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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!

4 comments:

  1. I've also seen that website and I guess it is very useful for those individuals who want to try options trading.

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  2. However your comment (?) links to a website where traders have to PAY for information, whereas Tasty Trade is FREE.

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  3. What about commissions for the trade and contracts? If we keep our "bets" small and do frequent trades we may win more often, but do we loose more in the commission.

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    1. I just consider commissions part of working expenses. Yes, it costs a bit more, but I always negotiate with Think or Swim for lowest rates. (if you trade enough,
      even with a small account, you can get them).

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