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Trading options process

In order to trade successfully and stay in your comfort zone, I believe you need to know exactly what to do in any situation of your trade outcome.

No analysis, no oscillator, no market prediction will tell you what the market would do next. It is impossible and if anyone tries to sell you a miraculous winning strategy secret, he is lying. If any such secret exists, the one selling it to you would use it for himself and get awfully rich.

Trading is 90% about psychology and the rest is skills and knowing what to do. In order to trade successfully and have consistent returns, you must do the following:

1) Have a trading plan and strategy. Always know what to do in any situation.

2) Have enough money in your account so you can manage your trades when they need adjustment. The worst case what can happen to you is to be forced closing your trade at a loss due to a margin call.

3) Never predict the market. Always trade what you see is happening and not what you think will happen because it may not happen at all.

4) Trade only a handful of trades you have time to handle and manage. If you still work a full time job, opening 1000 different trades will knock you out in a sharp sell off. You will not be able to manage them when needed.

I am a visual person. It helps to have the process visible. Here is what my strategy decision process looks like:

Strategy flow chart
(note, I took the IT classes about 10 years ago and no longer remember exactly how to create the flow charts properly. So some ways above may not be correct and I apologize for it.)

When trading options, you must be perfectly OK with anything what’s depicted above. If you are OK with any of the point shown above you will not be surprised, angry or anxious about it and you will trade comfortable. And when comfortable you will also become consistent.

5 responses to “Trading options process”

  1. Tom says:

    I am starting to agree with you Martin. I am looking for these weekly, even monthly options to sell, and most premiums are .20 or less. There is no way I can do this on ThinkorSwim, the commissions are too high.
    I need to find another broker who charges less, I dont have 10k for Interactive Brokers, only got 5K. I see the Wisdom of selling options. But am scared away by the low prices, most options are a lot less than 20 Bucks. And I damn sure am not going to buy any.
    I subscribed to Schaffers Advisory and 80% of the trades are losers. Forget that!
    Would have made money if I had faded every trade, HA!

    • Martin says:

      Tom, trading options is about safety of a trade rather than maximizing profits. I recommend you to use TastyWorks as they charge a lot less making this trading possible, then select the strikes to be as far from the heat as possible to survive. Even when collecting $20 per trade, it makes sense. If you collect $20 bucks per three days a week (giving that you be trading SPX, for example with expiration three times a week) for the next 20 years you will collect $57,000. compound it and you make tons of money.

  2. JC says:

    Ah. my internet messed up so hopefully this isn’t a duplicate comment.

    Thanks for the feedback and further explanation of your strategy. I’ve wanted to put on some shorter duration trades because like you said those “pennies” add up and it’s about the churn to increase the number of trades. The reason I’ve always stayed away from it though is because my commissions are much too high to make it worth doing. If you don’t mind me asking what broker do you use to get such a low commission structure. At $1 R/T commission/fees it’s much more feasible to due these shorter duration trades for less credit but high chance of closing quickly. I guess at a minimum I need to ask my broker about lowering my commissions for option trades especially. The worst case scenario is they say no and I either leave my funds there or move some to a lower cost broker.

    One other question do you typically stick with index products such as SPY/SPX/IWM/QQQ… or also use individual companies or is it primarily individual companies?

  3. Always like to see others’ strategy when it comes to options. Is there any reason in particular that you go with such a short DTE and low credit received upon entry? I’m assuming short DTE to really take advantage of the theta decay, but 0.20 cr doesn’t seem like it’s worth it to me by the time you factor in commissions and to BTC the position. Overall I do approach things very similar to you and only write options against companies I don’t mind owning even if just for a little bit so I can write aggressive calls against the long shares.

    • Martin says:

      JC, The reason is safety. Taking 0.20 at 16 or less delta and ~15 DTE is probably max you can get. I want to give the market as little time to go against me as possible. So 90% of all my trades get closed worthless and I can reuse the money immediately compared to waiting for 30 days or more. If I open a trade with 15 DTE I can make $60 in 45 days while if I open 1 trade with 45 DTE I will make less. Try to open ABBV trade with 12 DTE and you will be able to collect approx. $40 and then try the same symbol at 38 DTE and you will collect approx. $45. So opening three 12 DTE trades in the same time period vs only one I make more money.

      The second reason is that I want to trade so I want out as fast as possible and trade again.

      My commissions and fees are so low that they do not play any role. Opening an entire trade cost me about $1 dollar, closing it is free, so I do not have to worry about it. Yes within the 45 DTE I spend $3 on three 12 DTE trades vs $1 on one 45 DTE trade but again, I make $120 vs $45.

      Again, it is about priorities and over time I learned that this approach makes the most sense to me. Many people consider $20 dollars in 15 days worthless, I don’t. I had so many trades being closed as winners during the recent correction which wouldn’t happen would I trade them the conventional way trying to collect more credit and in February alone I made $5,000 dollars so far trading little drops one after another. I prefer safety over maximizing premiums. In the past this got burned me a lot so safety of a trade has priority and 0.20 credit allows me to achieve it. Of course, there will be trades where I can get more than that. The $20 is a very minimum premium per contract.

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