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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.

www.tastytrade.com     

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