As options traders we need to focus on the levers that really move the needle in terms of generating income and cash flow for our portfolio. There's no point in doing something if it doesn't contribute to the overall profitability of the portfolio right? It'd be like shoveling your driveway before a huge snow storm. Or washing your car before it rains. The wrong activity for the sake of being active serves no purpose. Today's show resets the foundation for options traders by focusing on the "big rocks" that should take priority. Get this right and you'll set yourself up for success.
Key Points from Today's Show:
The concept of "Big Rocks" is best explained when you think about filling up a jar.
- If you want to fill up a jar, you start by putting in the big rocks first because they take up the most amount of space.
- Next, you take smaller rocks to fill in all the spaces in between the big rocks.
- After that, you pour sand into the jar to fill in even more of the space that surrounds all the rocks.
- Then finally you pour water into the jar, which truly fills it up all the way.
- The key is that you have to take care of the big rocks first, before taking care of everything else.
1. Position Size
- Position size is all based on the ticker that you are trading.
- If your max position size in any ticker is $5,000, you can break that down into 5 trades of $1,000 of risk.
- This helps to spread the trade (and the risk) out over time and laddering into different positions.
- When you increase the frequency of your trades over time, market direction becomes meaningless.
- If you could only trade one time per year, that one opportunity has all the weight on it and you have to get it right.
- However, when you trade multiple times a month (trading 100's of positions and contracts) then each individual contract carries less weight.
- This allows you to gravitate towards the expected probabilities and the expected outcomes.
- The more often you trade, the better success you are going to have and the more market direction becomes meaningless.
3. Options Selling
- In any trade that you do, you have to be an options seller because option buying is a losing proposition.
- Implied volatility is always overstated long-term, and does not present itself until expiration.
- You have to wait for the IV over-expectation to mature.
- It requires patience and thick skin to be an option seller and let the market move against you in some cases.
4. Keep Your Portfolio Balanced
- Your options selling cannot be a one-directional.
- A balanced portfolio has the potential to be profitable in any direction within a range.
- Essentially, you want to be in a position where if the market moves or stays the same, you have a chance to make money.
- Always come back and revisit your portfolio balance to remain generally neutral.
5. Diversify Your Underlyings
- To diversify, you have to trade uncorrelated (as much as possible) securities.
- Spread out your risk so that you are not consolidated in any one industry, ETF, or sector.
- There is no magic formal for diversification; the idea is to trade several different tickers.
- The key is to spread the risk out over different tickers so that no one ticker controls your whole portfolio.
6. Have Directional Ignorance
- Don't assume that you can predict where the market is going - be ignorant!
- There is no standard in the market because it is always evolving and always changing.
- Build positions and trades that focus on the things that you can control instead.
- Time commitment and consistency is often a huge hurdle to cross over.
- However, none of the strategies will work unless you stick with it on a consistent basis.
- Trading is a long-term wealth-building system.
- Be consistent in your trading, because that is what it takes to be a successful trader.