On this date, I have decided to blog about my learning experiences in Options Trading,
I want people reading this blog to learn the easy way to trade Options without the need to pay and learn from schools which charges a few thousand dollars to learn Option Strategy. All the information stated here is a consolidation of what i have learn from Options Trading Books and a lot more from Tastytrade.
Tasty trade was created by Tom Sosnoff, he is the co-founder of Thinkorswim and he is a great teacher of Options Trading, He sold Thinkorswim to TD Ameritrade and founded tastytrade, the website has many videos and slides that teach about Option Strategy. Do explore the website for wealth of information in Options Trading.
I started to learn Options Trading about 2 years ago when I have decided on my retirement job, that is to be Trading in the market to earn sufficient monthly living expenses. Why I choose Options instead of other products or derivatives is because of Statistical information on Trading Options. Just like watching Texas Holdem games on the TV, where they display probability of a winning hand. It opens a whole new dimension of trading the market for me.
In Options Trading, it is a combination of Trading Stocks and CFDs, margin account (so do not overtrade).
Website which I visit frequently to reinforce my learning includes:
Tastytrade Videos in Youtube
Books that I have read includes:
Trading Options for Dummies by Joe Duarte
The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets by Michael Gross & James Cordier
Options Exposed Playbook by Don A Singletary
Option Trading for the Institutional Investor by Michael C. Thomsett *
*Best Reading Material thus far, however need some options experience before reading it.
I have also paper trade for one year and have learn some useful lessons;
1. Not to trade too big a size; drawdown is too great to swallow.
2. Take trades only if volatility is High, > 50 IV Percentile
3. Have a larger number of trades and small size to allow probability to be working for us.
4. Price of Stocks or Index is not mean reversing, only mean reverting components to an option is Volatility, thus as Option Seller, we have to sell only when it is at High IV Percentile.
5. Correlation in Market, our portfolio should be made up of non-correlated Underlying.
Options is a zero sum game, it means someone will win and the other party lose, so the brokers will make all the money. We should always negotiate low cost of trades with the brokerage if we trade quite a large number of Options a month to minimize our cost.
Should at least start with a big enough portfolio, that is not to bet big, but to have sufficient Outstanding trades to make the time invested worth the while. Too small an account size will make the effort to trade not worth the time spent. My recommendation is at least 100K, my profit target is 1% a month so for the time spend, I want to get about $1,000.
Options Trading is not a get rich quick mechanism, so if you want to get rich quickly, rather to visit a casino. In Singapore, we also have Options in SGX, they are called Warrants, however Warrants are sold by institution only, we can only buy Options but not sell options in Singapore. I trade Options in the US Market (usually sell to open, buy to close), large liquidity and many Options Exchange.
To make things simple, I only want to cover 2 strategies, I feel that it is the best way of trading Options. Sell Naked Puts and Sell Covered Calls.
Selling Naked Puts.
1. Look for a Index or Stock that provides a great Dividend Yield, about 5-6% and has Option Market
2. Dividend Pay Out Ratio is not greater 40% of earnings.
3. Fundamentally sound, good ROE (optional, unless you goes closer ITM for opening the trade)
4. IV Percentile is >50%
5. Open Interest is High (not necessary if it is Naked)
6. Sell Naked Put at the Price level for Options that is expiring in 45 - 30 Days.
7. Decide on a Price Level that you are willing to hold the shares, as far OTM as possible. (should not go closer than 15% ITM)
8. Keep Trades Small.
Selling only on Index and Stocks that provides good dividend, so that if any case it become a losing trade and it resulted in you holding the stock/index, it can still provide good annual dividend. This is a "Rich Man strategy" used by Warren Buffet.
https://www.gurufocus.com/news/256254/naked-short-put-options--warren-buffetts-little-secret
Sell Covered Calls - Covered Calls are sold on Stocks that is in your Portfolio.
1. Decide at a price level that you are willing to sell your stock for Profit.
2. Sell when Volatility is High (High IV Percentile)
3. Keep changing Price level every month or every other month.
4. Sell options that will expire in 45 to 30 days.
This method is a Investor way of holding the stock, earning annual dividend and to lower the cost basis of the shares on monthly or bi-monthly basis by collecting premium from the Options sold.
That is why a portfolio of sufficient size is worth the while to sell options.
Managing Winners:
Take Profit when it is >50% profit, re-open new trades.
Manage losing Trades with these few possibilities:
1. Repair when it is two times the Max Profit before it becomes ITM.
2. Don't Repair, either sell the porfolio stock for Covered Calls, Exercise the Option at expiry, resulting in holding the stock (Naked Put), usually I choose this method.
The above two strategies is the easiest to understand and ways to trade Options.
Other strategies that also work, however they are more to manage risk, but incur a large sum of commission.
1. Strangle (Naked call & put as a PAIR Trade)
2. Vertical (Sell Leg and buy leg)
3. Iron Condor (Vertical on Both Legs)
Collecting Premium through selling a Bear Call Vertical Spread or selling a Bull Put Vertical Spread does reduce the Margin requirement, therefore for smaller account, it is a preferred method.
My advise is to do paper trading for a year before using real money, keep learning new things every day till you can talk options and risk like how you can recite A to Z. Understanding Options will open up a new world to trading.
To be successful, you will also need to know how to manage portfolio margins, not to exceed 50% of your portfolio size. Each trade should never risk more than 1% of your portfolio.
If you are not successful after one year of paper trade, then you can look for a teacher to teach you about Options Trading. Try to put in one trade every trading day, the more you trade the more confident you will become. do repair trades while you learn, then you will understand why it is better just to close a trade, collect or sell the stock or look for another underlying that is at high IV Percentile to trade in.
The next few blogs, I will share the trades that I have made on a monthly basis. It will also record why I took the trade and why i took profit or loss.
You can see if these strategies is what you should be exploring into.
Options Exposed Playbook by Don A Singletary
Option Trading for the Institutional Investor by Michael C. Thomsett *
*Best Reading Material thus far, however need some options experience before reading it.
I have also paper trade for one year and have learn some useful lessons;
1. Not to trade too big a size; drawdown is too great to swallow.
2. Take trades only if volatility is High, > 50 IV Percentile
3. Have a larger number of trades and small size to allow probability to be working for us.
4. Price of Stocks or Index is not mean reversing, only mean reverting components to an option is Volatility, thus as Option Seller, we have to sell only when it is at High IV Percentile.
5. Correlation in Market, our portfolio should be made up of non-correlated Underlying.
Options is a zero sum game, it means someone will win and the other party lose, so the brokers will make all the money. We should always negotiate low cost of trades with the brokerage if we trade quite a large number of Options a month to minimize our cost.
Should at least start with a big enough portfolio, that is not to bet big, but to have sufficient Outstanding trades to make the time invested worth the while. Too small an account size will make the effort to trade not worth the time spent. My recommendation is at least 100K, my profit target is 1% a month so for the time spend, I want to get about $1,000.
Options Trading is not a get rich quick mechanism, so if you want to get rich quickly, rather to visit a casino. In Singapore, we also have Options in SGX, they are called Warrants, however Warrants are sold by institution only, we can only buy Options but not sell options in Singapore. I trade Options in the US Market (usually sell to open, buy to close), large liquidity and many Options Exchange.
To make things simple, I only want to cover 2 strategies, I feel that it is the best way of trading Options. Sell Naked Puts and Sell Covered Calls.
Selling Naked Puts.
1. Look for a Index or Stock that provides a great Dividend Yield, about 5-6% and has Option Market
2. Dividend Pay Out Ratio is not greater 40% of earnings.
3. Fundamentally sound, good ROE (optional, unless you goes closer ITM for opening the trade)
4. IV Percentile is >50%
5. Open Interest is High (not necessary if it is Naked)
6. Sell Naked Put at the Price level for Options that is expiring in 45 - 30 Days.
7. Decide on a Price Level that you are willing to hold the shares, as far OTM as possible. (should not go closer than 15% ITM)
8. Keep Trades Small.
Selling only on Index and Stocks that provides good dividend, so that if any case it become a losing trade and it resulted in you holding the stock/index, it can still provide good annual dividend. This is a "Rich Man strategy" used by Warren Buffet.
https://www.gurufocus.com/news/256254/naked-short-put-options--warren-buffetts-little-secret
Sell Covered Calls - Covered Calls are sold on Stocks that is in your Portfolio.
1. Decide at a price level that you are willing to sell your stock for Profit.
2. Sell when Volatility is High (High IV Percentile)
3. Keep changing Price level every month or every other month.
4. Sell options that will expire in 45 to 30 days.
This method is a Investor way of holding the stock, earning annual dividend and to lower the cost basis of the shares on monthly or bi-monthly basis by collecting premium from the Options sold.
That is why a portfolio of sufficient size is worth the while to sell options.
Managing Winners:
Take Profit when it is >50% profit, re-open new trades.
Manage losing Trades with these few possibilities:
1. Repair when it is two times the Max Profit before it becomes ITM.
2. Don't Repair, either sell the porfolio stock for Covered Calls, Exercise the Option at expiry, resulting in holding the stock (Naked Put), usually I choose this method.
The above two strategies is the easiest to understand and ways to trade Options.
Other strategies that also work, however they are more to manage risk, but incur a large sum of commission.
1. Strangle (Naked call & put as a PAIR Trade)
2. Vertical (Sell Leg and buy leg)
3. Iron Condor (Vertical on Both Legs)
Collecting Premium through selling a Bear Call Vertical Spread or selling a Bull Put Vertical Spread does reduce the Margin requirement, therefore for smaller account, it is a preferred method.
My advise is to do paper trading for a year before using real money, keep learning new things every day till you can talk options and risk like how you can recite A to Z. Understanding Options will open up a new world to trading.
To be successful, you will also need to know how to manage portfolio margins, not to exceed 50% of your portfolio size. Each trade should never risk more than 1% of your portfolio.
Example
: $100,000 Portfolio
Max Risk 1% Per Trade = $1000
Cost of 1 contract $0.80 x 100 (Lot size is 100 for each 1 stock / ETF contract) = $80
Cost of each trade = Max Risk/ Cost of each contract = $1000/$80
Max contract per trade = 12 contract
If you are not successful after one year of paper trade, then you can look for a teacher to teach you about Options Trading. Try to put in one trade every trading day, the more you trade the more confident you will become. do repair trades while you learn, then you will understand why it is better just to close a trade, collect or sell the stock or look for another underlying that is at high IV Percentile to trade in.
The next few blogs, I will share the trades that I have made on a monthly basis. It will also record why I took the trade and why i took profit or loss.
You can see if these strategies is what you should be exploring into.
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