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.