OAP 061: Interview w/ Cameron Skinner – How He Earns 22% Annually Selling Options Every Day

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I’m just going to come right out and say it - today’s show is going to blow your mind. Not because we are talking about some crazy complicated strategy or options pricing model, but because we’re talking about a dead simple system for selling options every day that generates 22% per year since 2009. And what’s so fascinating for me, the host of the show, is how calm and cool our special guest is talking about his strategy. It’s just so mechanical and systematic it’s almost boring (well not for me but maybe some people might think so).

In today’s show I’ll be interviewing an incredible trader, real estate entrepreneur and patriot. You’ll hear how this former Army Officer who served in Iraq in 2003, subsequently awarded a Bronze Star, used his “options” experience in real estate to start selling covered calls. Eventually, he transitioned into selling credit spreads on the major indexes and continues to generate consistent income with an annual average return of 22% per year. So yeah, you should listen to today’s show - and of course forward it to at least 3 other people you think need to hear it right now.

About Cameron Skinner:

  • Cameron received his accounting degree from FSU in 1998, his MBA from Troy State in 2002, and he is licensed to practice as a CPA and tax accountant.
  • He was a former army officer who served in Iraq in 2003 and was awarded the bronze star for his service there.
  • Cameron is also a licensed general contractor as part of his real estate ventures. He has been a real estate investor for a long time and started trading options 15 years ago.
  • In this interview, Cameron discusses how he started trading cash covered calls and then transitioned into spreads, eventually. This is the natural progression that most people have, starting with covered calls and then slowly moving towards just trading options as a whole.

Interview Focus Points:

  1. His strategy is so simple — a “one by one” strategy.
  2. His exit strategy — Cameron takes a relaxed philosophy for handling trades when markets move against them.

Interview Takeaways:

  • Options trading has become a lot more convenient over the years, and making actual trades is much simpler than it used to be 15 years ago.
  • With the increased volume in the options market and because of the spreads being so tight now, you can get really creative with some of the more complex strategies.
  • The main reason to transition into more complex strategies, like credit spreads, is because with cash covered puts and covered calls you are limited on the income that you can make.
  • When trading, Cameron takes the stance of an insurance company by taking in a premium every month and if something dramatic happens he takes on the risk. However, he also gets re-insured by buying protection below that.
  • With this in mind, when trading on the SPY, 10% out of the money, he will sell a put and then buy protection 1 to 3 strikes below that. He will sell one and buy another every day — sell one 60 days out, and buy on 30 days out.
  • Cameron found that from looking through a lot of data and building up the experience when you are 10% out of the money, your best decay comes between 30 and 60 days.

Example:

Say you put a trade on and get $1,000 on the trade. It will decay down from $1,000 to $200, then you take it off and re-roll it and get another $1,000. So you are making $800 every month versus only making $1,000 every two months. The key is the ability to increase the velocity of your money and the number of times you can roll it over. The ability to have a higher win rate and to capture that premium earlier definitely works out in the long-term.

  • Cameron chooses a major index to trade on depending on how much premium he can get, 10% out of the money. There is huge volume in those indices, so you can always move out of the positions or roll them out relatively easily, plus, the spreads are also very tight.
  • To hedge against a bad trade or market move, Cameron opts to stick with his original strategy. He will still buy it back at 30 days out. You ultimately may have to buy back a couple of spreads for dramatically more than what you sold them for, but at the end of the day it all works out.

Example: 

If you put it on at $1,000 and there is a 10% move, you might buy it back for $6,000. But then at the same time, you put another one out, 10% out of the money, 60 days out. So then you will get $1,000 premium. Usually volatility spikes, so then the premium increases and you may even get $2,000 for the same exact trade just for the next month.

  • The best approach is to try and mitigate most losses, but to keep in mind that statistically, every 20 months you will lose money, and every five years you may take a really bad hit.
  • Put yourself in the mindset that you are going to lose money every once in a while, but if you set your strategy up correctly and you really look at the probabilities, then you will take more premium in than you will ever pay out.
  • When entering a trade, in regards to allocation, Cameron normally has 60-70% on and will keep 30-40% in cash to prepare for the big loss events that are bound to happen.
  • When volatility spikes up, Cameron's strategy is to put a credit spread on the call side and then just wait for the volatility to come out of the market, and then take it off. In these trades you want to put them on pretty close to the money and 90 to 100 days out to give you plenty of time for it to work.

Example: 

During Brexit the volatility spiked. Cameron put on several credit spreads, waited until things calmed down, and then took them off.

  • As options traders, the key is to look at the probabilities and make strategic assessments on how to make money by selling premium.
  • If you are going to be selling options you need to make sure that you have plenty of reserves because there will be those one-off events with huge moves in the market that you will need to have capital at the end of those moves to get back into the market.
  • You have to look at options trading as a long-term strategy, and you have to set up your strategy to be realistic, factoring in losing months.

Option Alpha Podcast Show Notes[FREE Download] Podcast Show Notes & Transcript PDF: No time to read the show notes right now? We've made it incredibly easy for you to save time by giving you instant access to the complete digital version of today's show. Click Here to Download Your FREE Copy ?

Free Options Trading Courses:

  • Options Basics [20 Videos]Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

Option Trader Q&A w/ Ellie

Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. This week's question comes from Ellie who asks:

1. Which technical indicators and parameters are you using after the signals report?

2. Do you know of any good overall technical analysis books or webinars or websites as a good source to learn?

3. Do you look at any sort of fundamentals before making a trade?

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
  • CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
  • APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
  • IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
  • XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
  • AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
  • COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
  • GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

Thank You for Listening!

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.