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Finding a Trade Opportunity

Hi Mark,

I just by chance found your blog and read a few lines… Probably
you already wrote that – but I just can not resist at this point to
repeat the part of the question above – how do you "find" your trades –
or which are your preferred strategies?

Thanks a lot!

Vido

***

My reply indicates how I operate.  Some traders appreciate the simplicity of my methods.  Others shrink in horror at the apparent randomness of my choices.  I must tell you that I do NOT recommend the method described below as a good idea for everyone.  You must (please) think about it and decide whether it's appropriate for you. 

Many people time their trades, with a market bias.  That's 'normal' procedure for traders.  I admit an inability to know where the market is going next, so I just trade when other conditions are met.

The strategies that appeal to me have one thing in common: limited losses and limited gains.  Risk management is far more important to me than seeking giant profits.

You can find potential strategies by reading this blog, Options for Rookies.  If you prefer books, I wrote The Rookie's Guide to Options for people who are looking for answers to questions you raise.  There are also other educational materials offered at no cost online. 

If you understand how a specific strategy works, you should be able to decide if it 'sounds' good enough to try.  And by 'try' I mean a paper-trading account.  Don't use real money until confident that you understand the trading method.

Then experiment with another strategy – until you find one that just feels right.  You will like the risk/reward potential. You will like the probability of earning a profit vs. the probability of losing money.  You will feel comfortable that you know what to do if trouble looms.  In other words, you 'get it.' 

It's important to acknowledge that this is not your lifetime strategy.  As you gain experience, as market conditions change, so will you.  Thus, if you decide to change methods, or modify your strategy of choice, that's more than okay.  It's a smart thing to do.

If you are brand new to options, it will take some time.  If you already traded options, pause, consider several strategies and practice one or two of them until you are sufficiently confident to use real money to trade.

I cannot tell you how to find trades.  If you are into technical analysis, then you can adopt bullish, bearish, or neutral strategies.  I always choose the neutral plays.  But, most traders prefer to express a market bias when investing.

What I do to find my trades works for me.  I don't have any idea if it will work for you, so please do not copy it unless you feel it fits within your comfort zone:

When I am ready to put more money in the market – and the timing is when I have extra cash, not when I predict any special move – I trade an iron condor (market neutral) on the Russell 2000 Index (I prefer using only one entity because it makes my portfolio easier to manage.  You may prefer more diversification).

I choose specific options to trade based on MY comfort zone: 2-3 months prior to expiration; as far as possible out of the money such that I collect about $300 total for the tqo 10-point spreads; and I check the delta of the options traded, preferring to sell options with a delta lower than 15.  That 15 delta suits me.  Many prefer delta in the 8-10 range.

If a suitable trade is not available, I wait.  No urgency to put money at risk.

My specifics probably will not help you – I list them to get you to consider alternatives that meet your needs.  You truly want to find your own zone of comfort.

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