Articles


SteadyOptions 2015 - Year In Review

Happy New Year everyone! Wishing you and your families a lot of health, prosperity and happiness in 2016.

 

2015 marks our fourth year as a public service. We had a fantastic year. We closed 129 trades in 2015 which produced 195.6% ROI (117.3% gain on the whole account based on 10% allocation). The ROI is based on fixed $1,000 allocation per trade (non-compounded) and 6 trades open. The winning ratio was pretty consistent around 75%. We had only one losing month in 2015. Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance.

All You Need to Know About Auto-Trading

We are getting a lot of questions about our auto-trading program. Specifically, people want to know how it works, why we auto-trade some strategies and don't auto-trade others etc.

 

Auto-trading is basically money management, but vast majority of newsletters are not licensed to manage money. Would you give your hard earned money to amateurs? I assume most people would give a negative answer to that question - yet, by participating in Auto-trading program, this is exactly what they do. Is it stupidity or ignorance? You decide.

Is Timeframe Your Biggest Mistake?

Few days ago I came across an excellent article by Dan from http://www.thetatrend.com. The article is called Awareness and Taking Losses and discusses some of the aspects of trading psychology, especially how traders react to their losses. I respect Dan very much and I found out that we share a lot in terms of trading philosophy.

 

I would like to share some of the thoughts expressed in the article and add my own perspective.

Are You Following "Tharp Think" Rules?

Thirty years ago, legendary trading coach Dr. Van K. Tharp sat down with two top traders Ed Seykota and Tom Bassoand and discussed the importance of psychology in trading. They decided that the factors of trading could be broken down as:

  • 10% Trading System
  • 30% Money Management
  • 60% Psychology


Many years later, Tharp admitted that they were wrong. Now he thinks that Psychology accounts for 100% in trading success.

 


We can argue about the exact percentage, but there is no doubt that Psychology plays HUGE role in trading success.

Lessons From Q1 2016 Earnings Season

In our continuous effort to expand our strategies, few weeks ago I presented a new exciting strategy to SteadyOptions members. The strategy is buying a Reverse Iron Condor (RIC) before earnings on stock with history of big post-earnings moves. RIC benefits from a big post-earnings move, but requires less movement than a straddle or strangle.

 

The assumption is that with careful stock selection, this strategy has a very high probability of success. I performed extensive backtesting on number of stocks, and the results were very promising. Stocks like AMZN and LNKD showed average gains of 30-35%. However, I also mentioned that this strategy has higher risk than other strategies that we use since earnings are unpredictable. High Probability High Risk is the right definition of this strategy.

My 2015 Personal Account Return: 80.2%

Many people say that it's too good to be true after looking at our performance page. In fact, if you had a nickel for every time you heard some investing “guru” cherry-pick advice to look good, you wouldn’t need to invest anything because you would have a fortune.

 

SteadyOptions provides great options trading education, but is also striving to be one of the industry leaders in terms of honesty and transparency. Our performance reporting is on the whole account and based on real fills. We put our money where our mouth is. Our members already know that we execute all trades that we share with members in our personal accounts. You can read here what our members think about us.

 

But today I'm going to take one more step toward complete transparency. I'm going to provide an additional reference to the current and prospective members and share with you my personal account performance. I'm going to show you the summary of my actual 2015 account statement, directly from my broker.

Steady Condors 2015 Report: 46.7% Return

This week we closed our December trades with gains of 6.7% on margin, and 5.1% return on 20k unit. This makes the 2105 year non-compounded return 46.7% on a whole account (including commissions). If we reported returns like most other services do (Compounded ROI before commissions), we would report 80.8% gain.

 

As you noticed, we closed our December trades two weeks before expiration, to reduce the negative gamma risk. We recommend reading the Why You Should Not Ignore Negative Gamma article to understand the gamma risk.

Options Trading Greeks: Gamma For Speed

Gamma measures the rate of change for delta with respect to the underlying asset's price. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price.

 

Like the delta, the gamma is constantly changing, even with tiny movements of the underlying stock price. It generally is at its peak value when the stock price is near the strike of the option and decreases as the option goes deeper into or out of the money. Options that are very deeply into or out of the money have gamma values close to 0.

Options Trading Greeks: Delta For Direction

The option's delta is the rate of change of the price of the option with respect to its underlying price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price.

 

Far Out-of-The-Money options have delta values close to 0 while Deep-In-The-Money options have deltas that are close to 1.

Options Trading Greeks: Vega For Volatility

Investopedia defines vega as:

 

The measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the volatility of the underlying asset. Volatility measures the amount and speed at which price moves up and down, and is often based on changes in recent, historical prices in a trading instrument. Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration. Vega is one of a group of Greeks used in options analysis, and is the only one not represented by a Greek letter.

Options Trading Greeks: Theta For Time Decay

The options theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration date gets closer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears.

Why We Sell Our Earnings Calendars Before Earnings

In my previous article I described why we sell our earnings straddles before earnings.

 

As a reminder: “There are many examples of extraordinary large earnings-related price spikes that are not reflected in pre-announcement prices. Unfortunately, there is no reliable method for predicting such an event. The opposite case is much more common – pre-earnings option prices tend to exaggerate the risk by anticipating the largest possible spike.”

 

So if options are on average overpriced before earnings, why not to sell those options and hold the trade through earnings?

Why We Sell Our Earnings Straddles Before Earnings

Our regular readers know that buying a straddle few days before earnings is one of our favorite strategies. IV (Implied Volatility) usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. I'm asked many times why we sell those trades before earnings.

 

In this article, I will show why it might be not a good idea to keep those straddles  through earnings.

Impending Market Reversal And Our Options Strategies

By Gagan Gautam, CEO & Founder @ www.optionsherald.com

 

U.S. Market has seen a bullish run since 2009 after its tragic collapse in 2007-2008. It has been more than 5 years of partying on Wall Street and now it looks like the market needs correction and “introspection”. There are various economic indicators that rationalize our belief that the market is now headed for a correction.

4 Low Risk Butterfly Trades For Any Market Environment

This article is presented by Dan, founder of Theta Trend, a site focused on simple, objective options trading with an awareness of trend.

 

The other day I was having a conversation with an options blogger and he asked me how I traded. When I told him that my primary trade is the Butterfly, he was surprised and said I was one of the first people he met who regularly traded Butterflies. In a world where Iron Condors get all the love, it wasn't the first time I had that conversation. I've traded a wide range of options strategies, but, for a number of reasons, the Butterfly is my preferred trade.

Top 10 Options Strategies

There are about 72 options trading strategies. There are three most commonly used options strategies: bullish, bearish and neutral or non-directional.

 

The following infographic describes the top 10 options strategies: Covered Call, Protective Put, Long Call, Long Call Spread, Long Put, Long Put Spread, Long Straddle, Long Strangle, Collar and Iron Condor.

Is The Correction Finally Here? Frankly, We Don't Care

August is finally behind us. It was a worst month in 3 years, with most major indexes down 6-8%. The Dow Jones Industrial Average ended August with the steepest monthly loss in more than five years. At some point the markets entered the correction territory, after declining more than 10%.

 

What's ahead of us? Are the markets going to retest the August lows? Or we are going to see a rebound? Will it be another V-shaped recovery?

How We Lost 60% on $SPX calendar

Experienced traders know that nothing teaches you more than losing trades. And the bigger the loss, the more you learn.

 

Today I would like to dissect our biggest loser in the last 2 years.

 

This year's sideways market has been very kind to calendar trades. We booked few very nice winners with SPX and RUT calendars. When we opened another SPX calendar on August 5, I expected another nice winner. But the market had very different plans.