The Hard TRUTH About Trading Options For Income - Income Trading
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- เผยแพร่เมื่อ 11 ม.ค. 2014
- If options trading is based on probabilities then how do we break the cycle of the zero sum game and actually start making consistent income? In this video we uncover the hard truth about options trading risk.
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This here is probably the best recap of what a succesfull option trading strategy should look like. Nothing complex, just two major rules to always obey.
Glad it helped!
Thank you very much for your videos and tons of information, You sound knowledgeable and very sincere , not pushy. It is a lot to digest but I go step by step. I am already member in basic and hope to join you in elite very soon. Thank you for sharing your experience with us.
You break it down very nicely into fundamentals. Thank you.
The Seven Commandments right there - Implied Volatility is God! ( Technically speaking..)
Directional calls are tough, I think straddles and strangles can be beefed up a bit to your liking as well... this way it doesn't really matter which way the market goes, increasing your occurrences. When the direction is realized you could sell the losing position, or keep it if your out long enough and there's a lot of action from the vix.
This is very useful, but being someone who is very new to options trading I sometimes find myself getting stuck at what appears to be very basic notions of trading. You make it very easy to understand and I really liked your way of adjusting the strategy based on the market and not vice versa - it makes perfect sense! I would be very grateful however, if in one of your future videos you will create some sort of a workshop where you will show us some more examples on how to analyze the market and choose the best strategy accordingly. Thank you
thank you :-) Good information. Help me!
Thank you so much for this video! I like the way you explain about risk managements. It makes option trading perfect sense. On a side note, i can relate your trading strategy to poker. hahah. Great video indeed!
Thanks for the kind words Tony and so glad you like these videos. Please help spread the word by sharing!
You explain things perfectly, thank you for the guidance!
Glad it helped!
Very true about selling/puts during high volatility. It's easier to predict than trying to figure out when the market is going up.
You bet
Fantastic video ! This is the place to be , period !
Thanks. Gud video
Learning lots, and appreciate your approach~ I'll likely get my question answered in Video 4: For Options strategies slide here you show 5 strategies. In your pdf guide you list about 16 in total (Bull, Neutral, Bear). Give we don't want to force fit a strategy on a stock in a given time frame... how many do you typically recommend we specialize in?
I trade about 4-5 a vast majority of the time. Otherwise I have the others in my "back pocket" when I need them.
Makes sense, thanks
I TRIED options a couple years ago, and fell victim to a lot of bad strategy. As you said trade at 2% of your account, I was trading like 10% and so on, let the trade run till expiration.
Makes a lot of sence. Thanks
Yep gotta trade small!
This is a great video with great information and perspective.
Glad you like it Don! Thanks for the sharing!
Straight forward and logical suggestion, thx so much
Welcome!
Nice information
very helpful, thank you!
Very welcome
Hey; your videos are really superb & helpful to learn about options & really commendable; i would really appreciate if you can tell me about when and how to short either call or put option in different aspects like ITM,ATM,OTM.
looking forward to hear back from you shortly.
Thanks
Dipesh Tiwari
We have videos about that you can checkout in our channel under playlists. Glad you like the videos - please share them online to help spread the word okay?
Such a great video. Nice job 👍🏼
Appreciate that Digi!
Going deeper yessss
thank you for educating
Glad it helped!
great guide thank you very much
Very welcome!
Hi Kirk, great videos. True fan! 1 question: Where can I find Implied Volatility for a stock? I am mainly trading European stocks. Thank you, Sai
Most broker platforms should have it inside the platform itself. You might just have to look around a bit.
Kirk is there a "magic" number to the volatility? Meaning what's high, what's low, what's in between? At what percentage do you decide to be selling VS buying?
It's all relative so we use IV ranking to compare everything apples to apples.
This information very help full
Thanks!
In this video we uncover the hard TRUTH about options trading risk nobody is willing to tell you. . . until now!
Hi great video, by the way where does the implied volatility shows in TOS?
It's a study you can add via the charts tab.
Great video. What is the trading platform you've used in this video?
thinkorswim - check it out here: optionalpha.com/tos
Would you still sell a spread going into earnings? (taking advantage of higher IV)
Yep but sometimes you should make those Iron Condors to reduce directional risk.
thank you for this awesome video
Great to hear!
Option Alpha hello! question.... you say to let the trade ride to expiration.... but won't you get assigned if the trade goes against you and you ride it until expiration?
You won't get assigned only if the options are OTM
Got another question.....where can I find an option trade that has a $30 credit per contract for a $1 strike difference?
Haha that's the tough part right now. They are out there but usually only when IV is higher. I believe YHOO is one of the only stocks right now with high enough IV to trade.
but you always need to cut your losses short when you see you go wrong on your probability, yea when you say waiting for profit, it can supposedly work while writing them, as you correctly said markets are rangebound, I would like to confirm, is is right to wait for profits when your probability is not working?? and you are waiting just for the sake of waiting and it doesn't and can not work with Options.
How do you know it's not working? When you enter a trade with say 70% chance of success it has that likelihood of working at 70% given enough trades over time. They don't just "not" work.
Kirk... so what are your thoughts about trading something like selling 30-45 DTE high probability Iron Condors in index etf's (SPY, IWM, QQQ) to avoid that one in a million move ? Would taking on more risk be appropriate ? For instance, setting your short strikes at between 1 and 2 standard deviations, giving 85-90% chance of OTM at expiration, and setting wide wings. Then just do more contracts. The risk to reward ratio looks horrible on paper, say risking 10 to make 1, but the probabilities are firmly stacked in your favor, esp as it's in etf's which statistically are highly unlikely to make those large moves. You could even take the trade off at something like 75% of max profits to reduce risk even further...
Yep sounds like a fine strategy - just remember that undefined risk trades like strangles and straddles aren't bad necessarily and will give you more premium if you can handle the margin changes.
My apprval level at my broker won't allow me to sell straddles/strangles, unfortunately. It's the highest level to be able to sell naked put/calls in equities/indices. They don't trust my knowledge and risk management quite yet. So I trade REALLY wide wing Iron Condors, hahaha
arupian666 not a bad idea actually 👍🏼 I'm in the same boat but that totally makes for a great workaround!
hi, when you are glaring for stock in your watchlist, what are you looking for ?
Things that are either A moving big up or down or B have high IV rankings.
I agree with high IV rankings but why big movings?
Alfredo M Big moves can always swing volatility so it's another way of looking for trades.
Option Alpha ok and how can you control Big moves when it started a bull market and you dont realise and wating to come back you start to have big looses?
Alfredo M million dollar question you can't control them you can only trade small positions so that if it happens it doesn't blow up your portfolio.
You mentioned choosing options with higher volumes and open interest. Ok - what's a comfortable minimum threshold for each?
I would look for at least 100,000 shares on the stock and 1,000 on options. You can trade lower volume tickers but just make sure to move down your allocation.
Thanks for the quick response - which of course generated a follow up :) if u don't mind too much. So a stock with an avg 3 month trading volume of +400K shares and an option strike with 138 shares in open interest is an example of a scenario you may not consider ideal?
***** Correct might be too low on the option open interest.
Under what circumstance would you rather trade a 50/50 trade than a high probability trade? Is it when there's an extra profit that's worth it?
When you just want to trade low volatility directional trades. I trade them but not big.
Why not just place an expiration out further into a year (LEAPS / Long term contract) if the idea is that due to probability that the option will at one point in time work itself into your favor and then create profit, this would give time to work with the contract, limits risk and also decreases the decaying factor that contracts have. An example, say I obtain calls for netflix with an expiration of July 1st 2016 (1 year later) and set my strike price, eventually the price of the stock should always move into my favor be it call options or put options and when it does then i liquidate the contract and obtain my profit?
holy_cerberus You could do that but if you want to trade high probability then you also have to realize that you need a lot of occurrences or data points to make it worth it. If you only trade long-term contracts then how many years would you have to wait to see the probabilities play out right? So closer, more active contracts are better.
Option Alpha Sounds good, thanks for the quick reply back. Definitely something to think about.
Option Alpha To also add onto that, would the same be said for contracts that are long term yet still active, such companies like netflix and facebook for example?
holy_cerberus Yep
Hey, Kirk! Quick question...I've noticed in your videos that you mention the SELLING of options...can you sell options without owning at least 100 shares in the underlying stock? Thanks, Kirk!
You just put up margin to cover the risk but you don't need to own the underlying shares to buy or sell options.
i really like this truthful option trading idea
hey im new to this trading industry but very interested but not sure which direction to go.
dow?
s&p?
nasdaq?
send me a useful site where i can learn the basics and understand how to make money using options house or tools of such nature.. thank you
optionalpha.com
Do you look at the individual stock IV when to choose debit or credit trade or do you just go off VIX to determine if you are going for credit or debit. Thanks.
We go off the stock's IV not the VIX since the VIX is just for the S&P 500
Most options videos (and books) do not bring commissions into play. Assuming you can get a $30 credit on a spread trade with strikes $1 apart, how are you analyzing risk & reward AFTER commissions? With TOS commissions at $10 + $.75 contract, if you get a $30 credit on the 1 lot spread, your max gain on the trade after entry is only $19.25 ($30 - $10 - $.75)..and that is only IF you hold it to expiration and it expires worthless. But if you decide to exit early and take profits after the option is up 50% (option @ $15), your result will be a LOSS after another round of commissions. The only way I see to overcome the commission costs is to increase the contracts, but then we violate risk mgmt. rules of 2-3% of account value.
Yep you absolutely have to take into account YOUR commission structure. I never include it in anything I do because they varry widely. For example I pay $1.25 per contract with no ticket charge (much different than your example above). If I just took one structure and used that I would either under/over estimate the profit/loss. But it is important to factor in no doubt.
Option Alpha Where do you get $1.25 per contract commission structure? I am guessing you are going to need more than 500 trades a month to get that rate?
B Nourse thinkorswim and you don't have to trade 500 per month but just show a consistent pattern of trading. It's got to be a win/win for you and the broker.
Option Alpha Ok, I'm not sure If i understand you, i just started using ThinkorSwim, and on my paper money account (im in the testing phase) it show's a $9.95 broke fee, such as "B Nourse" mentioned above, but think or swim is now through TD Ameritrade, correct? Are you using TOS independently? if so, how do you do that? is the $9.95 fee something that will go down after a certain amount of trades (w/ in a specified time frame)? can you be a little more specific please?
Thank you!
How do you do that Ryan Evans?
Kirk, i am new, i want to join the pro account on your site. I just want a little more info. So I barely know how to even place a trade on stock options. I know what to do and how to pick off of what you would tell me but no idea on how much i need to place to make my bets around $50. I have an account with $2k. Once i start placing bets i will get the hang of it, i haven't found a video on actually saying, this is what this is, and this mean this, etc. Then if you want to do $50 a bet, this is the number you need to do, and it just shows how much i would lose, but i want to know why i would lose and how i would gain. Very willing to learn i just have no idea where to start. Also, on your site do you go thru and pick all the stocks your company is trading and basically say if you want to trade you can too? Then i would just get that and place the trade and thats if, i just pick how much i am playing with, money wise? I don't want to join then one week later figure out how to place bets based on my account balance, i'd like to join and be making bets that next day if possible. And hopefully profit enough to put away and pay for my membership and still have the $2k to trade with, or put half of the profit into my account and the other half away in saving. Does this sound like i should join the site tomorrow or wait until i watch a few more videos? Or are those videos on your pro membership? thanks!!!!
Hey Jason! We have a ton of free training on our website that walk you through everything start to finish. I suggest maybe you start with track 1 here: optionalpha.com/members/tracks
+Option Alpha I'm 50% thru the training session. Ready for the webinar tmrw!
👍👍👍
Isn't it true that every time you sell options you are always at risk of being assigned? If this happens do you just close the other leg and move on to the next trade?
Yep you do have that risk (though it's not as prevalent until the last week of expiration.
+DanielOnGuitar Index options are usually european settlement - they can only be assigned at expiration - one reason they are popular for condors.
Is it really true that 90% of options traders lose money? If so, is it such a large number because it includes individuals who try trading uneducated and lose a bit of money and then quit? I am getting into options trading and spend hours everyday watching videos like this and reading about different strategies, as well as paper trading on the TOS platform, so I feel like I am not one of those people, but it's still interesting to note that such a small fraction of people really make money consistently. Do you think educated traders ever lose money consistently (like for longer than a few days at a time)?
There are various studies out there but yes generally most traders lose or more importantly quit. Actually it's more often that people quit before they actually give it enough time to work correctly. It's not an easy get rich quick thing but it's well worth the journey if you are up for it!
What's a good ballpark number for what's considered high and low implied volatility?
I use the 50th percentile as my determination of HIGH vs LOW
how do you get 70.00, 2% of 10000 is 200 the way I do math
It is $200 but then you DIVIDE by $70 to get about 3 contracts
Option Alpha I'm still not comprehending where the $70 actually comes from though?
Jonathan Fleming Width of the strikes is $1 (or $100 of risk) but we took in a credit of $30 so the rest is our potential loss or $70
Hey Kirk, considering signed up monthly, so i could schedule a one hour session with you and you would explain this to me a little better? if so i will be signed up the same day! I learn going through the motions and would really love to learn how to do these and actually know what i am doing. thanks!
Hey Jason - 1 on 1 coaching with me is separate from the monthly membership. I always suggest folks start with the PRO membership first and go from there.