearish, or neutral.
Find the implied volatility level
- Use software like Thinkorswim to determine implied volatility.
- Take the highest implied volatility setups first.
Pick a day to expiration timeline
- Decide upon an expiration date.
- Choose monthly, weekly, etc. cycles.
Enter data into the optimizer software
- Plug in direction, account, and optimization factor — returns or Sharpe ratio?
- The optimizer determines exactly how to set up the trade for a given ETF.
- In different market situations, you might have different strategy setups.
Stock Options Strategy Example
Iron Condor Scenario 1:
- 40 days until expiration, IV rank at 50.
Best setup: sell the short strikes at a 20 Delta with $10 wide wings.
Iron Condor Scenario 2:
- 60 days out, IV rank at 25.
Best setup: sell the 25 Deltas at each side with a width of $15 strikes wide.
*Little tweaks in your strategy can cause a 2X increase in returns.