http://steadyoptions.com/articles Sat, 25 May 2013 11:38:33 +0000 86400 Manage articles http://steadyoptions.com/articles/_/general/price-of-education-r41
Education does cost money. When I see unrealistic expectations, I like to quote OptionPundit, who had a major impact on my trading style. OptionPundit wrote:

"Before one get to a earn say $5-$7k/month an engineer need to go through 4 years of professional education including one or two summer projects before he is allowed to be even called an Engineer Trainee. Medical professional is required even much more rigorous training before one is allowed to even touch knives for first surgery. Then why do people think trading is any different if it were to give you $5-7k/month to start? It doesn't take long before one starts to realize that trading is not easy as it seems on the surface (sadly after either account is wiped out or suffered a major loss."

So how do you begin your journey into options trading?
Reading some trading books can be a good start. Getting a formal education can be a good idea. There are some good mentors out there - Dan Sheridan is one of them. There are also a lot of charlatans. Before you give your hard earned money to anyone, ask for references. Be aware of false and unrealistic promises. If someone claims that you can double your account in one month after spending a week with him, stay away. If someone sounds too confident and "guarantees" that all your trades are going to make you money, or doesn't disclose the risks, be careful.

If you decide to follow an options expert or a newsletter, ask yourself the follow questions:

• Do you like the trading style? Are the strategies too stressful and cause you to lose your night sleep?
• Are you aware of the risks? Are they properly disclosed?
• Is the newsletter properly diversified in terms of trading strategies? For example, would you be comfortable placing your whole account into 3-4 iron condors every month?
• Will the membership help you to become a better trader vs. just blindly following the trade alerts?

Focus on your education, not short term performance. Focus on risk management.

Setting realistic expectations is very important. I'm a big fan of the "slow and steady" approach. Aim for many singles instead of few homeruns. Be patient. Be prepared to lose for a while - set your goal as capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come.

Here’s a quick list of some things to consider as you write down your expectations and goals.

• More traders lose more money than they make. The figures are a little off depending on who you talk to, but it is 80% to 90% (maybe more) who end up losers and leave the business altogether.
• Only a small percentage of retail traders are profitable. The numbers get even smaller if you look at a 3-5 year average which measures consistency. Don’t get discouraged, we all fell off the bike before we learned to ride it right?
• Paper trade first with a small amount of money. I always recommend members to paper trade everything first. This way you learn how to enter orders, adjust trades, and more importantly learn you’re your mistakes without losing real money. Then when you are ready to invest real money, keep it small. Prove yourself that you can make money with 10k, then increase it to 20k and so on, but do it gradually.
• You will have losing trades. Too many people quitting after a streak of few losing trades. Losing money is part of the game, the trick is to keep the losses as small as possible.
• Don’t expect to become financially independent. Don’t you think it’s completely unrealistic to expect a small account, say under $5,000, to generate consistent income to replace your regular job?

For real options traders, the learning never stops. If you think education is expensive, try ignorance - Derek Bok. You can start your journey by taking the SteadyOptions free trial. Please refer to Frequently Asked Questions for more details about us.]]> Sat, 11 May 2013 05:42:55 +0000 0f28b5d49b3020afeecd95b4009adf4c http://steadyoptions.com/articles/_/general/steadyoptions-produced-339-roi-in-april-2013-r40 The YTD non-compounded ROI is 58.7% based on the same 6 maximum trades. Check out the Performance page to see the full results. Please note that those results are based on real fills (excluding commissions), not hypothetical performance or "profit potential".

We continue expanding the scope of our trades beyond the earnings trades. We closed three VIX trades for ~30% gain each. We also closed three pre-earnings calendars (AAPL, IBM and NFLX) for double digit gains. Those trades provide nice balance to the portfolio in periods of lower IV. The earnings straddle/strangles performed very well too, including AMZN, CMG, QCOM, SNDK and RVBD. GLD straddle was the only sizable loser - we just held it for too long. We also started trading VXX. We will continue refining those strategies to get better results. This gives members a lot of choice and flexibility. I also encourage members to trade what they feel comfortable with.
The membership is now open to new members for a limited time. We invite you to join us.]]> Wed, 01 May 2013 23:38:11 +0000 1385974ed5904a438616ff7bdb3f7439 http://steadyoptions.com/articles/_/articles/lessons-from-apple-crash-r39 Warning signs

When the stock has risen to $705, you could find plenty of warning signs. For example:

• Apple's value was more than 4% of the U.S. GDP.
• Options Implied Volatility jumped from 19% to 41% in a matter of few weeks with no significant news.
• You could make almost 50% in one week trading a delta neutral butterfly spread. Those returns are possible only with highly speculative stocks.
• Pretty much everyone was bullish on Apple. If everyone is bullish and already has purchased the stock, who is left to support further stock increase?
• The market was pricing the good news only and ignoring all the bad news.
• According to Forbes, some of Apple's insiders dump the stock.
• The positive sentiment reached extreme levels.

The Forbes article is especially interesting. The columnist argues that:

"Apple cultists may want to take notice that the top brass of Apple clearly does not believe that Apple stock going to $1000 is a sure thing. Blind faith is the hallmark of cultists. "

It also quotes an email from an Apple's cultist:

"You are wasting your time here……. Other analysts on AAPL are all silly? You are smarter? A nuclear physicist, so what? Apple will be above $1000 soon, no matter what you said……. You took profit at $360 and $525, shame on you."

Please note the definitiveness of Apple going to $1000 in the above excerpt.

Some people argued that the stock will get more support from dividend funds that were restricted to own it till now. I personally doubted it then and I doubt it now. The stock often moves up and down more than the entire year's dividend in just a few minutes. Most of the dividend funds don't want to own that kind of volatility.

History lessons

Unfortunately, in most cases of parabolic moves, those who join the party late buy the shares of those informed traders and investors who have already made significant gains and are ready to move to the next target. When they decide to sell part of their remaining portfolio, then the late comers, who are usually weak hands, panic and try to sell at break-even or just below that.

The recent crash also shows the dangers of over-concentrated portfolio. Many people went "all in" with Apple thinking that the stock will just continue going up $100 month after month. Obviously they were proven wrong. No stock deserves more than 20-30% of your portfolio maximum, and AAPL is no different.

Market history is filled with moves that defy logic as the charts "go parabolic." Those moves usually have 3 things in common:

• They go further than one would expect.
• They never last.
• They usually end really, really badly.

What now?

AAPL price action simply proves that there is no such thing "cannot go any lower". Is the stock cheap? Yes, some would say ridiculously cheap. But it was cheap at $500 too. Would I buy it now? The answer is no. I learned the hard way not to invest in stocks without some kind of hedge, no matter how cheap they seem. Personally, I'm implying non-directional options strategies that are designed to make money in every market. Since joining Seeking Alpha four months ago, I shared quite a few Apple trades with my readers. Here are some of them:

• The Bull Credit spread from December 13, 2011 produced a 42% gain in 6 weeks.
• The Iron Condor from January 10, 2012 produced a 28% gain in 2 weeks.
• The Long Butterfly from March 19, 2012 produced a 35% gain in three days.

Since Seeking Alpha discontinued the Options section, I cannot write options articles anymore. However, I still share the trades with my members - my last AAPL trade was a calendar spread just a month ago which made 25% in two weeks (the stock was down 5% during that time).]]> Wed, 24 Apr 2013 02:17:01 +0000 e00da03b685a0dd18fb6a08af0923de0 http://steadyoptions.com/articles/_/general/trading-earnings-a-tale-of-two-strategies-r38 The article finally came out last week, but it had nothing to do with my trading approach. It was all about my personal history with Kevin which I don't think is much of an interest to our readers. My article is strictly about my trading approach and how it compares with Kevin's.

First, let me be very clear: no matter what some "gurus" will tell you, no strategy will work all the time. Mine is no exception. I never claimed that it works under all market conditions, and I never claimed that other strategies won't work and mine is the only right thing to do. There is more than one road to Rome.

My approach

I described my strategy of trading earnings here and here. The strategy is buying a strangle/straddle or reverse iron Condor a few days before earnings and selling it just before earnings are announced (or as soon as the trade produces a sufficient profit). The idea is to take advantage of the rising IV (Implied Volatility) of the options before the earnings.

Now, few scenarios are possible.

• The IV increase is not enough to offset the negative theta and the stock doesn't move. In this case the trade will probably be a small loser. However, since the theta will be at least partially offset by the rising IV, the loss is likely to be in the 7-10% range. It is very unlikely to lose more than 10-15% on those trades if held 2-5 days, and the maximum risk is around 20-25% (except for some very rare cases).
• The IV increase offsets the negative theta and the stock doesn't move. In this case, depending on the size of the IV increase, the gains are likely to be in the 5-20% range. In some rare cases, the IV increase will be dramatic enough to produce 30-40% gains.
• The IV goes up followed by the stock movement. This is where the strategy really shines. It could bring few very significant winners, sometimes in the 50-60% range.

What I really like about this strategy is the ability to keep the losses small. The risk/reward is significantly smaller than most other options strategies. Overall, the average gain is in the 10-15% range and the average loss in the 5-10% range. Combined with decent winning ratio of ~60%, the strategy should be a winner in the long term.

In some cases, when I think that near term options are overvalued, I might also buy a calendar spread with short options expiring just after earnings.

Kevin's approach

Kevin also likes to trade earnings non-directionally, but with one significant difference: if the trade doesn't produce significant gains before earnings, it will be held through earnings. In my opinion, this strategy has negative long term expectancy because on average, options tend to be overpriced before earnings and IV collapse after the earnings will cause the trade to lose value - unless the stock moves more than implied by the options prices. I described here why I don't like to hold those trades through earnings.

Same is true with calendar spreads - if you hold a calendar spread through earnings, you bet that the stock will not move much. If it does, the loss can be catastrophic, as proved by Kevin's IBM trade.

The main problem of holding any trade through earnings is complete lack of predictability. Some trades can produce outstanding gains while others end up with catastrophic losses. If the trade uses short expiration and the stock moves less than "predicted" by the options prices, the collapsed IV will cause a very significant loss.

How position sizing impacts the overall performance

The most important point that many traders ignore is the position sizing. Even if the second strategy (holding through earnings) produces higher average gains (and I doubt it), what really matters is how much your overall account gains. When you risk only 20-25% per trade worst case, you can easily allocate 10% per trade. However, when you hold through earnings, your risk is up to 90-100%. That means that realistically, you cannot allocate more than 2-3% per trade. If you allocate 10% and you have a streak of 4-5 big losers, you have just lost half of your account. Whoever claims never having such a streak is either lying or hasn't been trading for long enough.

Kevin keeps saying that he "doesn't trade options for a 5% ROI". Let's check what 5% return can do to your account.

Assuming that you make 20 trades per month, allocate 10% per trade and make 5% per trade, your overall account grows 10% per month. Commissions will reduce it to ~7-8% per month. That's about 80-90% per year, non-compounded (while having ~40% of the account in cash). Increasing the allocation to 15% will produce 120-140% annual return while still risking only 3% per trade. I challenge Kevin to show how he can achieve a similar return with his strategy with similar level of risk. I also challenge him to show any kind of statistics for his strategy of holding through earnings.

Here is another point that many traders miss. If you have a 15% loser and two 15% winners, that's 5% average return. But if you take a 100% loser, it will take two 60% winners or three 40% winners to produce similar 5% average return.

Conclusion

To conclude, it all comes to what kind of trader you want to be. Is your goal to limit the losses or to maximize the gains? You cannot have it both ways. Higher gains come with higher risk and inevitably will produce some big losers, so the position sizing has to be adjusted accordingly. Risk and reward are closely related in trading.]]> Sat, 20 Apr 2013 14:42:40 +0000 013d407166ec4fa56eb1e1f8cbe183b9 http://steadyoptions.com/articles/_/general/trading-options-%e2%80%93-the-binary-way-r37 Everything changes…You might ask what’s the connection between that and Options and you would be entitled to do so, but to answer the question, I must tell you a little story: I started to trade Forex about five or six years ago. I went through the usual ups and downs, lost money in the beginning and then made it back. I’m not going to bore you with the details, but after I finally got my trading together and found my balance, I thought I would never trade something else. Well, that thought was short lived because my curiosity led me to Options. At first I just wanted to know what they’re about, I wanted to compare them to Forex and see if I am able to achieve higher returns with lower risk, but soon I started to trade Options more than Forex.

Then the Binary Options craze hit the internet. All the slogans, all the stuff like “…binaries are easy and profitable” made me stay away at first, because I don’t consider that to be a good approach to financial instruments and trading in general. But curiosity struck again and got the better of me so I took a second, closer look at binary trading.

The Good, the Bad…the Binary
To put it simply, when trading Binary options you either lose the entire amount invested on a trade, or you win a fixed payout which usually ranges from 65% to 95% of your investment, depending on broker and underlying asset. This leads us to the first and major difference between Binaries and regular options: while trading regular options, the further price moves away from the strike price in our predicted direction, the more we profit, but when trading Binary Options, just one pip/point is all we need in order to win the entire payout. Assuming we have a regular option trade and at expiry time price is one pip/point above the strike price, we are not in a very happy situation, but if a Binary trade expires at the same point…well, we just made 65% to 95% profit on that trade.

On top of that, a Binary Option trade is not affected by the Greeks. Did you ever find yourself in a trade that lingered around the strike price and only started to move in your desired direction late in its “life span”? I know I did…and by that time, Theta ate all my potential profit. Not a beautiful scenario, but nonetheless, time decay is something that we need to take into consideration when trading regular options. However, the good news is that Binaries are not affected by Theta or any of the Greeks so in other words, even if in the last moments of my trade, price moves above/below the strike price, I still receive the entire payout.

Not everything is milk and honey in the Binary world and a drawback is the Risk to Reward ratio: I can lose 100% but I can only make 65% to 95%, depending on the broker I am trading with. Well, I know that in order to make a profit you have to either have a high win rate or a good Risk to Reward ratio…In Binary Options this ratio is not so good, but the fact that you just have to be right about the direction and not having to care about the distance traveled can help with the high win rate part. Also, some brokers offer a refund on Out of the Money options and this refund can go up to 15%, but not all brokers adopt this practice and 15% is seen rather rarely.

Wrapping it up
Once I got over my first urge to dismiss Binary Options due to the advertising and the hype created around them, I realized it’s a profitable instrument, much easier to trade than others. Some Forex traders, especially new comers find it difficult to calculate position sizes; some regular Options traders have difficulties understanding all the butterflies, iron condors, bull spreads, albatross spreads and especially the Greeks and how they can influence the profit of a trade.

None of the things mentioned above are a problem when trading Binary Options and to be honest, I am glad that my curiosity made me try them out. If you already are an experienced trader it will take you probably about 10 minutes to learn all about Binaries and although it will take longer for a newbie to understand it all, in my opinion, Binary options are one the most accessible trading instruments available at the moment.

Disclaimer:
This article is intended for informational and educational purposes only. In no way should it be viewed as endorcement from SteadyOptions to use binary options or one of the brokers.]]> Tue, 26 Mar 2013 15:21:15 +0000 3988c7f88ebcb58c6ce932b957b6f332 http://steadyoptions.com/articles/_/general/option-strategies-for-earnings-announcements-r36 The baseline case is as follows: you enter long straddle position five days before the announcement, using the nearest month options, and close the position one day before the announcement. Using this strategy, they found out that the average return was -0.45%.

So what does it mean for us? You would think that including slippage and commissions, the results will be even worse, probably in the 3-4% loss range. So how do we manage to "beat the statistics" and produce average gain of 4-5%? (As a side note, 20 trades per month at 4% average return and 10% allocation will produce monthly returns of 8% before commissions).

Several factors contributed to the difference between our results and the results in the book.

1. They examine the full universe of all equity options traded over 14 years. While this means "no cherry-picking of good results and brushing aside of bad results", we would not even consider stocks with consistently bad results. We have a selected list of just few dozen stocks which tend to produce the best results over time. This alone should make a huge difference.

2. They limit the holding period to 5 days, entering five days before the announcement and exiting one day before the announcement. We don't have that limitation. We enter our trades between 2 and 14 days before the announcement, based on backtesting results, price, implied volatility, time to expiration etc. For example, for options expiring in less than a week, we usually limit the holding period to no more than 2-3 days.

3. The testing includes 14 years of data from 1996 to 2009. This was before weekly options have been introduced. Now we have a choice of trading weekly options or monthly options, and we adjust our strategies based on market conditions and individual stocks. For some stocks, weekly options tend to work better. For others, monthly options would be a better choice.

4. The testing included closing the trades at the last day only. We don't have that limitation. We can close earlier if our profit target has been hit.

5. The testing is based on End Of Day prices. We can use the daily fluctuations to enter and exit at better prices.

6. We can manage our positions. For example, if we opened a 30 straddle when the stock was trading at $30 and the stock moved to $31, we might roll the straddle to the 31 strike. If the stock moves back to $30, we will roll back to the 30 straddle. This is what we did with one of our recent trades. Using the methodology in the book, the straddle would produce 10% loss, but with proper management, our final return was 12% gain.

7. We use a combination of straddles and strangles. If the stock is trading at $102, they would open a 100 straddle - we would prefer a 100/105 strangle in such situation. This can make a huge difference as well. If the stock is not close enough to the strike, we won't open the trade.

The bottom line is even with such strict rules and limitations, the average return is almost breakeven. This is a definite confirmation that with proper selection of stocks, holding periods, adjustments and trade management, the strategy has positive long term expectancy with very limited risk.]]> Sat, 09 Mar 2013 06:11:33 +0000 42a0e188f5033bc65bf8d78622277c4e http://steadyoptions.com/articles/_/general/performance-reporting-the-myths-and-the-reality-r35 "Maximum profit potential"

Few days ago one of the options service providers sent a summary of his 2012 performance, bragging about ~42% average return per trade. A quick look on his website reveals how he calculates his returns: "The highest price the option achieves is recorded as the result since this was historically what the option price reached."

Did you get that? Is anyone really able consistently to sell at the top, or even close? Pro-Trading-Options, an independent source which tracks performance of few hundred newsletters, actually stopped tracking the service because they track only profitable services. Turns out that based on real (auto-trading), not hypothetical results, not only the performance was not nowhere near 42% average return, but it didn't even make money.

Calculating gains based on cash and not on margin

This is one of the most outrageous frauds. This is how it works:
One of the services makes a lot of risk reversal trades. A risk reversal involves selling a put and using the proceeds to buy a call (or vise versa). The track record includes many 100% losers, but also some ridiculous triple digit returns like 757%, 780% or even 1,150%.You would think that those returns would more than offset the 100% losers.

Out of curiosity, I decided to check how they calculated those returns. The 1,150% trade involved buying a $18 call and selling a $18 put for a net cost of $0.04, and closing the trade for $0.50. 1,150%? Not so fast. What they "forgot" to tell us is that selling naked put involves a margin of ~$450 per spread, so $46 gain is really 10% gain and not 1,150%. No wonder they are able to present "4,344% cumulative return since 2007".

"Cumulative return"

There are a lot of services which make only one trade per month (or per week), yet they present their results as "350% cumulative return since inception". While technically this is correct, does it mean anything? Would you be comfortable placing your whole portfolio (or even half of it) into one weekly Iron Condor?

When a newsletter claims a 1,000% return for the year, wouldn't you assume that if you started the year with $10,000 and invested in all the recommendations given on the site, they would now have $100,000? But this is not the case. A lot of services calculate their yearly return by adding together all the individual returns on each trade recommended for the year.

So, for instance, if a website recommended 100 trades for the year and each trade made 10%, they would claim they made 1000% for the year.

The problem is that the returns on trades that overlap cannot be added together. If a service has 5 open positions and each position made 10%, did they make 50%? Of course not, because you could allocate only 20% to each position. So your overall return was 10%, not 50%.

Holding losing positions indefinitely

Many sites claiming unbelievable win ratios hold trades that move against them for many months while new recommendations continue to be given during that time. To you, it really doesn't matter what other trades are recommended during that time or what alleged returns are made because your capital is tied up.

One service that does one trade a month had a losing trade at the beginning of the year that was held the entire year and ultimately closed at the end of the year for a breakeven trade. Yet, during that entire time, new trades were opened each subsequent month. So, they reported a 100% win ratio and a very good return for the year.
The problem is that, realistically, you would not have made a dime since all your capital would have been tied up in the losing trade all year.

Resetting past returns after a large drawdown

One service we know of posts hypothetical results that change each time the service has a bad month. What happens is, when a bad month occurs, they just fix the bad month and post new past performance numbers.
Another service has 10 trading programs. When one of the programs has a large drawdown, they simply close or rename it so new members don't see past results. Needless to say that no track record is posted on the website.

Having too many open trades

Some services claim to have a certain maximum of trades and base the performance on this number. In reality, they open much more trades. There is a service that bases their track record on maximum of 10 open trades and $10,000 portfolio, so members would allocate 10% per trade. In reality, they might have as many as 16-18 trades, with average trade value around $1,400. They have two separate trades in the Open positions section: active trades and "other" open positions. The "other positions are " trades that are still open in the portfolio but are down over 50%. They are on “hold” but are not worth mentioning until they turn around."

Needless to say, most of the time those trades don't turn around and end up being 100% losers. Meanwhile, they tie up the capital, but the service continues opening new trades way beyond the maximum number of 10 positions. In fact, with average value of $1,400 and $10,000 portfolio, they should not open more than 7 trades - in reality, they have double most of the time. This is how they were able to claim 700% return in 2012.

"90% winning ratio"

You will see a lot of services advertising 90% winning ratio. Let me tell you a small secret: some strategies (like selling far OTM credit spreads) have built-in probability of success of 90%. The tradeoff is that the gains are usually very small (3-4%) and you need to hold 3-4 weeks to get that gain. So you win 9 out of 10 trades and lose one time - the big question is how much do you lose on that losing trade. If you made 4% nine times but lost 70% one time, the overall return is negative. Conclusion: winning ratio by itself means nothing. The only thing that matters is the total return.

Annualized return

When used correctly, an annualized return is the average annual return over a period of more than one year.
When used incorrectly, annualized means "we had a good trade so if we continue to make these exact same returns in this same amount of time, we will make X amount by the end of the year."

When someone makes a 10% in one week, they can advertise an annualized return of 500%. To achieve that return, they will have to repeat this 10% return every single week. Does anyone believe this is possible?

How does SteadyOptions present performance?

SteadyOptions does not use any of those dirty tricks. This is how we present our performance:

• The performance numbers are based on real fills, not hypothetical or backtested trades, and definitely not on "profit potential".
• Our ROI is based on maximum number of open trades. For example, in 2012 we made a cumulative return of 915%, but based on 6 open trades, this is 152% ROI, and this is what we advertise.
• We base the model portfolio on 10% allocation per trade which leaves at least 40% of the portfolio in cash.
• All our trades are clearly presented on the performance page.
• We base the returns on the required margin, not on cash.
• We always mention that the returns do not include commissions.

Be aware of those tricks before giving your hard earned money to crooks!]]> Sun, 20 Jan 2013 06:34:21 +0000 7f1de29e6da19d22b51c68001e7e0e54 http://steadyoptions.com/articles/_/general/2012-year-in-review-r34
SteadyOptions uses a mix of non-directional strategies: earnings plays, Iron Condors, Calendar spreads etc. The focus is on pre-earnings plays. The strategy is based on my Seeking Alpha articles ‘Exploiting Earnings Associated Rising Volatility’ and ‘How To Rent Your Options For Free’. This strategy aims for consistent and steady gains with holding period of 2-7 days. We also trade other non-directional strategies.

SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come. Looking at SO performance, you will see very few double digit losers. In fact, only 24 out of 271 trades have lost more than 10% and only 8 more than 20%.

We continue expanding the scope of our trades beyond the earnings trades, Iron Condors and calendars. We started trading GLD and VIX and added the double calendar as an additional earnings strategy. We will continue refining those strategies to get even better results. This gives members a lot of choice and flexibility.

What makes SO different?

First, unlike many other non-directional services that offer you just few Iron Condors per month, we use a portfolio approach, that may include a variety of non-directional strategies. We are trying to balance the portfolio in terms of options Greeks. The earnings trades are vega/gamma positive and theta negative. To balance them we might open a calendar and an Iron Condor or a butterfly which are theta positive. We might use a mix of different expirations to balance the gamma.

Second, our performance is based on real fills. Each trade alert comes with screenshot of my broker fills. Many services base their performance on the "maximum profit potential" which is very misleading. Nobody can sell at the top and do it consistently.

Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage.

We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders.

I assume most of you are familiar with the Pareto principle, also known as the 80/20 rule. As a reminder, the rule states that, for many events, roughly 80% of the effects come from 20% of the causes. How does it apply to trading?

If you go to your trading log, you probably will find out that 80% of your profits came from 20% of your trades. Look at SteadyOptions performance page - a big chunk of our gains in 2012 came from May, July and August performance. What many novice traders don't realize is that the best trading strategies are usually boring. You can wait months for that one nice winning streak, and then in couple of weeks or even days you make a year worth of profits. The trick is to survive during those "boring" periods which are 80% of the time.

Going back to SO performance, I think our biggest achievement was avoiding big losses. Sure we made some mistakes (mainly holding few trades through earnings), but overall, our drawdowns have been minimal so far. Patiently waiting for the next winning streak proved to be very rewarding.

Let me finish with my favorite quote from Michael Covel:
"Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between."

Subscription is now open to new members.

Happy Trading from SO!]]> Sat, 05 Jan 2013 02:13:11 +0000 02522a2b2726fb0a03bb19f2d8d9524d http://steadyoptions.com/articles/_/general/options-expiration-date-and-how-it-influences-t-r33 Elements of the price of an option
When someone who is options trading buys or sells an option, the price of it is determined by a few factors. These are:

• The intrinsic value of the option.
• Plus: the extrinsic value, which depends on:
• The time to expiration.
• The risk-free interest rate.
• Volatility.
• Dividends.

Only ITM options have intrinsic value. Let us assume the share price of company ABC is currently 100USD. A call option with a strike price of $80 will have an intrinsic value of $20.
If that option sells for $24, therefore, the intrinsic value is $20 and the rest ($4) is extrinsic value, of which time value, determined by the time to expiration, is an important component.

Time value
If one looks at a typical options chain, it is immediately clear that the more time there is until expiration, the more expensive the options become. The newer 1-week options are, everything else being equal, much cheaper than 1-month options, which are in turn much cheaper than 3-month options.

This is simply because with more time to expiration the price of the underlying asset has more scope to move up or down. The options writer needs to be compensated for this risk, otherwise there is little sense in writing (selling) an option.

Time decay
When a trader therefore buys a call or put option, a certain percentage of the purchase price is for time value, i.e. to compensate the options writer for the risk he is taking during the time left to expiration.
What is vital to understand here is that the closer to expiration the options come, the less time value they will have. Even if the price of the underlying asset does not move a single cent, your call or put option will lose its time value component as the expiration date approaches and eventually it will expire worthless. This is referred to as the time decay of options.

For options buyers time decay is their biggest enemy. The price of the underlying has to move beyond the strike price of their options by the expiration day, or they will become worthless. For options sellers this often becomes their best friend: all they need is for the underlying price to remain on the ‘right’ side of the strike price long enough and they will keep the full options premium.

What is interesting to note here is that options tend to suffer more time decay during the last 30 days of their lifetime than during earlier months. This is why many options sellers only sell options with an expiration date that is no more than 30 days away. Options buyers, on the other hand, need as much time as possible to give their options an opportunity to reach their strike price.

Summary:
It is important to understand how time to expiration influences the value of options. An option buyer is literally ‘buying time’ when he or she purchases longer term options, while an options seller will get bigger premiums for a longer term option than for a short term one, but this means additional risk because there is more time left for things to go wrong.]]> Thu, 13 Dec 2012 17:12:43 +0000 9fc3d7152ba9336a670e36d0ed79bc43 http://steadyoptions.com/articles/_/general/november-delivered-167-roi-to-steadyoptions-s-r32 The YTD non-compounded ROI is 149.8% based on the same 6 maximum trades. Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance.

The performance was negatively impacted by two earnings plays that we kept through earnings (AKAM and ADM) and carried from the previous month. Removing those two trades would almost double the performance. As mentioned before, I'm not going to hold any trades through earnings anymore.

Like in October, most losers were in the 3-7% range. But we also had few decent size winners (OVTI, ARO, GPS and CF). The ability to keep the losers small remains the key factor.

The earnings trades are still our bread and butter. But we continue expanding the scope of our trades beyond the earnings trades, Iron Condors and calendars. We started playing GLD and added the double calendar as an additional earnings strategy. We closed our second SPY butterfly trade for 39% gain and the GLD strangle for 20% gain. We will continue refining those strategies to get better results. This gives members a lot of choice and flexibility. I also encourage members to trade what they feel comfortable with. For example, many members chose to play earnings with monthly options only instead of weeklies in order to reduce the risk. I strongly encourage members to take all trades, earnings and non-earnings, as they provide the necessary balance for the portfolio.

The membership is currently opened to new members for a limited time. ]]> Sun, 09 Dec 2012 06:22:44 +0000 65ded5353c5ee48d0b7d48c591b8f430 http://steadyoptions.com/articles/_/articles/more-options-for-options-traders-r31 Read the full article]]> Sun, 09 Dec 2012 00:23:15 +0000 1afa34a7f984eeabdbb0a7d494132ee5 http://steadyoptions.com/articles/_/general/debit-spreads-vs-credit-spreads-r30 Lets address those misconceptions.

The simple truth is that credit and debit spreads require exactly the same capital. You just have to compare apples to apples. Lets look at July AAPL options as an example.

Trade #1:

• Buy AAPL July 2012 600 call
• Sell AAPL July 2012 590 call

Trade #2:

• Buy AAPL July 2012 600 put
• Sell AAPL July 2012 590 put

Both trades are bearish - the maximum gain is realized if the stock is below $590 by July expiration. If the stock stays above $600, both trades will experience the maximum loss.

In the first trade, you get a $788 credit. The margin requirement is $212 which is the difference between the strikes less the credit received. If the stock is below $590, both options will be worthless and you keep the whole credit. The maximum gain is 271% (788/212).

In the second trade, you pay a $214 debit. The maximum gain is realized when the stock is below $590, in which case the spread will be worth $1,000. The maximum gain is 267% (786/214).

The maximum gain of the first trade is slightly higher than the first trade, but the difference is very small. The capital requirements and P/L profiles of both trades are very similar, almost identical.

The bottom line: what determines the P/L graph of the spread is not the credit or debit, it’s the strikes you are using. The same trade can be done for credit or debit, using calls or put. As long as the same strikes are used for both trades, the results will be very similar, almost identical.]]> Wed, 28 Nov 2012 23:44:48 +0000 9b8619251a19057cff70779273e95aa6 http://steadyoptions.com/articles/_/forexpros/the-use-and-the-abuse-of-the-weekly-options-r29 Read the full article]]> Sun, 29 Jul 2012 16:09:41 +0000 d1f491a404d6854880943e5c3cd9ca25 http://steadyoptions.com/articles/_/articles/thank-you-google-and-see-you-next-cycle-r28 Read the full article]]> Mon, 23 Jul 2012 18:33:01 +0000 76dc611d6ebaafc66cc0879c71b5db5c http://steadyoptions.com/articles/_/articles/google-earnings-trade-risk-vs-reward-r27 Read the full article.]]> Wed, 04 Jul 2012 17:52:54 +0000 ec5decca5ed3d6b8079e2e7e7bacc9f2 http://steadyoptions.com/articles/_/articles/lessons-from-earnings-plays-r26 Read the full article]]> Mon, 07 May 2012 15:30:50 +0000 069059b7ef840f0c74a814ec9237b6ec http://steadyoptions.com/articles/_/forum/balancing-your-portfolio-r25 Read the full post]]> Sat, 28 Apr 2012 16:50:10 +0000 3def184ad8f4755ff269862ea77393dd http://steadyoptions.com/articles/_/forum/determining-a-good-entry-price-for-pre-earnings-r24 Read full post]]> Fri, 20 Apr 2012 15:43:18 +0000 c8ffe9a587b126f152ed3d89a146b445 http://steadyoptions.com/articles/_/articles/what-a-high-beta-means-for-apple-r23 Read full article]]> Wed, 18 Apr 2012 02:04:09 +0000 202cb962ac59075b964b07152d234b70 http://steadyoptions.com/articles/_/articles/6-ways-to-play-apples-earnings-r22 Read full article]]> Tue, 17 Apr 2012 14:19:05 +0000 a0a080f42e6f13b3a2df133f073095dd http://steadyoptions.com/articles/_/articles/lessons-from-googles-earnings-options-plays-r21 Read full article]]> Sun, 15 Apr 2012 23:22:49 +0000 4c56ff4ce4aaf9573aa5dff913df997a http://steadyoptions.com/articles/_/articles/trading-apples-pre-earnings-run-r20 Read full article]]> Mon, 09 Apr 2012 14:42:06 +0000 da4fb5c6e93e74d3df8527599fa62642 http://steadyoptions.com/articles/_/articles/exploiting-earnings-associated-rising-volatility-r19 Read the full article]]> Sun, 08 Apr 2012 17:37:39 +0000 07e1cd7dca89a1678042477183b7ac3f http://steadyoptions.com/articles/_/articles/myths-and-misconceptions-of-options-trading-r18 Read the full article]]> Sun, 08 Apr 2012 17:35:03 +0000 5ef059938ba799aaa845e1c2e8a762bd http://steadyoptions.com/articles/_/articles/why-i-wouldnt-trade-apple-right-now-r17 Read the full article]]> Sun, 08 Apr 2012 17:32:16 +0000 eb160de1de89d9058fcb0b968dbbbd68 http://steadyoptions.com/articles/_/forum/straddle-strangle-or-reverse-iron-condor-ric-r16 Read the full post]]> Sun, 08 Apr 2012 16:44:50 +0000 c45147dee729311ef5b5c3003946c48f http://steadyoptions.com/articles/_/forum/how-i-trade-iron-condors-r15 Read the full post]]> Sun, 08 Apr 2012 16:39:45 +0000 2b44928ae11fb9384c4cf38708677c48 http://steadyoptions.com/articles/_/articles/apple-dissecting-the-butterfly-trade-r14 Read the full article]]> Sun, 08 Apr 2012 02:50:07 +0000 5fd0b37cd7dbbb00f97ba6ce92bf5add http://steadyoptions.com/articles/_/articles/has-apple-become-a-speculative-stock-r13 Read the full article]]> Sun, 08 Apr 2012 02:44:33 +0000 73278a4a86960eeb576a8fd4c9ec6997 http://steadyoptions.com/articles/_/articles/5-ways-to-play-google-earnings-r12 Read the full article]]> Sun, 08 Apr 2012 02:41:16 +0000 7f6ffaa6bb0b408017b62254211691b5 http://steadyoptions.com/articles/_/articles/how-to-be-cautiously-bullish-on-apple-r11 Read the Full Article]]> Sat, 07 Apr 2012 23:12:49 +0000 698d51a19d8a121ce581499d7b701668