Philosophy of Options Trading. Part IV


In this final installment (for now), I'll share more of my ideas about trading, and options trading in particular.  The purpose is to provide guidance for readers.  I'm not suggesting that you agree with, and adopt, all (or any) of these ideas.  Instead the purpose is to get you thinking about your own philosophy of trading and why my ideas may or may not be appropriate for you.

The bottom line is there's more to option trading than merely slapping on a position and then waiting for the options to expire.

1) Make the best decision you can at the time the decision must be made.  Do not berate yourself if it turns out not to be the winning decision.

2) Stay within your comfort zone.  Never 'hate' any position you own. It's easy to exit and find a better trade. 

3) "It's not good enough to find winning trading techniques; one has to continually
adapt these techniques to an ever-changing environment." So says, Dr. Brett – and I agree.

4) Don't depend on 'hope' to salvage a bad position.  Use your intelligence to make a good trading/risk management decision.

5) I find that it's too risky to try to earn every every last nickel from a trade.  Exiting a position early locks in profits and gives you a quiet period with no risk.

6) Don't sell naked options.  The exception is for investors who want to buy stocks as prices decline.  For those investors only, writing naked puts is a satisfactory strategy.

7) Don't use options to gamble.

There's always more to say on any topic.  If you are so inclined, please share any of your basic trading tenets.

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4 Responses to Philosophy of Options Trading. Part IV

  1. marathonman 06/24/2009 at 12:43 PM #

    hi Mark…So I am looking at the IC section and using TOS paper money to examine how they work in real time. Here’s what I saw today at 1:35 in APPL at 136.10
    IC
    Buy October 140/145 call (sell at 11 buy at 8.80) Net 1.10
    Buy October 135/130 put (sell at 11 buy at 8.90) Net 1.10
    Total Credits 2.20 Total Risk 5.00(price between spreads)-2.20 for 2.80 Total risk (today without adjustments) When I war reading your comments you stated your risk is 3:7 I am not sure if that is because you are figuring a 3 credit vs. a 7 risk for 10 point spreads? Here the R:R is about 1.2:1 (obviously with only a 5 point spread)just curious as to your thoughts…
    Are all calenders selling the front month and buying the further our month and what is it called if its set up in reverse…
    Thanks Don

  2. Mark Wolfinger 06/24/2009 at 1:02 PM #

    Don,
    1) If you set the calendar ‘in reverse,’ it’s still called a calendar spread. The name does no change. But your action does.
    When you buy the longer-term option, you BUY the calendar spread.
    When you buy the shorter-term option, you SELL the calendar spread.
    2) Yes, my 3:7 risk comes from selling a 10-point spread and collecting $3. Max gain = 3. Max loss = 7
    3) My thoughts. You have a very nice risk/reward for the AAPL iron condor. But that’s because you chose strikes relatively near each other. The probability that you will collect the entire $2.20 is not very high. First because you may choose to adjust and second because there’s only 5 points between your short strikes.
    There is NOTHING wrong with your spread. This is a CTM (close to the money) IC and many sophisticated traders prefer CTM positions.

  3. marathonman 06/25/2009 at 7:15 AM #

    Thanks Mark, Really appreciate your comments…
    Regarding IC’s is that why you lean towards wider strikes on index based trades?
    From what I have been reading IC’c are used most effectively when IV is lower and DD used when IV is more pronounced. Is this right?
    and if the is correct, would you consider selling the IC when IV is higher to take advantage of that?
    Just curious as to your thinking and considerations when trading.
    Thanks Don

  4. Mark Wolfinger 06/25/2009 at 7:44 AM #

    1) I don’t lean towards wider strikes. I use the narrowest spread with possible, and for RUT options, that’s 10-points wide.
    If you are asking if the strike prices of the options I sell are far apart – then I choose an IC based on my comfort zone: As far apart as possible with the highest premium possible. Obviously these are in conflict and I find a compromise that I am willing to trade.
    If you use charts and technical analysis, then that would have a large influence on your choice of strike prices.
    2) Again, the exact meaning of your words is not coming through to me. But I disagree with what I believe you are asking.
    I trade IC when IV is HIGH, now low. But when you say ‘used effectively’ I don’t know what that means. Do you mean that they are more likely to be profitable when IV is low? I’ll agree with that.
    Do you mean it’s a better idea to trade IV when IV is low, then no – I strongly disagree with that.
    When IV is low, then that’s the time to own vega (or at least it’s time to no longer be selling vega). IC positions are always short vega and DD are always long vega.
    Right now, I trade vega-neutral and own a combination of positions.