Profit With Non-Directional Trading

I understand why an options trader might prefer using a non-directional trading strategy rather than, as you phrase it, "bet on the direction of the markets or individual stocks". These non-directional trading strategies certainly minimize your loss potential, but at the same time limit your profit potential.

With proper risk management directional trading strategies can be even more profitable and you can unwind the trade at any point you see the market starting to move against you. With sufficient amount of research and analysis on a specific stock you can predict where the market won't go to in the allocated time frame (expiration month) rather than trying to predict where the market for that stock will go to in the allotted time frame.

There's a hugh difference in the two approaches. In the second approach, which I don't want to take, I'm making a guess at where I think the market will end up at the end of option expiration. That's the hardest game to win. Nobody is that good at figuring out the where and when of a market move. But, if you are somewhat good at having at least a general idea of which way the market is headed (either higher or lower), you can also make a pretty good guess as to where the market probably won't end up at option expiration.

When you sell options, your only concern is for the market to not go pass the OTM option strike that you are short. That's the key. And when you have a general idea where the market probably won't end up at option expiration... you're chances of a profitable trade are pretty good.

There are many ways to trade options. Directional strategies might work for some people. It is true that non-directional strategies usually limit your profit potential. But with directional strategies, profit potential is unlimited only in theory. In reality, how many times did you get 100%+ gains? And how many times did you lose 50-70% or more?

It also impacts your position sizing. When you know that your risk is limited to 20-25%, you can allocate larger positions to those trades.

Also, don't forget that there are many types of non-directional strategies. Some strategies bet that the underlying will not move much. Others like straddles need it to move - just doesn't matter which direction.

The bottom line is that everyone should find what works for him and stick to it. There is no holly grail, only hard work and discipline.

Your statements about non-directional strategies are well taken. I completely agree with you that everyone should find what works best for them and stick to it. For me directional strategies have proven to be very profitable. In reality I usually get 100%+ gains around 90% of the time, and I have never had a 50-70% loss selling options. Thanks again for your feedback.

Well, 100%+ 90% of the time would probably make you the best trader in the world.. By large margin. I definitely cannot compete with those results.

On the other hand, my results are fully documented. Our non-directional trading produced 82% 5 Year Compounded Annual Growth Rate (including commissions). I still have to see directional strategy consistently producing similar results (or even half of it). I mean, not some absurd claims, but fully documented track record, with portfolio allocation etc.

I'm certainly not the world's best trader, but at the same time I'm not making an absurd claim. Since I don't currently have fully documented trading results neatly tabulated to present at this point, I'll have to present them at a later date. To successful trading.

2 minutes ago, Michaelg said:

Since I don't currently have fully documented trading results neatly tabulated to present at this point, I'll have to present them at a later date. To successful trading.

 

I didn't think so..

And yes,  making 100%+ gains around 90% of the time IS an absurd claim. Lets see your directional trading results in real time.

We'll see. Have a good day!

3 hours ago, Michaelg said:

In reality I usually get 100%+ gains around 90% of the time, and I have never had a 50-70% loss selling options.

Michael,

Any strategies you'd be willing to share with us?

I only want to state to support Kim´s words, that it is possible to follow SteadyOptions trade ideas (with the same or slightly different parameters, entry, exits, adjustments, ...) and get similar and from time to time better results (depends on your risk tolerance, Kim is in my opinion quite conservative and wants him followers to be able take similar results). Kim is willing to discuss and share any new approach or idea in options trading. Are you too? Show us any and we can give you our opinion if you want.

good trading

@Noah Katz

Turns out that the "secret" strategy that makes " 100%+ gains around 90% of the time" is selling naked puts.

According to Michael, "100% gains is keeping the entire option premium that I received as the result of the option contract expiring worthless."

However, there is a "small" problem: when you sell a naked put, there is margin requirement. And the only way to calculate gains is return on margin. Depending on the stock and the expiration, your return on margin is usually around 10-15% if your sell slightly OTM puts. Nowhere close to 100%+ gain. Yes, you can win 90% of the time if you sell far OTM puts with deltas of 10-15, but in this case your maximum gain is usually 3-5%. 

Unfortunately, internet is full of hype from people that will tell you what you want to hear. In some cases it is ignorance, in others it is intentional misleading. Be very careful when someone makes absurd claims. Usually when you dig deeper, you find out the "fine print".

What you characterize as intentionally misleading was really a misunderstanding. Granted it may have been ignorance on my part, by misinterpreting what you meant by a 100%+ gain. But to me keeping all the initial premium I received when selling naked puts is a 100% gain or more appropriately said a “100% win”… since that’s the maximum profit that can be made on that type of trade.

There are many recognized options trading experts that promote selling naked puts as a fabulous way to collect option premiums, which generates income for you while you wait to potentially purchase your stock at a lower level.  It’s an alternative way to take advantage of your bullish outlook of the market.

How great is that? Someone will actually give you cash today in exchange for the opportunity to buy a stock at a lower price. You can see it as sort of a consolation prize given to you for your patience as you wait for your stock to get cheaper. As a result, this strategy falls into the “income-producing” category.

Naked put selling is a time-tested, legitimate, and popular strategy. If you’ve ever looked through the educational material published by the U.S options exchanges, you will see the naked put selling strategy is listed right along with all the other strategies like the ultra-simple “long-call” and the more advanced “iron butterfly”.

You only want to sell naked put options on stocks you want to own. But since you are selling OTM put options on these stocks, it's unlikely you will be assigned the shares. Thus, the option contract expires worthless and you keep the full premium. So it’s an incredible way to earn passive income while you "sit on the sidelines of the stock market".

So directional trading, like naked put selling, can be very profitable… potentially more so than non-directional. Kim, even by your own admission in an earlier post in this string you stated: “It is true that non-directional strategies usually limit your profit potential.”

I don’t want to argue which is better, but importantly which method works best for you. I think it would be more prudent on your part to be more careful how you characterize another person’s statements and /or intentions.

You missed my point.

Is selling puts good strategy? Absolutely! It's not a holy grail (you profit less if the stock goes up a lot), but it's a great way to buy stocks at discount. However, I find it ironic that you advocate this strategy as superior to non directional trading while mentioning that non directional trading limits gains. Isn't put selling limiting gains as well? In fact, it limits gains much more, because some non directional strategies like straddles or calendars can win more than 100% in some cases.

But my main point was about your claim about 100% gains, which turned out to be extremely inaccurate. 100% gain means that if you allocate 1k to a trade, you end up with 2k. With naked puts selling, this is not the case. 

As a side note, your claim "But since you are selling OTM put options on these stocks, it's unlikely you will be assigned the shares." is also inaccurate. If your put is slightly OTM, it will have delta of around 40, which gives you 40% to be assigned. If you go further OTM, you will have higher probability of success, but also lower potential gain since you will get less credit.

I don't know you, and I have no idea if your 100% gains claim was ignorance or intentional misleading. Frankly, it doesn't really matter. Nobody should make such absurd claims. And when you say on your website "What If You Could Always Be Profitable in Today’s Markets… And With Less Money at Risk" - yes, I have a big issue with this statement. It is very misleading, and it doesn't matter if the reason is ignorance or intentional misleading. Not only nobody can be ALWAYS profitable, but in fact, naked puts selling places more money at risk, not less. And if you consider it a safe strategy that can always win, ask those who sold naked puts on S&P500 in 1987 or 2008. Some hedge funds went out of business after doing it.

How To Blow Up Your Account article might help to understand the risks of put selling. Doesn't mean it's a bad strategy - on the contrary. But describing it as a holly grail that cannot lose money is very inaccurate and misleading.