Welcome to Wall Street, Main Street and Me

Thursday, November 28, 2013

Are You a Poor Newbie?

I'm running into some financial problems and will likely have to dip into my trading fund to deal with real estate issues. This gave me great pain, as I love trading and don't want to stop~! Plus I use it to enhance my monthly fixed income!

It occurred to me that there are probably a LOT of new,young or inexperienced wannabe traders out there who haven't stuck a toe in the water and opened a brokerage acccount yet, so I thought I might do a bit of footwork for them. You need to research the difference between "cash" and "margin" on your own, and naked options are mentioned all over my blog. (an options strategy that offers high probabilbities with high risk).

I couldn't remember the exact rules for what size fund you need to have on Think or Swim, so I asked!

Here's the helpful reminder for those of you with "Tasty Bite" size pocketbooks, but still might want to trade.

Here's a conversation with a TOS Support person:

------- Wednesday, November 27, 2013 -------

11:09 trading diva: Are there rules about how large a fund you have to have to trade at TOS? I'm wondering what the smallest fund I could use?

11:09 _BradM: depending on what you want to do:

11:09 _BradM: if you just want a cash account, there is no minimum

11:10 _BradM: if you want to have a margin account, the minimum is $2K

11:10 _BradM: if you want to sell naked options, the minimum is $5K

11:11 trading diva: Yes, this is the info I need. Thanks.

11:11 _BradM: you're welcome


Sunday, November 10, 2013

Pattern Day Trading regulations - NASTY business

I haven't posted a lot lately because my trading fund has been basically shut down by a wonderful little SEC regulation for 90 days. It has brought me to my knees, because I'm not allowed ANY new trades and can only close existing trades OR until I bring the account up to $25K. It is a disgusting regulation that targets the small trader with the smallest funds and is UNFAIR. It's been passed by Congress to protect the small trader from herself. Big Brother. Thank you very much.

Oh! I've gotten some emails asking me WHY I day trade! Let me be clear...I do NOT day trade. I got CAUGHT in this lousy regulation by simply doing a few earnings plays (selling premium and buying it back when it surprisingly went into profit BEFORE earnings, and instead of holding it overnight, I bought it back for a profit ON THE SAME DAY. Without knowledge of this regulation, I was "day trading" four trades without any intention to day trade at all. Think or Swim should give a warning on said trades (I understand E Trade does) but doesn't.

To explain the damned reg, I've copied and pasted from Wiki and other websites. Bolded sentences, mine.


Pattern day trader is a term defined by the U.S. Securities and Exchange Commission to describe a stock market trader who executes 4 (or more) day trades in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. As the trader is exposed to the danger of day trading and intraday risks and potential rewards, it is subject to specific requirements and restrictions. A FINRA (NASD) rule that applies to margin, but not to cash accounts.

A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account. The required minimum equity must be in the account prior to any daytrading activities. Three months must pass without a day trade for a person so classified to lose the restrictions imposed on them. Pursuant to NYSE 432, brokerage firms must maintain a daily record of required margin.

A non-pattern day trader (i.e. someone with only occasional day trading), can become designated a pattern day trader anytime if they meet the above criteria. If the brokerage firm knows, or reasonably believes a client who seeks to open or resume an account will engage in pattern day trading, then the customer may immediately be considered a pattern day trader without waiting 5 business days.


If you open and close a trade in the same day, it is a day trade. If you buy in one trade and sell the position in 3 trades, that is still considered 1 day trade. Three more day trades in the next 4 business days will freeze your account (you can only close existing positions) for 90 days, or until you get $25,000 cash into your account, whichever comes first. This also applies to options. Forced sales of securities- for instance through a margin call- still count towards the day trading limits.


While all investments have some inherent level of risk, day trading is considered by the SEC to have significantly high risk. The Securities and Exchange Commission (SEC) makes new amendments to address the intraday risks associated with day trading in customer accounts. The amendments require that equity and maintenance margin be deposited and maintained in customer accounts that engage in a pattern of day trading in amounts sufficient to support the risks associated with such trading activities. In addition, the SEC believes that people whose account sizes are less than $25,000 may represent less sophisticated traders, who may be more prone to being misled by advisory brokers and/or tipping agencies. This is along a similar line of reasoning that hedge fund investors typically must have a net worth in excess of $1 million. In other words, the SEC uses the account size of the trader as a measure of the sophistication of the trader. THIS IS SO WRONG! This rule essentially works as a stop-loss on an unsophisticated traders account, disabling the traders ability to continue to engage in day trading activities.

One argument made by opponents of the rule is that the requirement is "governmental paternalism" and anti-competitive in a sense that it puts the government in the position of protecting investors/traders from themselves thus hindering the ideals of the free markets. Consequently, it is also seen to obstruct the efficiency of markets by unfairly forcing small retail investors to use Bulge bracket firms to invest/trade on their behalf thereby protecting the commissions Bulge bracket firms earn on their retail businesses.

Another argument made by opponents, is that the rule may, in some circumstances, increase a trader's risk. For example, a trader may use 3 day trades, and then enter a fourth position to hold overnight. If unexpected news causes the equity to rapidly decrease in price, the trader is presented with two choices. One choice would be to continue to hold the stock overnight, and risk a large loss of capital. The other choice would be to close the position, protecting his capital, and (perhaps inappropriately) fall under the rule, as this would now be a 4th day trade within the period. Of course, if the trader is aware of this well-known rule, he should not open the 4th position unless he or she intends to hold it overnight. However, even trades made within the three trade limit (the 4th being the one that would send the trader over the Pattern Day Trader threshold) are arguably going to involve higher risk, as the trader has an incentive to hold longer than he or she might if they were afforded the freedom to exit a position and reenter at a later time. In this sense, a strong argument can be made the rule (inadvertently) increases the trader's likelihood of incurring extra risk to make his trades "fit" within his or her allotted three-day trades per 5 days.

The rule may also adversely affect position traders by preventing them from setting stops on the first day they enter positions. For example, a position trader takes 4 different positions in 4 different stocks. To protect his capital, he sets stop losses on each position. There is then unexpected news that adversely affects the entire market, and all the stocks he has taken positions in rapidly decline in price, triggering the stop losses. The rule is now triggered, as 4 day trades have occurred. Therefore, the trader must choose between not diversifying and entering no more than 3 new positions on any given day (limiting their diversification, which inherently increases their risk of losses) or choose to pass on setting stops due to fear of the above scenario, a decision which also increases the risks to higher levels than it would be present if the four trade rule were not being imposed.

I'm mad as hell, but there's not a damned thing I can do about it.

Oh, good, here's a little rant by Tom Sosnoff about the ludicrous Big Brother controls around the little trader, including the rant of my own above. Tom Sosnoff - What Else Ya' Got?


Monday, August 12, 2013

Other Reasons I Love Tasty Trade

I've blogged extensively on Tasty Trade's philosophy of selling volatility and playing the probabilities of being in the money, and probabilities of success. Such information is invaluable to an options seller, especially if you are contrarian.

But there are other reasons that Tasty Trade appeals to me so much.

1. Trade Small, Trade Often. This mantra has big payoffs as my major losses in options have been when I was in too many contracts, and too few trades. (the all my eggs in one basket problem). When you operate with a limited fund, it is tempting to go for the big Apple trade or something similar, but the smart thing is to do a LOT of small trades with (appropriate) varied strategies (depending on the volatility and underlying), and keep a lot of trades going all the time. It's a numbers game.

2. It's a Numbers Game. This is a very exciting area of options. If you flip a coin, you have a 50 - 50 chance of it being heads, and a 50 - 50 chance of it being tails. If you are a statistician or/and mathematician, you will be familiar with random walk market theory. For us novices, Wiki tells us that the random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus cannot be predicted. Think about that! If it cannot be predicted then WHY are all of these people learning chart indicators and chart oscillators and the hundreds of variations on chart predictions. It's because (obviously) that they believe that the market CAN be predicted, and believe that following the trend will produce results. Tasty Trades' research team has done enough analysis (see their entire archive of "Market Measures" videos) to prove to me otherwise. I'm in the random walk corner.

3. Standard Deviations. The volatility of an option is by definition equal to a 1 standard deviation expected move. So if I sell a put 1 standard deviation below the current stock price, it has an 84% probability of expiring out of the money. That kind of information gets me a lot more confident than the possibility of a trend continuing. As I said, a numbers game.

4. More Risk? Better Probability of Success! The TRUTH about naked options is inspiring. One would have you believe that you will lose your mind, give away the farm, and let the Devil take your soul if you sell (short) a naked put or call. UNLIMITED RISK~!~ the options class teachers warn. They have everyone so scared that all the real successful trading is kept in the hands of professionals who KNOW that the brokers estimate your risk on every trade, and the amount of margin they hold for your naked options is the actual risk. It is not unlimited. Indeed it is quite limited. And the more margin it takes, the higher the risk. The higher the risk, the more likely the trade will be successful. Unless of course you are an IDIOT and don't know how to trade at all. Tasty Trade has videos on just what the mathematical truths are about selling naked options and strangles vs. selling defined risk trades (like iron condors and credit verticals). The naked strategies are incredibly more successful, historically, over any reasonable period of time.

5. Underlyings that Entertain me One of the bonuses of trading the Tasty Trade way is that their philosophy does not work unless you use underlyings that have high volume, high volatility prospects, and good premium. This means that selling options on staid little stocks that trades less a million shares per day is a waste of your time. It also means that I get to trade Apple, Priceline, Google, Chipotle, Bidu, etc. ALL fun, sexy, and rich premium underlyings. If you want to enjoy trading, keep it interesting. if you buy LEAPS on Proctor and Gamble expiring in 2015, you can go to sleep until then for all the action you'll get. To say nothing of the loss of real income on more volatile underlyings. Selling options is the only way to go in my opinion.

If any or all of this sounds crazy to you, and you think you know options, I urge you to tune in to TastyTrade.com on your computer, take a look through their archives, (ALL FREE) and watch the live shows as well as the teaching videos. You'll thank me some day.


Saturday, April 27, 2013

The Myth of stocks "Filling the Gap"

Tom Sosnoff of Tasty Trade is working hard at changing retail option trading, and exposing the myths of Wall Street.  He has set up an incredible research team to examine historical data and to mathematically do calculations on a whole number of things.  This data is collected on the Tasty Trade.com website as "Market Measures."  His latest (4/26/13) presentation "Mind the Gap"  involves the time honored belief system that when stocks gap up or down, they will retrace and fill said gap.   Goodness knows I've always believed that, and yes, I've even traded on that assumption.  Every chartist will teach you that.

They took a sample of 25 stocks from their own well used watchlist (liquid, tradable stocks) and looked for large moves that produced gaps during the last 3 years. They were only interested in price moves that were larger than 1 Standard Deviation expected move (either up or down) which produced gaps in the charts of these stocks.

There's a lot of ways to calculate one Standard Deviation (I've written extensively about it already) but for this study, they looked at the closest expiration option chain, and took the ATM Straddle price (on the day before the gap) times * 85% = estimate of 1 Standard Deviation.

On this sample of 25 stocks, they discovered a total of 36 gaps that met the criteria of a greater than 1 SD move. Then the job was to see if the stock filled the gap over the next 30 days, and then over a 60 day period. (30 and 60 were used as those are the TastyTrade typical timeframe for trading options.)

I find the results astonishing. While traders walk around thinking stocks ALWAYS fill the gap (and of course they can and do sometime over a period of many months or years) but for a 30 to 60 day time period, they only fill gaps approximately 15% of the time. If you think your chances of that gap filling is 50-50, think again! Here's a recap of the actual data figures for a one standard deviation gap:

Okay, you might say, but what if it gaps down MORE than one standard deviation. Maybe a larger gap means a more certain retracement!? Tom's researchers thought of that too, so they continued testing. So they looked at 1.5 standard deviation, and 2.0 standard deviation move.

Compare the number of times the gaps filled, when the gap was even larger and you can see that the gaps filled even LESS often.

The 2 Standard Deviation move (a HUGE gap) produced the following statistics for this study, even smaller probabilities:

Correction: Both of the last two slides have typos on them, should show 30 days and then 60 days. (not 30 days/30 days)

This study shows 2 things:

1. The chances of filling that gap, in even up to 60 days, is less than 1 in 5.

2. As the gap increases in size, the likeness of retracement decreases.

Obviously this study does not mean that gaps might not fill on a different set of stocks in a different set of numbers. Obviously gaps DO fill, and you can easily look at a chart to prove it. But what's the probability? So this is not a NEW belief system to replace the old one that gaps always fill. What it is is a caution for you to stop and consider the probabilities before mechanically trusting such belief systems in your trading.

Sosnoff doesn't believe in trading by technicals or fundamentals. He believes in a probability/volatility game and to learn more of his amazing studies, see the archives on Tasty Trade.com.


Monday, April 15, 2013

What makes Tasty Traders Different than Other Traders?

I often mention Tasty Trade to people who say they are traders, but their interest  in what I'm trying to say is as vague as if I was another cold caller on the phone offering a new investment scheme.

Tasty Trade is the antithesis of investment schemes.  I was thinking the other day that I need to organize (in my mind) just why I love this approach to trading so much, and need to define what are those differences from the rest of the options universe.. IT IS AN ENTIRELY NEW APPROACH if you are watching TV financial gurus, or subscribing to Option schools and mentors.  Obviously many other professional traders know and use these techniques, but they aren't sharing it with the retail public traders.  This is where TastyTrade excels.  They truly want to educate people, not grab their money.

WHY BELIEVE ME?  I know everyone is trying to tell you how to trade.

The answer is:  I'm not trying to sell you anything.  And I'm earning approximately 5% per month on my capital using this trading philosophy..  That should make you sit up and take notice.  I never did that trading with any other system.  In fact, all I did was lose money.

So here's my attempt at letting you know what they represent, and how they work:  (the real deal is easy to obtain by simply opening a ThinkOrSwim account through the TastyTrade website, for free, and see the fabulous archives of endless information therein).

  •   Nobody else can handle your money better than you can.  If you don't know how, learn. 
  •  The stock market goes up and down.  Nobody can predict which direction it is going, not with charts, not with fundamentals.  It's a 50-50 crap shoot unless you play probabilities.  The news doesn't matter, the talking heads don't matter, the experts don't know any more than you do about the market's future.  Only mathematical probabilities can give a trader an edge.  (There is a multi billion dollar industry out there trying to convince you that you NEED their services.  You don't.)
  • Mathematical probabilities are based on the strategy selected for the circumstances, and the NUMBER OF OCCURRENCES.   In other words, the number of trades you make increases your probabilities of success. (think flipping coins. Flip one coin for a 50-50 chance of success, but what about 10 coins?) There are books to be read on probabilities.  Read them!  So the Tasty Trade anthem is:  Trade small and trade often.  
  • If you keep the number of option contracts small, you can afford to lose 30% of the time as long as you win 70% of the time.  If you "go for the home run" (taking uncalculated risk) you are likely to lose everything you've gained previously.  It happens over and over and over again to new traders.  This bears repeating:  Trade SMALL and trade OFTEN.
  • The particulars of strategies are fascinating.  The more you risk, the better your probabilities of winning.  You have to be willing to take calculated risks which means that always playing it safe is going to give you very little in the way of success.  Naked options (done properly) have a better success rate than Iron Condors, as an example.  But Defined Risk spreads make total sense in some situations.  Tasty Trade has a staff of researchers who are testing the data, going back years in different market conditions, to ascertain which strategies have the highest probabilities of success and how they relate to Delta and number of occurrences. (it's all in the archives)
  • Sellers of options are infinitely more successful than buyers of options.  Be a Seller.
  • The philosophy is that everything returns to the mean, so Standard Deviations (one, two or three) have an active role in choosing your strike prices, and deciding your probabilities. Tasty Traders are mostly contrarians.
  • Volatility and very liquid underlyings are the name of the game.   Compare the volatility of a stock you're interested in  to that of  Netflix or Apple, and check out the daily volume.  Liquid stocks are fairly priced and are efficient.  Slow moving stocks are not.  (even when they have excellent fundamentals and a fantastic chart!)  Sell options into high volatility when premium is rich.  In low volatility markets (like we've had for so long this year)  you almost have to have directional assumptions (which are just that,--pure assumption) and do credit spreads that are directionally biased or  calendars and neutral strategies until  volatility picks up at earnings time.  (many say to do debit spreads in low vol but remember that debit spreads are a 50-50 proposition, whereas credit spreads are more forgiving and can still be directional.)
  • Manage your WINNERS, not your losers.  Trades should be managed at the time you put them on. Do not trade more than you are willing to lose.  If it goes against you, don't waste time managing it, either get out of the trade, let it go, or roll it.   In an iron condor, if one side goes against you, then roll the OTHER side closer to the money, to reduce or eradicate the loss of the losing side.  Take winners when they're winning (close the trade for profits) and don't be greedy holding every trade to expiration in the hope of making more.  (I personally have a $100 expectation;  if my trade reaches profits of $100 per contract, (no matter what the original premium) I close it and get out.  Take the money and run.  Each trader's expectation will be personal, but do have a figure in mind for your escape hatch.  It only takes some wild reverses in the market to convince you that $100 in hand is so much better than $100 loss overnight.
  • The whole concept of Portfolio management is part of this philosophy.  Basically, you manage the entire portfolio with Delta, and Beta weighted, (I use the SPY) to make underlyings correlate.  I am still wrapping my head around this, but I can see that keeping your eye on the overall portfolio makes very good sense, as the market swings direction.  Individual trades become less important, and become just cogs in the giant wheel of trading small and often.

Friday, April 5, 2013

Standard Deviations for Dummies (and me)


I always think I know things when I really just have a vague-ish idea of it.  Standard Deviation is one of those.  Yeah, yeah, I know that sounds stupid.  But think about it.  I'm not a mathematician, I'm not even a thoroughly seasoned option trader.  My education has major  holes in it, (no mathematical or statistical)  so I lean on the internet.  Do You?  It makes my  head hurt.


I read things on the internet, like:

In options trading, standard deviation refers to a range of possible stock prices.  It can be useful to an options trader who would like to estimate how likely it is that a stock price will rise above or fall below a specific price level..

Well, that's somebody's definition.  Does that mean that I  now "get" it?  I don't think so.


Or should we delve into  tech speak?

A standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. 

1.      A specific numerical value for the annual standard deviation can be calculated using the implied volatility of the options  using the formula: :underlying price X implied volatility

2.      This standard deviation can be adjusted for the specific time period under consideration by multiplying the value derived above by the square root of the number of days divided by the square root of 365

Question: Huh? Do I need to do this math in order to trade?   
Answer:  No.  But you do want to understand what it is you’re doing when you use the standard deviations and probabilities that others provide you, right?

Options Playbook has good  explanations of options, and this is how they show the danged formula:

And here’s a square root calculator for you, if you’re the kind of geek who wants to do this!
 Square Root Calculator


Well, thank heaven for Tasty Trade, because I FINALLY found some definitions that make sense to ME.


The volatility of an option is by definition equal to a 1 standard deviation expected move. So, if we sell a put: 1 standard deviation below the current stock price, it has a 84% probability of expiring out of the money.

Now isn't that more helpful???  THIS GIVES YOU A MECHANICAL MEANS OF DECIDING ON YOUR STRIKE PRICE/PROBABILITIES, given that you pick the right strategy...

and furthermore, check out these probabilities:

There are chart studies on Think or Swim (and other platforms) which actually draw standard deviation lines for you, so this math is done for you automatically.


Here's some more info I picked up and want to pass on for those of you who want a little more explanation.

Let’s consider the price of an underlying asset (be it a stock, index, future, whatever).  Let’s call that  price “the mean”.  Prices higher and lower than the mean might be considered “data values” or “data points.  The prices of any given underlying can be considered to be distributed on a classic bell shaped curve. 

Plus / minus one standard deviation from the mean will include 68% of the individual price points, two standard deviations will include 95%, and three standard deviations will include 99.7%

These derived values are immensely important for the options trader because they give definitive metrics against which the probability of a successful trade can be gauged. An essential point of understanding is that the derived standard deviation gives no information whatsoever on the direction of a potential move.  It merely determines the probability of the occurrence of a move of a specific magnitude.

(It is important to note that no trade can be established with 100% probability of success; even boundaries of profitability allowing for a three standard deviation move have a small but finite probability of moving outside the predicted range. A corollary of this observation is that the trader must NEVER “bet the farm” on any single trade regardless of the calculated probability of success. Black swans do exist and have a nasty habit of appearing at the most inopportune imes.)

The higher the volatility, the bigger the standard deviation.
The further the future date is, the bigger the standard deviation.
The larger the stock price, the bigger the standard deviation.

Usually you need a table of standard deviations (SD) to calculate exactly. However, option-traders use the following approximations:
• Plus or minus 1 SD of the mean includes 68.3% (approximately 2/3) of all possible results.
• Plus or minus 2 SD of the mean includes 95.4% (around 19/20) of all possible results.
• Plus or minus 3 SD of the mean includes 99.7% (roughly 369/370) of all possible results.

In other words, we can expect a result that ends further away from the mean in:
• 1 SD in 1 out of 3 occurrences
• 2 SD in 1 out of 20 occurrences
• 3 SD in 1 out of 370 occurrences 

Remember, that most charts allow you to put on Standard Deviations as an Indicator,  and Think or Swim give the Probability %'s right on the Option Chain, so there's no math needed once you truly
understand what you're looking for.

Tasty Trade has many "Market Measures" regarding Standard Deviation, plus many Iron Condor videos showing that 1 Standard Deviation (which is what Tom Sosnoff uses to trade) is not always the best choice, that 2 SD's have a higher success with Iron Condors.  But I'll do another blog post about that later.

From Tasty Trade: Liz & Jenny's video on STandard Deviation (a normal distribution curve)


A nice article about Tom Sosnoff:

Interview on Daily Finance

Thursday, March 7, 2013

Covered Put -- New Strategy (for me)

Here we go again, UNLIMITED RISK!     The entire idea that any option strategy or stock strategy, for that matter, gives you unlimited risk, is simply NOT TRUE.

The brokerage (in my case, Think Or Swim) will 'freeze' a certain amount of your account when you short options.  Think of it as them holding some "collateral" on the trade-- it is roughly based on a formula of two standard deviations which gives the broker assurance that his risk is covered.  BROKERS DON'T ALLOW YOU TO TAKE UNLIMITED RISK!  So the whole "infinite" or "unlimited" risk warning is keeping traders from making the kind of trades that could earn them money.  The pros have this market cornered, whether you realize it or not.

If you doubt this, just try to make a trade that requires more margin than you have in your regular margin account.  The trade will be rejected!  Your REAL risk is the amount of margin that the broker holds when you place the trade.  So forget this unlimited risk business and learn how to short some options and stocks!!

Now when the market crashes a la 1929, don't tell me "See?"  We don't live our trading lives as if the sky is falling, Chicken Little.


Okay, I'm learning  another strategy for an underlying when YOU EXPECT THE STOCK TO STAY STAGNANT OR GO DOWN.   (Sosnoff at TastyTrade, a confirmed Contrarian, used YHOO as his example in teaching his daughter, Case Sosnoff, how this works.)

Sell Stock and Sell an ATM put against it.  That's it in a nutshell.

For instance:

Suppose ABC stock is trading at $45 in June. An options trader sells a JUL 45 put for $200 while shorting 100 shares of ABC stock. The net credit taken to enter the put position is $200, which is also his maximum possible profit.
On expiration in July, ABC stock is still trading at $45. The JUL 45 put expires worthless while the trader covers his short position with no loss. In the end, he gets to keep the entire credit taken as profit.
If instead ABC stock drops to $40 on expiration, the short put will expire in the money and is worth $500 but this loss is offset by the $500 gain in the short stock position. Thus, the profit is still the initial credit of $200 taken on entering the trade.
However, should the stock rally to $55 on expiration, a significant loss results. At this price, the short stock position taken when ABC stock was trading at $45 suffers a $1000 loss. ($55 X 100) $5500 - $4500 SHORT = $1000 LOSS.
Subtracting the initial credit of $200 taken, the resulting loss is $800.

Think of this strategy as a mirror image of the Covered Call, BUT much lesser known and lesser used than the covered call.

A covered call profits from a stagnant or bullish move.

A covered put profits from a stagnant or bearish move.

Two chances to win out of three are pretty good odds, especially if your expectations are fairly lucky!

Happy Trading!

  • lly, you should buy to close the short put options.
  • Saturday, February 23, 2013

    Probabilities Work!~!

    Since I've been able to increase my trading fund somewhat, (nothing very major), I have enough collateral/buying power/limited margin to do the kind of trades that give one higher probabilities, (and also high risk).  Unfortunately "high risk" has become a boogie man in trading parlance, but you need to be aware that rewards are in proportion to risk, in terms of improving your probabilities.

    One of the most important things I've learned recently is that if you want to make more money, increase your RISK, not the number of contracts you buy.  (what this means is that ONE OTM naked put COULD offer you THE SAME premium and a HIGHER PROBABILITY OF SUCCESS than 5 or 10 Iron Condors on the same underlying.  While the risk is defined as "Unlimited" and "Infinite" on naked options, if you look at the margin that the broker withholds on these plays, you'll have a much clearer vision of just how much risk you're in for. Brokers are NOT going to take unlimited risk on you; they have a pretty good idea of how much you will likely lose if the trade goes against you, and they put that aside, just in case.  Putting the fear of naked puts into new traders' heads is the single worst injustice of teachers/mentors and programs who are reaching the public about options.  Just as there as teachers out there who put the fear of assignment in students' heads as well.  THERE IS NOTHING TO FEAR IF YOU EDUCATE YOURSELF.  And it does not take a mental giant to learn this stuff, just some hard work and comittment. If you don't know what you're doing, paper trade!!!!  Until you do.

    I've done very well with a limited number of trade strategies:  Credit Strangles, Naked Puts, Iron Condors,
    Credit Verticals, and Covered Calls.   As Liz and Jenny (on Tasty Trade) would say: "winner, winner, chicken dinner."

    I have noticed something however that I was never conscious of before.  I have studied so many different options programs that my head was pretty much stuck in "rules" and  struggling through the fog of not completely understanding how professionals were able to tape read, match strategy to underlying, market level and volatility.   Now suddenly it's as if a switch has been tripped, and options trading seems to be like a very longgggg process of learning the mechanicals, but then the Wizard finally steps out from behind the curtain and all seems logical and even less mysterious than balancing your check book.  Which is to say that the element of utter fear seems to have finally gone.  I don't have the old highs of winning, nor the old lows of losing.  It's just a business now.  Some days it's good, some days you are bound to lose.  The point is that the winners outnumber the losers.  Or so it seems to me right now.

    Tasty Trade has made the final and most significant difference (although without earlier basic education, it would not have "taken" quite so quickly.   The basic "Advanced" information is not all that hard to get:

    1.  Trade often, and trade small.  No need to do 10 contracts and lose your shirt.  Do 5 or 10 diverse, high probability trades instead.  Quantity of trades is what puts the odds in your favor, like coin tosses.  Duration of trades is what gives you time to reassemble and manage trades.

    2.  Sell volatility.  When IV is high, sell premium.  When IV is low, change gears and think directionally.
    I'm learning to use dr. verticals and calendars for directionals,  iron condors for neutral positions, and credit strangles and naked puts for high vol. situations.  Of course there's no rules here.  You can mix it up, but the experience of trying different things is key.  I haven't learned yet how to short stock, but I suspect that's next on my list of new adventures.

    3.  DO use underlyings that have volume in excess of 1Mill or 2Mill+ so that there's a chance of volatility.
    Yes, AAPL, GOOG, NFLX seem like scary underlyings, but a lot of money is available there if you know what you're doing.  Smaller stocks can also be lucrative, but experimentation is key, I think.

    4.  Look for volatility squeeze on earnings plays, and check out the TOS volatility percentile to see if the
    underlying is really worth trading. (under Today's Options Statistics on the TOS trade page).   There are some wonderful "Market Measure" segments about this in the Tasty Trade archives.  Learn how to read IV percentages, differentials, and percentiles.  It can really make a difference in your trading.

    The things I notice that Tom Sosnoff and Tony Batista check before they do a trade are this:

    1. High Volume (the higher the better.  (We want really active stocks)

    2.  High Open interest on the options.  (We want really active options)

    3.  Narrow spreads between Bid and Ask.  (We want efficient options, fairly priced) (anything over 5 cents spread is likely not a good trade)

    4.  Duration.  (We want enough time for adjustments and changes, in case the trade goes against us, so 25 to 40 days out to expiration is a loose rule).  (this does not mean you can't trade weeklies, but have a good reason (like overnight earnings) for doing so.)

    5.  Enough premium.  If you can get a 3 to 1 ratio between risk and reward, on credit spreads, that's excellent.  If you can get a 1 to 1 ratio on debit spreads (risk one to make one), that's usually good.  But there are lots of ways to tweak more premium with ratio spreads, naked options, etc.  Just make sure that the premium received fits your trading plan.

    Happy Trading!

    Tuesday, January 22, 2013

    Options Trading Plan for Small (under $25K) accounts

    If you haven't joined Tasty Trade. com yet, you are missing out on some really wonderful information.  It is however a new philosophy -- and for those who are already set in their own views of trading, it would be a tough sell.  But if your system isn't working and you've given up on yourself, or options, or the markets, you should run, not walk, to Sosnoff and company.


    But I AM a tasty trader, and wanted to share Tom Sosnoff's trading plan for folks who have small funds in their broker accounts.  (this list supposes a basic knowledge of options).

    1.  Make a watchlist of underlyings (stocks, ETF's, and Inverse ETF;s) with option chains that have single-wide ($1) strikes spread.  (stay away from $5/$10 spreads like AAPL, GOOG)

    2. Familiarize yourself with the stats of those items on your watchlist.  Volume, (liquid) Volability (active),expected moves, dividend dates, earnings, etc.  This is NOT the same as studying fundamentals or technicals.  Just get cozy with how the stock moves, its ranges, highs, lows.

    3. Understand the concept of "laddering" by laying out trade positions at time intervals. They need to be spread out to different expiration periods. (weekly/monthly/leaps/etc.) so all eggs are not in one basket!

    4. Narrow your strategies down to 3 or 4 that you feel really comfortable with. I have narrowed mine down to verticals, strangles, covered calls and iron condors.

    5.  Make some rules about how much (% or $) you are willing to risk on each trade, and stay consistent.
    (example:  no more than $200 each trade on a $5000 fund)  And try to make trades equally close to this, not in staggered risk amounts.  So losses and wins are "equal" amounts.  It is common that big trades go wrong while the small ones win.  Try to level out all trades to be equal risks.

    6. Focus on being conservative about Delta risk and target a decay (Theta) number. (example: for every $1000 used, target $5  decay daily which would translate to approx. $150 to $200 per month in time decay.

    7. In order for the probabilities to work, you need a high number of trades (occurrences), so set a minimum number of trades to start with proof of concept.

    You can find the original video of this information on the TastyTrade website under "Tasty Bites" in January 2013.

    Happy Trading!

    Wednesday, January 9, 2013

    The Greeks - Portfolio Management

    I am just beginning to learn (really learn) about portfolio management, as opposed to just managing individual trades.  My tiny mind used to see the words "portfolio management" and think it was just another lesson chapter that any rational trader with organizational skills would already be doing.  So basically I ignored it, in total ignorance.

    Couldn't have been more wrong.  I am beginning to notice how frequently I ignore these investment "buzz words" thinking that there's no meat there.  When instead I should be examining every buzz word for what it is that they're talking about, and how much of it I might not know!

    Portfolio management is a MUCH bigger deal than I ever thought.  To really do it properly, it requires some knowledge of "correlations"  (another one of those words I'd be quick to dismiss).  

    This means that you have to have a pretty good handle on the Greeks, in order to know how one underlying in your portfolio correlates (in Delta value) to others.  100 shares of Apple stock (100 Deltas) does not correlate to 100 shares of IBM, or 1 contract of Netflix.  Furthermore, indexes like TLT (bonds) and VIX (volatility) are fear indicators and could be considered negative delta when correlating them against your positive long positions (as an example.)  I'm just putting my toe in this water, so I'm probably not giving enough information here to teach anything, but I want to make you aware of what I was totally ignoring.

    Managing your WHOLE portfolio as a unit, instead of managing individual trades means keeping the portfolio "balanced" in the way you want, either neutral or directionally.  And it also means that you need to have the ability to BETA WEIGHT your trades


    Here is a good article on the subject:  What is Beta Weighting?

    When you Beta weight an entire portfolio, you are combining all of your open positions (trades) into a single profit picture, by correlating them to an instrument of your choice (I use the SPY) making apples and oranges comparable to apples and apples.  This is done effortlessly on the Think or Swim platform, on the Positions page, just by adding the instrument you want.  It can be anything and the software will automatically convert the Greeks of all trades into CORRELATED Greek values.

    Obviously if you are a beginner or intermediate trader, you may still be "foggy" about the Greeks and how they help you.  Long trades have positive Delta and negative Theta.  Short trades have negative Delta and positive Theta.  By looking at the beta weighted totals of your positions, you can see in an instant if your portfolio is largely Long or Short, or neutral.  When you look at the market trend, it can be useful to know if your trades are cumulatively representing your expectations.  Are you riding the horse in the direction he's going or are you bucking the trend?  If you're a contrarian, bucking the trend might be your choice.  But wouldn't it be nice to know how your portfolio is doing in toto??  You can actually trade the portfolio totals, instead of just trading one trade at a time, randomly.  Any professional trader always does.

    As a seller of premium, I pretty much want my portfolio to tally to HIGH positive Theta (for fast decay)
    and LOW positive Delta.  High Delta would conflict with my short strategies, making my shorts losers.

    I guess there's two things I want to emphasize here.  You probably don't know enough about how to use
    the Greeks, and you might not have a clue about portfolio management.   The internet is full of information (free) and Tasty Trade has four videos on the subject in their archives, so do yourself a favor and if you are at all like me, get your head out of the sand!  I know I've got my work cut out for me!

    Happy Trading!

    Thursday, January 3, 2013

    Strategies -- hooking up to volatility.

    My life is settling down at last!!   My real estate disaster has been averted with the help of some really good friends, and my life and my trading fund will be back on track very soon.  You'll see me hanging out here more often once I get the paperwork done.  What a GREAT way to end the ugly 2012.  I am awash in gratitude.

    My new year resolutions include learning to trade options on futures, as well as getting down to a lot more
    "automatic" recognition of what strategy to use for what market/volatility.

    In trekking around the internet, I found this wonderful article on strangles as an earnings play.  This is
    exactly the kind of information in detail that I want to know.   Be sure and read the comments however, as there are some cautions and it's for you to decide how you want to play this.  But I love the clarity of this
    post, so this is my first on my list of trades.

                                                                          Earnings Play