How to Pick the Right Stock Options Strategy for Wealth Building
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.