Most newbie option investors start trading with small brokerage accounts. Whether by choice or necessity, the average investor opens up their account with approx $10,000 according to most brokers. And while this isn't a small amount of money by any means, it does limit your ability to trade more aggressive options strategies like straddles and strangles.
In today's podcast, I want to help you understand how you can still trade these more aggressive and profitable options strategies (synthetically with small tweaks) even if you've got a small account or are trading in and IRA. Specifically, I'll answer a bunch of common questions I get from new PRO members including; What if I can't trade straddles and strangles? How do I adjust the trading alerts to fit my portfolio? Should I scale position sizes down or up (# contracts)? What about spread width - go wider or more narrow? What if the commissions are eating too much into the profit after closing at 50%?
Sure, it might take a little more time to grow and mature an account but don't jump ahead or try to "game" the system. Eventually, the math and probabilities always play out the way they should, and you've got to learn how to build profitable strategies today if you plan on still being around in five or ten years from now.
Key Points from Today's Show:
- Options trading is a long-term game that requires strategy and patience.
- Having a high level of patience in options trading can make or break your success with your trading strategy. Many positions require time to show the types of returns that traders are after.
- The results that you are trying to achieve may not be available now that will be in the future. If you try to game the system, you will see the consequences later on.
- Two months is not a long term strategy. Although the negative effects may not be visible now, they will become clear later on.
Trading Strangles and Straddles; to do or not?
- Strangles and straddles generally have higher win rates and shorter durations for trading time. These positions are not held for long periods of time, they make more money, and are really easy to adjust.
- However, sometimes trades cannot be done with either strangles or straddles. The best option in both cases is using a "synthetic cousin” to straddles and strangles.
- In the case of a straddle, it is a short at the money call and a short at the money put. So if a stock is trading at $100 you would sell $100 strike put and the $100 strike call, and taking some of the premium and buying further out the wings to create a risk-defined position.
- Strangles are selling options far out on either end. With a strangle you might only be able to buy options $2 or $3 past your short strike because in this case, your short strike is already $5 or $6 out from where the stock is trading.
Adjusting Alerts to Fit Your Portfolio.
- You have to keep your portfolio or position size in mind and then start working backward from this. Remember to scale up or scale down your position to fit your specific individual portfolio size.
- If you are working with a smaller portfolio, scale down the number of contracts first. If you still have too much risk for that one trade, then you need to narrow down your spread width.
- A narrow spread will have less risk, but also less profit potential because it will cost more money to buy the options that are tighter in. Be patient and realize that this strategy will not prohibit you from growing; it will just scale back the trade to fit your account size.
Avoiding High Priced Commissions That Eat Into Your Profits.
- The first strategy would be to trade less contracts and go wider in your spread, especially when your account is still within the 1 to 5% allocation in your account size.
- Overall, take in more money but on less contracts and hopefully you can also get your commissions reduced, and make the spread a little bit wider if commissions are eating into it.
- Convert most of your trades to becoming iron butterflies, which takes in a lot more premium for that trade. This will definitely sacrifice your win rate, but for the time being, you will be collecting a lot more money with a positive outcome.
- Focus on collecting as much premium as you can to cover the commissions until you get more money in your account, or until you reduce your commission costs.
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/ Doug Hebble
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 Doug who asks:
If you already have a 3% allocated position in SPY, does this limit you to creating a second position in SPY to 2% until the previous position is closed? Or, because these positions are separate, can you allocate 3% to each? What is the best way to think about per-trade allocations when you are laddering positions, like EWW and TLT recently?
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:
- EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
- VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
- DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we'll discuss why I'm adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
- COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
- TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
- MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
- IBB Call Debit Spread (Opening Trade): We'll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
- TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly - even still the drop in implied volatility helped generate a $330 profit for us.
- XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
- COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
- EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
- IBM Iron Condor (Earnings Trade): Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
- SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.
Thank You for Listening!
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