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Seeing how large blocks of options moved compared to smaller positions was eye opening over the past few years. I’ve heard from quite a few frustrated Steady Options members who have had issues getting anything close to the Steady Option’s official numbers. The complaints generally fall in the range of (a) the numbers must be made up (they’re not), (b) it’s impossible to get those numbers (it’s not), and/or (c) what am I doing wrong? (Hint: the last question is the one everyone should be asking.) Trading of any form is not easy. Trading of options, particularly in the higher frequency format that Steady Options tends to use, is even more difficult. In part, this is due to how fast option prices move, the various components that make option prices (Greeks), and to typical investor/trader psychology. Like any profession, most people get better with practice. However, I’ve noticed option trading (and to a lesser extent trading in general), tends to attract large numbers of people who don’t seem to be able to “get it.” Regarding Steady Options, I have heard from well over a dozen members over the years that have stuck with it, often for over a year without making progress in understanding how to achieve the same success. Why is that? Why can some people figure it out, and others have difficulty? Well, one common thread among those who report having trouble duplicating the results is the lack of record keeping – in particular, a trading journal. Every option trader should keep a detailed trading journal. I use an excel spreadsheet. The categories have varied over the years, but I’ve settled (for now) on the following fields: Date Trade (e.g. BTO CSCO Feb 15 Call) Quantity (number of contracts) Price Commission Earnings (or close by) date Previous quarter RV Previous 8 quarters average RV Enter below/above average RV Average post earnings move last 8 quarters SPY Price at time of entry VIX at time of entry Steady Options Entry Date (official trade) Steady Options Trade (official trade) Steady Options Price Comments In the comments portion, I always put thoughts on the current market. If I entered above average RV, I list why, and I try to put thoughts on targeted closing prices (or expected closing prices). For example, if CSCO had an average gain of 7.5% the last 4 cycles, I would say “CSCO has gained an average of 7.5% the last 4 cycles, if the position ever has gains of 10% or more, exit.” When a trade is closed, I enter information in the comments column. If I do better than the official Steady Options trade (rare), I explain why. If I do worse, I try to explain why. Sometimes I do worse because I was late to the trade and the market had moved. Sometimes I do worse because I had projected a closing price (such as CSCO at 10%), exit, but the official Steady Options trade ran longer and experienced more gains. Once I did worse because I was away from the computer when I received an unexpected assignment, with time value left, and had a forced liquidation of positions, leading to losses. Sometimes I did worse because of a trading error (e.g. entered the wrong strike, the wrong period, etc.). Sometimes I did worse because I was risk adverse and only took on a 5% position, when the Steady Options’ trade was 10%. Sometimes it was the opposite (taking on more risk). The list of why I underperformed the official trades is quite long…but so is the list of when I outperformed. It is also helpful to list trades you don’t do and why. For me, the most common reason is I missed the trade. The official trade might go up at 10:00, I’m with a client, and by 10:20, the price has moved $1.00 and it never comes back to an entry point. Without a record such as this, you will never learn to spot your mistakes,or understand how to improve. The investors that have done the best with the Steady Options strategies are those who develop their own understanding of them, why entries are done where they are and when, how to manage the trades, and how to react when you are “off” in time from the official trades. It’s amazing what a trade journal can teach. For instance, over the last five years, I never could match or beat the official trades on YUM or TIF. It was driving me crazy. This was true whether I reacted to the official trade in under a second or predicted where the official trade would enter and got a better entry price. In digging out the trade journal, only one thing jumped out – namely that Kim’s trades were on smaller positions. I was trading an account of more than $10,000. What if I switched to using a smaller allocation on them…maybe only trading $2,000 or even $1,000? Well, last cycle that worked. Hopefully, it will work going forward, too. Other times, a trade worked very well five or six cycles in a row, but then it stopped for several cycles. Such results seem puzzling until I looked at the volatility numbers in the market and realized that the trade performs well in low volatility but not well in high volatility…regardless of what the RV of the trade was. But more than anything else, a trading journal forces traders to do more than blindly follow the official trades. The reason I like the Steady Options community so much is that it encourages members to learn, ask questions, and actually understand what is happening, rather than members just attempting to duplicate results. If you are chained to your computer immediately mimicking the trades as posted, you might have good results, but very few people have that flexibility or time. A trade journal forces you to learn, as well as helping you to see questions you should be asking of the community. To help all of our members, we would like to encourage you to enter your trade journal entries in the thread setup for that trade after the trade has closed. Here, you can post your trade journal entries and ask for feedback. This will be particularly valuable after several trading cycles on a single position (e.g. you’ve traded a DIS earnings straddle three times and significantly missed the official performance all three times). I am anticipating that some common mistakes will emerge, and we will be able to create a helpful guide for avoiding those mistakes. I also hope that this will allow our entire community to identify “better” trades and improve as option traders. Christopher Welsh is a licensed investment advisor and president of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics.

In this article, I will try to help you understand Options Greeks and use them to your advantage. The Basics First, a quick reminder for those less familiar with the Options Greeks. The 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. In dollar terms, the delta is from $0 to +$100 for calls ($0 to -$100 for puts). Delta can be viewed as a percentage probability an option will wind up in-the-money at expiration. Therefore, an at-the-money option would have a .50 Delta or 50% chance of being in-the-money at expiration. Deep-in-the-money options will have a much larger Delta or much higher probability of expiring in-the-money. The 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 draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. Option sellers use theta to their advantage, collecting time decay every day. The same is true of credit spreads, which are really selling strategies. Calendar spreads involve buying a longer-dated option and selling a nearer-dated option, taking advantage of the fact that options expire faster as they approach expiration. The Vega is a measure of the impact of changes in the Implied Volatility on the option price. Specifically, the vega of an option expresses the change in the price of the option for every 1% change in the Implied Volatility. Options tend to be more expensive when volatility is higher. When you buy options, the vega is your friend. When you sell them, the vega is your enemy. Short premium positions like Iron Condors or Butterflies will be negatively impacted by an increase in implied volatility, which generally occurs with downside market moves. When entering Iron Condors or Butterflies, it makes sense to start with a slightly short delta bias. If the market stays flat or goes up, the short premium will come in and our position benefits. However, if the market goes down, the short vega position will go against us - this is where the short delta hedge will help. The Gamma is a measure of the rate of change of its delta. 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. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. Selling options with close expiration will give you higher positive theta per day but higher negative gamma. That means that a sharp move of the underlying will cause much higher loss. So if the underlying doesn't move, then theta will kick off and you will just earn money with every passing day. But if it does move, the loss will become very large very quickly. You should never ignore negative gamma. Example Lets analyze the Greeks using one of our recent trades as an example: Buy to open 4 ORCL July 17 2015 44 put Buy to open 4 ORCL July 17 2015 44 call Price: $2.66 debit This trade is called a straddle option strategy. It is a neutral strategy in options trading that involves the simultaneously buying of a put and a call on the same underlying, strike and expiration. A straddle is vega positive, gamma positive and theta negative trade. That means that all other factors equal, the straddle will lose money every day due to the time decay, and the loss will accelerate as we get closer to expiration. With the stock sitting at $44, the trade is almost delta neutral. Lets see how other Greeks impact this trade. The theta is your worst enemy as we get closer to expiration. This trade had 44 days to expiration, so the negative theta is relatively small ($3 or 1% of the straddle price). As we get closer to expiration, the negative theta becomes larger and the impact on the trade is more severe. The gamma is your best friend as we get closer to expiration. That means that the stock move will benefit the trade more as time passes. The vega is your friend. If you buy options when IV is low and it goes higher, the trade starts making money even if the stock doesn't move. This is the thesis behind our pre-earnings straddles. Make them Work For You If you expect a big move, go with closer expiration. But if the move doesn't materialize, you will start losing money much faster, unless the IV starts to rise. It basically becomes a "theta against gamma" fight. When you expect an increase in IV (before earnings for example), it's a "theta against vega" fight, and the large gamma is the added bonus. When you are net "short" options, the opposite is true. For example, Iron Condor is a vega negative and theta positive trade. That means that it benefits from the decline in Implied Volatility (IV) and the time decay. If you initiate the trade when IV is high and IV is declining during the life of the trade, the trade wins twice: from the declining IV and the time passage. However, it is also gamma negative and the gamma accelerates as we get closer to expiration. This is the reason why I don't like holding the Iron Condor trades till expiration. Any big move of the underlying will cause big losses due to a large negative gamma. The gamma risk is often overlooked by many Condor traders. Many traders initiate the Iron Condor trades only 3-4 weeks before expiration to take advantage of a large and accelerating positive theta. They hold those trades till expiration, completely ignoring the large negative gamma and are very surprised when a big move accelerates the losses. Don't make that mistake. One possible strategy is to combine vega positive and theta positive trades with vega positive and theta negative ones. This is what we do at SteadyOptions. A Calendar spread is an example of vega positive theta positive trade. When combined with a straddle trades which are vega positive theta negative, a balance portfolio can be created. Conclusion: when you trade options, use the Greek option trading strategies to your advantage. When they fight, you should win. Like in a real life, always know who is your friend and who is your enemy. The following videos will help you understand options Greeks: Related articles: Options Trading Greeks: Theta For Time Decay Options Trading Greeks: Delta For Direction Options Trading Greeks: Gamma For Speed Options Trading Greeks: Vega For Volatility We invite you to join us and learn how we trade our Greek options trading strategies. We discuss all our trades including the Greeks on our options trading forum.

Background Shorting volatility proved to be very profitable historically. The reason is that VIX futures are drifting lower over time, so all you have to do is being short a product that is long volatility (like VXX) or being long an inverse product (like SVXY). Looking at VXX historical chart tells the whole story: So what's the catch? Well, the issue with going short VXX (or being long SVXY) is those occasional big spikes, like the one in 2008. So the trick is to find a strategy that goes short VXX or long SVXY, but at the same time, doesn't lose much during those occasional spikes. This article tells the story of an incredible SVXY trade that was a big winner despite the total collapse of SVXY. Strategy Description We will be looking to hold constant exposure to short volatility while the curve is in significant Contango in an effort to harvest volatility premium. We will also look to go long volatility when the curve is in significant Backwardation and indicators reveal the trend will continue in the short term. Because the curve is in Contango approximately 80% of the time, we will hold short exposure to volatility most of the time. The main strategy to gain this exposure will be through a Collar spread. The PureVolatility model portfolio will be based on total capital amount of $10,000 with a 5% allocation on risk. This is very important as those who are trading in a Reg-T account would on average need $10,000 in initial margin to hold the position even though the risk may only be $500. Portfolio Margin accounts would only require the $500 max loss amount. Reg-T is somewhat antiquated when it comes to margin for a Collar spread. However, this really should not be an issue because if one does not have $10,000 to put aside for this strategy it is probably not appropriate. Furthermore, the increased margin amount will keep members from over allocating to this very aggressive strategy. We will target a risk reward of better than 1:1 for a two week holding period. Here is an example of the Hedged Collar strategy sized for the model portfolio: 100 shares of SVXY at 101.93 Short 1 contract of the 11/10 110 Call at (1.35) Long 1 contract of the 11/10 103 Put at 5.54 Using the above example, here is the P/L chart of the trade: Please note that the profit potential is around $400 and risk around $300. For a strategy that wins around 80% of the time, this is an incredible risk/reward. But it gets even better. One of our other veteran members posted the following comment on the forum: After some discussion, it has been decided to modify the trade and use deep ITM calls instead of the shares. Here is an SVXY "modified" collar entered on January 30 with SVXY at 114: P/L chart: Please notice how using ITM calls instead of shares allows to reduce the risk if the stock makes a big down move. The next day SVXY moved higher and short call has been added. On February 2 SVXY started to move down. By the end of the day on February 5, SVXY went down around 40%. After few adjustments the P/L chart looked like this: The trade was down $750 or 7.5% loss on $10,000. This is completely reasonable, considering that the underlying was down 40%. Any bounce to $90 area should bring the trade back to breakeven. But then black Tuesday came. SVXY opened around $11, 60% down. The calls became nearly worthless, but the puts were the big winners, far outpacing the losses in the calls: Overall this trade produced almost 45% gain on margin or 26% gain on $10,000 portfolio. The bottom line: A trade that was long SVXY, was a big winner after SVXY went down 90%+. This is options trading at its best. And this is the power of our trading community. Read the full description of the PureVolatility strategy here. Related articles: The Astonishing Story Behind XIV Collapse The Incredible Option Trade In VXX The Lessons From The XIV Collapse The Spectacular Fall Of LJM Preservation And Growth

A few weeks ago we introduced a new strategy to our members. While a double diagonal spread is a well known strategy, we are trading it with a tweak. The double diagonal strategy is part of SteadyOptions service, along with straddles, strangles, calendars etc. One of our members have mentioned that "I realize they are lower risk in the sense that they can be open longer without big losses, but feels to me like playing not to lose." Here is a response from our contributor @Yowster who introduced the strategy: Well... Lay me outline reasons why I like them (and I've been doing a ton more of them in personal trades in addition to the official ones, and are tracking even more of them). They are extremely low risk, of all the trades I've had on or tracked only one (a DE personal trade) was down by 10% or more at any given time provided I exit prior to T-0, and I wound up able to close that one for a small gain. I've had many make gains of 15% or more (NVDA, SQ, PANW were recent trades I closed within the past few days that fall into this category). Of the trades I've placed since January (about 25 of them), roughly 75% of them have been winning trades with an average gain across winners and losers of ~5% (and there were a few large winners like BA and MRNA that I only tracked and didn't have on). I compare the results to straddle trades since they have similar profit targets, although holding periods can be longer. Compare a 75% win rate with ~5% average gain to our historical straddle results found here and these DD returns are very good. One of the common things heard from many members over the years is that the shorter duration straddle trades are difficult to manage when they can't be watching the market all the time. DD's don't fall into this category as they can be open for longer periods of time, you can easily have GTC orders to close at profit targets and you don't have to worry about avoiding larger losses when RV suddenly spikes downward - so DDs are very good trades for people who can't be watching the market all the time. Regarding the "playing not to lose" comment. Managing downside risk as much as possible is one of my primary goals with SO trades, as larger percentage losses can have a large negative impact on portfolio performance. I look at DDs simply like this - I can have roughly 75% of trades be profitable (some smaller gains, but quite a few over 10% and some getting to 20%), but have almost all losses limited to below 10% (most losers below 5%) and that math works out very well over the longer term. Currently, we have 4 DDs open as official trades and this will be the most you are likely to see at any given time - thereby leaving plenty of slots for other trade types. Members have different risk tolerances so not every trade type we use is a good match for all members. But for people who can't be monitoring the market all the time and for some trades where you'd like a higher capital allocation because of the lower downside risk, DDs can be a good match this category. As one of our members mentioned: "Regarding the "playing not to lose" comment. Managing downside risk as much as possible is one of my primary goals with SO trades, as larger percentage losses can have a large negative impact on portfolio performance. I look at DDs simply like this - I can have roughly 75% of trades be profitable (some smaller gains, but quite a few over 10% and some getting to 20%), but have almost all losses limited to below 10% (most losers below 5%) and that math works out very well over the longer term. Many option forums or traders will report a win percentage, total percentage over a few years. However, I will say that over long periods of time, the unlikely occurrence of a higher risk/higher return strategy of will greatly reduce a portfolio. The cost of the extra options easily is worth the alleviation of risk. If you look at their historical performance. This was once of there better performing trades over time. So thank you Yowster. I also like that some trades are large enough stocks that you can exceed the recommended allocation without significantly effecting the float with a larger trade, as a straddle/strangle under a dollar needs is less desirable for me. I completely respect this strategy is for a 100k portfolio. I may be trading occasionally more, but that's a different topic that has been discussed I believe." My 2 cents: To put things in perspective, we closed 9 DDs so far with average return of 5.1% and average holding period of 9 days. Only 2 losers, both 2-3%, and none of the trades was down more than 5% at any given time. Even when the stock doesn't move, the losses are minimal. If someone believes that 5% is not a good return for options trades, I suggest reading Is 5% A Good Return For Options Trades? Yes, some options gurus will tell you that you should aim for at least 100% gain in each option trade, otherwise it is not worth the risk. What they don't tell you is the risk you will be taking. So I would say that on risk adjusted basis, those results almost too good to be true. They are also pretty easy to open, and because the holding periods are longer than straddles, members have more time to enter. Closing can be done with GTC order, and many times members get better results - just check the previous DD discussion topics. Commissions impact is negligible - in today's environment, many brokers have zero commissions, and even for people who pay 0.30-0.50 per contract (which is high by the current standards), the commissions impact is less than 0.5% per trade. As for the statement "playing not to lose" - guilty as charged. Limiting losses is our main goal at SteadyOptions. And if you look at our track record, in the last 12 years we were able to produce triple digit gains while keeping the drawdowns very small. I can only salute @Yowster for constantly coming with new variations of well known strategies in every market environment. Another consideration is trade allocation. Lets say you are willing to risk 2% of the account per trade. If you know that the maximum risk is not likely to be more than 10-15%, you can easily allocate 10-12% per trade. But if your risk is 100%, your allocation should not exceed 2% per trade. So your overall performance will not necessarily be better with high risk high reward trades, but with much higher risk. So yes, we are playing not to lose. Keeping your losers small is one of the key elements in trading. Subscribe to SteadyOptions now and experience the full power of options trading at your fingertips. Click the button below to get started! Join SteadyOptions Now!

Who Was Karen the Supertrader? Karen Bruton, known better as Karen the Supertrader, is a former hedge fund manager who became famous after multiple appearances on the Tastytrade live show. Bruton started as a novice retail trader who knew virtually nothing about trading and became a multimillionaire in a handful of years. Specifically, she turned $110,000 into $41 million between 2008 and 2011 using basic option selling strategies. Following her massive personal trading success, Karen started a hedge fund called Hope Advisors. Nowadays, Karen the Supertrader is infamous because she was barred from managing outside money by the SEC. According to the SEC’s complaint, Bruton was continually rolling losing positions forward to avoid realizing a loss and thus, in the eyes of the SEC, misleading investors. Because selling options results in immediate income, it’s been the weapon of choice for traders who are hiding large losses. Nick Leeson, a rogue trader who famously brought down Barings Bank, also hid his losses by selling naked options. What Was Karen the Supertrader’s Strategy? Karen the Supertrader’s trading strategy, sometimes referred to as the “KST method,” was based on the concept of theta decay. Her approach involved short selling options with the expectations that they would become worthless upon expiration. By focusing on options that were highly likely to expire out-of-the-money, Karen leveraged the gradual erosion of their time value to her advantage. Karen focused primarily on equity index options on the S&P 500, Nasdaq 100, and Russell 2000. Focusing on a small number of highly liquid symbols allowed her to form a consistent strategy. Her strategy involved selling options that were two standard deviations out-of-the-money with expiration dates ranging between 30 and 56 days to expiration. In other words, these options were roughly 95% likely to expire worthless. As far as systematically selling options goes, Karen’s strategy is par for the course. Most traders who use a similar strategy tend to sell deep out-of-the-money (OTM) options, as they will expire worthless most of the time. The strategy tends to rack up several consecutive winning trades that are relatively small in size with a rare losing trade that will be significantly larger. Karen the Supertrader Trading Rules Let’s take a more granular look at the specific trading rules that Karen the Supertrader has publicly reported using. Firstly, she preferred a short strangle trade structure. This gave her a market neutral market outlook, taking no position on which direction the market will move next. Her only goal with the trade was for the market to remain inside her chosen strikes until expiration or until she closed the trade. Here’s an example of what a short strangle looks like: When it comes to short strangle strike selection, Karen the Supertrader used Bollinger Bands to select her strikes. Bollinger Bands are a technical indicator that plots trading bands two standard deviations away from a moving average. See the chart below for an example: She primarily traded in expiration dates ranging from 25 days to 56 days at the latest. To round up all of these rules, let’s create a rough example of an SPX short strangle trade that Karen the Supertrader might take, based on the rules she’s reported publicly in her Tastytrade interviews: ● Trade type: short strangle ● Put strike: 3875 ● Call strike: 4230 ● Expiration date: June 23 (39 days to expiration) Karen would typically take profits on winning trades, and roll out losing trades to a later expiration. Today she manages 190 million dollars, after making nearly 105 million in profits. Before we start analyzing Karen the Supertrader's strategy, lets be clear: she did NOT make 105 million in profits as TastyTrade claims. That number includes money from new investors. This headline is misleading at best, deception at worst. How much did she really make? We don't really know, but lets try to "guess". With SPX currently at 2075, she would sell May 1825 puts and 2280 calls. This is how the P/L chart would look: So she would get around $700 credit on ~21k in margin. If she holds till expiration and both options expire worthless, the trade produces 3.5% gain in 59 days. That's 21% annualized gain on 50% capital, or ~11% gain on the whole account. This assumes that both options expire worthless and no adjustment is needed. This also assumes regular margin. With her capital, she obviously gets portfolio margin, so her margin requirements are significantly less. But if she wants to take advantage of portfolio margin, she has to sell more contracts, taking much more risk. For the sake of her investors, I hope she is using 50% of the regular margin, not portfolio margin. In any case, I have hard time to see how she can make more than 25-30%/year with this strategy. Don't get me wrong, this is an excellent return - however, by selling naked options, she also takes a LOT of risk. To make 25-30%/year with this strategy, she must use a lot of portfolio margin - which means a lot of leverage. Karen the Supertrader’s strategy is also short gamma and short vega, which means as the market moves against her, the positions become worse at a greater rate. If volatility spikes like it did in 2008, her account will be gone in matter of days. Here are some questions/comments taken from public discussions about Karen SuperTrader: I really have no idea how that is possible. In the TOS platform, if I sell a naked Put, the usual margin required is very large. We’re talking that my short Put usually would yield between 1.5% – 2.5% of the margin required. - I think there is more than a fair chance she may be a fraud and possibly even an invention of TastyTrade. Any manager worth her salt would be happy to provide audited returns, especially if only managing 150 million. She is probably generating around 30% a year while taking a lot of risk. I don’t know if that makes sense in the long run. Another thing that’s strange is the fact there’s not even one chart or table of her performance. I hear a lot of big numbers but just give the facts black on white. This strategy will only work for a period of time. When it stops, the results will be catastrophic. If she was that good as she claims she is, after 7 years of such spectacular returns she would have few billion under management, not 190 million. It’s Finance 101 isn’t it? The higher the return, the higher the risk you have to take. If she is generating 30% or greater per year, she is taking on a lot of risk. Hopefully her investors realize that. Here are some articles about Karen SuperTrader: http://www.optionstradingiq.com/karen-the-supertrader/ http://smoothprofit.blogspot.ca/2012/11/a-glimpse-of-option-strategies-of-karen.html So: IS Karen SuperTrader myth or reality? You decide. June 2016 update: Karen is now being investigated by the SEC for fraud. Don't say we didn't warn you. Read my latest article: Karen Supertrader: Too Good To Be True? Here are the links to the SEC claim and the verdict: https://www.sec.gov/news/pressrelease/2016-98.html https://www.sec.gov/alj/aljdec/2019/id1386cff.pdf I suspect that investors will not learn the lesson from this case. Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change. TastyTrade removed all articles and videos related to Karen the Supertrader from their website and YouTube right after the SEC investigation started, but returned them few days afterwards. Karen the Supertrader: Where Is She In 2023? The SEC sued Karen the Supertrader’s hedge fund, Hope Advisors, leading to the hedge fund paying a hefty fine, disgorging of profits, and Karen Bruton’s ban from managing outside money. However, Karen still appears in interviews, like she did with Michael Sartain in 2022. She maintains that the SEC unfairly targeted her firm seeking an easy prosecution. Both Karen and Michael Sartain, the host of the podcast, claim that the SEC’s complaint took issue with the fact that Karen’s hedge fund rolled losing positions forward, a common practice among systematic premium sellers. Her point of view is that the SEC interpreted the fund rolling its losing positions forward as the act of a rogue trader, rather than the routine actions of an options trader who sells premium.

The Theory is pretty easy to understand. It is backed up by mounds of statistical proofs and observations. Advanced math skills are not necessary. It is really borne out of two separate but interrelated concepts … 1) Market Performance and 2) Individual Performance. Let’s take a look at these two elements: Market Performance: A statistical proof exists; separate from data collection or observation, that indicates the market should have an upward bias (or positive skew). Observations and data, collected over the last 100 years confirm this to be true. It is noteworthy that the data confirms the theory and not the other way around. One doesn’t need a statistics degree to confirm this … they need only look at any long term chart and they can easily see that the market is an ever upward climb. Of course it has it “fits and spurts” but the upward bias is obvious to all that take the time to look.Though there is some discussion of how large this skew is, most studies indicate that the market is up 60% to 70% of the time. This seems to hold true when viewed over decades, years, month, weeks and even days. Individual Performance This is a little bit trickier to explain … but I’ll do my best. First, we must differentiate between the “trader”, the “market timer” and the long term investor. There have been many studies of professional money managers and individual investors that differ somewhat in their quantitative results but agree in the overall result … most investors (pros and DIY) underperform a simple buy and hold of abroad market index. Furthermore, this underperformance is not small … in some studies is as much as 5% per year in the short term, and even more in the long term Time Period (ending Dec. 31, 2014) Average Equity Fund Investor Return S&P 500 Average Return 5 years 10.19% 15.45% 10 years 5.26% 7.67% 20 years 5.19% 9.85% 30 years 3.79% 11.06% Simply put: The most effective investment strategy is “buy and hold” but few actually accomplish this end. The reason seems to be pretty simple … the average investor is driven “emotionally” not logically.Every seasoned investor has experienced this ... or they are kidding themselves. No one … yes, no one … is immune. Additionally, asset allocations such as the most popular 60%/40% stocks/bonds are widely recommended. Contrary to this, the data indicates that the most effective allocation is actually 100% stocks. By example, if we took the Five Year results from the above chart we would have a 10% Equity return. But if one was, say 60% in stocks, the equity return as a percentage of their portfolio is closer to 6%. So, on a portfolio basis they are not achieving anywhere near the 10% return. Contrast that with over 15% had they just simply put all their assets into an index fund and not engaged in any trading activity. Of course, very few investors will accept this because of the risk of loss in down years (we all remember 2008). But, once again, the path is clear … it is the emotional courage that is at issue. Even the worst of down years are regained in a couple of years. Nonetheless, investors seem willing to accept less than optimal returns in exchange for some degree of safety. Calendar Option Theory Let me be emphatic that this conversation is about utilizing calendar spreads as an adjunct to or as a core position. It is not targeting “one-off” trades”. That’s for another day. So, this brings us full circle to the theory behind calendar spreads (and most hedges, for that matter). Investors should seek out ways to be fully invested and also limit their downside risk. The theory is based, mostly, upon the fact that most investors would have increased PORTFOLIO returns if they abandoned traditional asset allocation mixes (such as 60%/40%) and, instead put 100% of their portfolio in an index fund and bought a far dated put to protect the downside. It is so with calendar spreads. One can expand their allocation towards equities, and away from bonds, while protecting against loss. Of course, the far dated put detracts from returns, but the ability to be 100% equity invested, the ability to have a cap on the downside (usually less than 5%/year) will enable the investor to outperform traditional asset allocations and … most importantly … enable them to avoid panic and emotional selling. Now, with this theory behind us, let’s look at calendar spread methodology. Methodology First the time to employ a calendar spread is during a rising market (or at least a flat market) when volatility is average or lower. This is common sense. The far-darted long put wants to be bought at the most economical price and lower volatility lowers the cost. Not rocket science. Next, and the more difficult part, is the setting of the near--dated put-write. This is complicated because one needs to consider the strike; the expiry; and when to roll. So let me give some guidelines. Strike One can “play around” and try to guess the market and go ITM, ATM or OTM as they please. My personal experience and the rather dismal track record for “market timers” would discourage this in favor of a more systematic approach. This approach would be based upon the concept that the market has upward skew. It is also aided by the fact that the downside is limited and protected by virtue of the long, far dated put. That being the case, the put-write strike should be as deep ITM as practical. Simply stated, it replaces a long equity position. The further ITM it is placed, the closer it comes to mimicking a long equity position. Remember: One sells a near-dated put instead of an outright buy of the underlying, to try to capture extrinsic with the hopes that it will offset the cost of the far-dated. There aren’t a lot of studies that would indicate how DITM it should be set, but if done as a monthly strike, 2% seems to be confirmed in at least one study. But before someone hops on that, we need to look at what is the best expiry. Expiry: When one sells a DITM put, it favors selling shorter durations provided the move --- in the direction of the strike --- does not exceed TWICE the premium collected. This is true whether one is comparing a weekly to a two-week; a weekly to a monthly; or a monthly to a quarterly; or even a weekly to a leap. So, if one sold a near-term put and received, say, $5 in premium … the near term is favored over any far-dated, provided the underlying doesn’t rise more than twice ($10) the premium received. Strike and Expiry Unfortunately, this is sort of a balancing act and there is no definitive study that helps us out. Combining the two elements, my experience is that selling a weekly 1% ITM is the right level. However, that holds only on an underlying with a Beta of 1 (SPX). If the underlying Beta is, say, 1.5, then the strike should be 1.5% ITM …and so on. The 1% ITM shows gains in and of itself and compared to a further-dated as long as the weekly move is less than 2% up. Now, there will be times that the move is greater than 2%up. This will happen, on average, 4 times a year. But the frequency of large up moves may be offset by “Holding the Strike”. Holding the Strike This is the most important part of selling puts (calendar spreads or naked puts). If there is a drop, do NOT lower the strike and try to capture more extrinsic. Always be willing to sacrifice extrinsic on a down move in order to be prepared for the inevitable bounce back up. It may come in a week; a month; or a year. But the market, historically and scientifically has always (yes, ALWAYS) rebounded. The real danger to a calendar spread is losing short term value on a big move down and then not fully regaining it on a bounce (the “whip-saw”) Always keep in mind that the far-dated protects the downside … “holding the strike” protects against the “whip-saw”. Additionally, many times a big up move will follow a down move. So, holding the strike will reduce the frequency of being over-run. Combining these three ingredients, one should sell the short put on a weekly basis; the greater of 1% ITM or the previous strike. Rolling the PUT As long as the PUT is ITM, it is best to hold till expiry to maximize theta decay. However there will be times when one sets the strike 1% ITM on Friday and on Monday the market moves up 1%. What to do? Will the market drop by week’s end? Or, will it continue up? There is no answer. The market will do what the market will do. History tells us that it is 60-40 going to go up. That may be sufficient reason to raise the strike. Even if the strike holds, you would have raised it another 1% on expiry under a normal roll, so at worst, you’re doing it a little early. Rolling up ½% now would be a cautious minimum. A greater dilemma occurs if the move is greater than 1% early in the week and you’re now OTM. If a strike is over-run and then rolled up, you incur a permanent loss of some amount. However, I’d consider rolling up on the basis that even if there is a drop down, theprevious level will be regained. Knee-Jerk or Fundamental With all that said it is worthwhile to evaluate the character of any big move. Is it knee-jerk or fundamental? Has something changed or is it concern over the possibility that something may change? Every investor needs to consider these factors. If there is a fundamental deterioration in the economy, then one might want to be somewhat more defensive on the near-term put-write. My best advice is to make any such determination carefully and don’t be afraid of getting there a little late. The far-dated put protects. So it is never an issue of suffering large losses, it is more about possibly making money during the bear, while others lose money. Summary Calendar spreads bring with them problems that all investors must face … what to do? These guidelines can resolve what to do on a down move… Hold The Strike. What is so simple in a calendar spread is usually the most difficult decision investors using traditional methods face. These guidelines also resolve what to do on more modest moves (less than 1%/week). Stay the course. Over-runs are more problematic. They resemble the issues that traditional investors face on up moves. Is it going further or is it coming down? The only way to fully resolve this is to make a determination as to whether it is a knee jerk or fundamental move. However, absent clear signals that a fundamental change has taken place … be willing to err by adjusting on the side of the market going up, even more. Ken Reel is a well known and respected Seeking Alpha Contributor with over 100 articles. He has worked in the financial service industry for 40 years. Ken's area of expertise is risk management and complex financial products. He has been a frequent speaker, on behalf of many financial firms, to financial professionals across the country. He has extensive experience in statistics and actuarial science.

This article will shows how this works, and how IV can affect your decision on what type of trade to open. Directional Spreads Let’s start with the simplest of options spreads, the put or call vertical spread which is often used as to place a trade for a stock to move in a certain direction. Here’s a slightly OTM (Out of The Money) call vertical debit spread on AAPL about a month away from expiration (a popular spread to play for stock price to rise). The stock price is $182 and the call vertical is long the 185 call and short the 190 call. Note the highlighted Vega section that will illustrate some important points regarding IV: When the spread strikes are OTM (stock price is below both long and short call strikes) the trade is vega positive. This means while the spread remains OTM, increasing IV will help it retain more of its value. As the stock price rises toward the spread strikes the degree of vega positive becomes less. It eventually becomes vega neutral at roughly the break-even point for the spread at expiration. As the stock price rises even farther, approaching the higher short strike and beyond, the trade will become vega negative. This means when the spread is ITM (In The Money), decreasing IV will help the value get closer to the spread width (the max gain). How can this factor into a trade opening decision? When opening a bullish call vertical spread when IV is elevated it may help to enter near the vega neutral position with the long strike ITM and short strike OTM. This will be likely be a setup where the max gain is equivalent to the max loss. If the stock price rises then you’ll hit the point where the spread becomes vega negative sooner, so any drop in IV won’t hurt. Conversely, if opening when IV is lower you can start out with both legs of the call vertical being OTM. This will give you a setup where the max gain is higher than the max loss, but you know that any further IV decline is less likely and therefore the downside risk due to dropping IV is not as high so it can be ok even though it will take more of a stock price rise to get to the point where the trade turns vega neutral and then vega negative. Spreads for Minimal Stock Price Movement I’m now going to focus on common spreads to play for minimal stock price movement. The Iron Condor (IC) is one such spread and shown in the following chart, it consists of both an OTM put credit spread and an OTM call credit spread. When the stock price is in the winning position between the wings it is vega negative meaning an IV drop will accelerate profit growth above the level that just time decay would generate. Conversely, an IV rise will decelerate profit growth. Also note that when the stock price gets to the losing zones within and beyond the wings, the IC becomes vega positive meaning an IV rise would help keep the losses smaller. How can this impact a trade opening decision? Opening an IC when IV is low means that you’ll have to use closer to ATM strikes to get the same opening credit compared to times when IV is higher when you can get the same credit with farther OTM strikes. Also, when opening with low IV a further IV decline is less likely, so you won’t get the accelerated profit growth when IV drops. Opening an IC when IV is somewhat elevated means to can go farther out with strikes (so a bigger stock price move is required to get to the losing zones) and any IV decline can accelerate profit growth provided the stock price doesn’t make a significant move. Many people don’t like Iron Condors due to their risk vs reward where the max loss is higher than the max gain. Let’s look at two other common spreads to play for minimal stock price movement that have more equal risk vs reward and how IV can factor into which one to use. The first is the calendar spread, which commonly uses the ATM strike when playing for minimal stock price movement. The primary gain catalyst is theta decay (and minimal stock price movement) but IV can also factor in. As shown on the chart below, its vega positive everywhere meaning that rising IV will always help the trade. Rising IV will both increase the gain potential and widen the profit tent. Declining IV will lower the gain potential and tighten the profit tent. The other common spread to play for minimal stock price movement is the butterfly spread. Its PnL chart looks very similar to that of the calendar with a balanced risk vs reward and similar break-even points. The primary gain catalyst is the same as the calendar, theta decay and minimal stock price movement. But there is one important difference, the butterfly is vega negative when in the winning zone meaning that declining IV will allow gains to grow at a quicker rate. How can this impact a trade opening decision. When IV is lower, further IV decline is less likely so using a calendar is a good choice as any rise in IV can help the trade. However, when IV is elevated and IV decline is more likely then a butterfly can be a good choice as any decline in IV can help the trade. Spreads for Stock Price Movement in any direction I’m now going to focus on common spreads to play for significant stock price movement, either up or down. A long straddle or long strangle consists of only long legs, so they are always vega positive. Rising IV will lessen the impact of negative theta, falling IV will add more price decrease to that of negative theta alone. This is why straddles and strangles are typically used in the timeframe before earnings where you have the virtually guaranteed IV increase to counteract some of the negative theta. A reverse iron condor (RIC) is the inverse of the iron condor. It consists of and OTM call debit vertical spread and an OTM put debit vertical. How far away from ATM you go impacts the risk vs reward setup. Note that the RIC is vega positive when in the losing zone between the put and call wings, so any IV decline will accelerate losses. The trade becomes vega negative when the stock price moves into a winning zone, so if you get the stock price to move then you are guaranteed to have a winning trade regardless of what happens with IV. There are certainly more complex trade setups to use in any of these scenarios, but I’ve covered some of the most popular trades and you can see how current IV can impact your decision to use one trade setup instead of another.

Performance Dissected Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower, depending on the broker and number of trades. Please read 2021 Year End Performance by Trade Type for full analysis of our 2021 performance. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details. After 10 years in business, SteadyOptions maintains its position as the most stable and consistent options trading service, with 126.6% Compounded Annual Growth Rate. We proved again that we can make money in any market. As one of our members mentioned: "I would rate the 3% profit for March 2020 as even MORE successful than the 25% profits for Jan/Feb. If someone can make a profit in a month when there was total carnage in the markets, then that shows resilience and security in the trading strategies. It shows that even during a black swan event, the system works, and the account will not be blown." Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Straddles, Calendar Spreads, Butterflies, Iron Condors, etc. We constantly adding new strategies to our arsenal, based on different market conditions. 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. What's New? We added a new contributor to our official trades. We introduced few opportunistic trades using a variation of a diagonal spread. We introduced directional butterflies and verticals strategies. We also introduced a new service Simple Spreads to our offerings. What makes SO different? We use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. Our performance is based on real fills. Each trade alert comes with screenshot of our broker fills. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 723 Newsletters on Investimonials, a financial product review site. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community. 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. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Anchor Trades produced 35.9% gain in 2021, beating its benchmark by 9.0%. Steady PutWrite - puts writing on equity indexes and ETF’s. Steady PutWrite produced 14.2% gain in 2021. NEW: Simple Spreads - simple spread strategies like diagonals and verticals. Simple Spreads produced 0.4% return in 2021. Steady Futures - a systematic trendfollowing strategy utilizing futures options. Steady Futures produced 21.0 gain in 2021. We offer a 5 products bundle (SteadyOptions, Steady Momentum PutWrite, Anchor Trades and Steady Futures) for $745 per quarter or $2,495 per year. This represents up to 57% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. More bundles are available - click here for details. Subscribing to all services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle. We also offer Managed Accounts for Anchor Trades and Steady PutWrite. Summary 2021 was another excellent year for our members. We are very pleased with our performance. SteadyOptions is now 10 years old. We’ve come a long way since we started. We are now recognized as: #1 Ranked Newsletter on Investimonials Top Rated Newsletter on Stockgumshoe Top 10 Option Trading Blogs by Options Trading IQ Top 4 Options Newsletters by Benzinga Top 40 Options Trading Blogs by Feedspot Top 15 Trading Forums by Feedspot Top 20 Trading Forums by Robust Trader Best Options Trading Blogs by Expertido Top Traders and People in Finance to Follow on Twitter Top Trading Blogs To Follow by Eztoolset Top Twitter Accounts to Follow by Options Trading IQ I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 125,000 posts in the last 9 years. Those facts show you the tremendous added value of our trading community. I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services. 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." If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee. Happy Trading from SO team!

This is a critical issue that many traders don't fully understand. To understand the real risk this lady is taking, I would like you to take a look at Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. The market bottomed right after Niederhoffer was margin called. By November, the market was back near highs. His 830 puts went on to expire worthless - meaning his trade, had he been able to hold on, turned out to be profitable. But his leverage forced his liquidation. He was oversized and couldn't ride the trade out. Niederhoffer had shorted so many puts that a run-of-the-mill two-day market selloff sent him out on a stretcher. If he had sized the trade correctly, he would have survived the ride and took home a small profit. But the guy was playing on tilt, got greedy, maybe a bit arrogant, and lost all of his client's money. Karen is managing over 300 million dollars now. Her annual returns are in a 25-30% range. Are those good returns, based on the risk she takes? Not in my opinion. I believe that betting 300 million dollars on naked options is a disaster waiting to happen. I'm sure that most of her investors are not aware of the huge risks she is taking. Niederhoffer's story should be a good lesson, but for most people, it isn't. Unfortunately, people desperately want to believe there is a way to make money with no or little risk. Personally, I have hard time to understand why Sosnoff is promoting those strategies. But this is a different story. As a side note, this article is not an attempt to bash tastytrade. It is an attempt to show a different side of the coin and point out some historical cases. If we don't learn from history, we are doomed to repeat it. tastytrade advocates selling premium based on "high IV percentile". They ignore the fact that IV is usually high for a reason. Personally, I consider selling naked options before earnings on a high flying stocks like NFLX, AMZN, ULTA, TSLA etc. as a very high risk trading. tastytrade followers consider those trades safe and conservative. Matter of point of view I guess. Some tastytrade followers argued that PUT Write index performed better than SPX. And it is true. But those are completely different strategies. The original purpose of PUT Write index (or any naked put strategy) is to buy stock at a discount and reduce risk. As long as you sell the same number of contracts as the number of shares you are willing to own, you should be fine, and in many cases to outperform the underlying stock or index. The problem with Karen Supertrader and Niederhoffer was that they used too much leverage. They sold those naked options just to collect premium. Same is true when you sell strangles before earnings. Related articles: Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? Do You Still Believe in Fairy Tales? Selling Naked Put Options The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust June 2016 update: Turns out Karen is under investigation by the SEC. Read the details here and here.

Here are 10 important things about VIX options. VIX options settle in cash and trade in the European style. European style options cannot be exercised until expiration. The options can be opened or closed anytime before expiration. You don’t need to worry about ending up with an unwanted position in VIX after expiration. If your VIX options expire In-The-Money (ITM), you get a cash payout. The payout is the difference between the strike price and the VRO quotation on the expiration day (basically the amount the option is ITM). For example, the payout would be $2.50 if the strike price of your call option strike was $15 and the VRO was $17.50. Expiration Days: VIX options do not expire on the same days as equity options. The Expiration Date (usually a Wednesday) will be identified explicitly in the expiration date of the product. If that Wednesday is a market holiday, the Expiration Date will be on the next business day. On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in 30 days. Last Trading Day for VIX options is the business day prior to the Expiration Date of each contract expiration. When the Last Trading Day is moved because of a Cboe holiday, the Last Trading Day for an expiring VIX option contract will be the day immediately preceding the last regularly scheduled trading day. The exercise-settlement value for VIX options (Ticker: VRO) is a Special Opening Quotation (SOQ) of VIX calculated from the sequence of opening prices during regular trading hours for SPX of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. Click here for Settlement Information for VIX options. For example: Table courtesy of projectoption.com. Contract Expirations: Up to six 6 weekly expirations and up to 12 standard (monthly) expirations in VIX options may be listed. The 6 weekly expirations shall be for the nearest weekly expirations from the actual listing date and standard (monthly) expirations in VIX options are not counted as part of the maximum six weekly expirations permitted for VIX options. Like the VIX monthlys, VIX weeklys usually expire on Wednesdays. VIX Options Trading Hours are 8:30 a.m. to 3:15 p.m. Central time (Chicago time). Extended hours are 2:00 a.m. to 8:15 a.m. Central time (Chicago time). CBOE extended trading hours for VIX options in 2015. The ability to trade popular VIX options after the close of the market provides traders with a useful alternative, especially from overseas market participants looking to gain exposure to the U.S. market and equity market volatility. VIX options are among of the most actively traded contracts the options market has to offer. VIX options are based on a VIX futures, not the spot index ($VIX) quote. Therefore VIX options prices are based on the VIX futures prices rather than the current cash VIX index. To understand the price action in VIX options, look at VIX futures. This can lead to unusual pricing of some VIX strategies. For example, VIX calendars can trade at negative values. This is something that can never happen with equity options. Hedging with VIX options: VIX can be used as a hedging tool because VIX it has a strong negative correlation to the SPX – and is generally about four times more volatile. For this reason, traders many times would buy of out of the money calls on the VIX as a relatively inexpensive way to hedge long portfolio positions. Similar hedges can be constructed using VIX futures or the VIX ETNs. VIX is a mean-reverting index. Many times, spikes in the VIX do not last and usually drop back to moderate levels soon after. So, unless the expiration date is very near, the market will take into account the mean-reverting nature of the VIX when estimating the forward VIX. Hence, VIX calls are many times heavily discounted whenever the VIX spikes. VIX options time sensitivity: VIX Index is the most sensitive to volatility changes, while VIX futures with further settlement dates are less sensitive. As a result, longer-term options on the VIX are less sensitive to changes implied volatility. For example, between September 2nd and October 10th 2008, the following movements occurred in each volatility product: Product Sep. 02 - Oct. 10 Change VIX Index +218% October VIX Future +148% November VIX Future +67% December VIX Future +47% Table courtesy of projectoption.com. So, while trading long-term options on the VIX might give you more time to be right, volatility will need to experience much more significant fluctuations for your positions to profit. Option Greeks for VIX options (e.g. Implied Volatility, Delta, Gamma, Theta) shown by most brokers are wrong. Options chains are usually based on the VIX index as the underlying security for the options. In reality the appropriate volatility future contract is the underlying. For example, August VIX options are based on August VIX futures, not VIX spot. Related articles: VIX - The Fear Index: The Basics Using VIX Options To Hedge Your Portfolio How Does VIX Work? 10 Things You Should Know About VIX Holiday Effect In VIX Futures

"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 this 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 the service was actually not profitable. 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 vice 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? For example, here is a screenshot from one of the services, so you can see how they report returns: Monthly returns: Detailed trades: Of course most people won't look on detailed trades (they are not easily visible like our trades) so they would think that the service makes 12-15% on a regular basis.. 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 little 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". We report returns on the whole portfolio, not on what was on risk. 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! Start Your Free Trial Related Articles: Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Can you double your account every six months? How to Calculate ROI in Options Trading

Short Term Options Trading My short term trading account is dedicated almost exclusively to SteadyOptions strategies, such as Straddles, Iron Condors, Calendar Spreads, Butterflies, etc. This is mostly non directional short term options trading. We recommend allocating no more than $100,000 for SteadyOptions strategies. We always have been very upfront about the fact that those strategies are not scalable to large accounts, and I follow those guidelines in my personal account. No position is larger than $10,000 (10% of the trading account), and once the account value significantly exceeds the $100k threshold, I withdraw money to get it back below $100k. I personally trade most of the trades we share with our members. I'm using Interactive Brokers for my trading account, and also for my long term accounts and TFSAs. On average, this account value is typically around $60-100k, which is less than 10% of my investable funds. I keep at least 20-30% of the account in cash. My target for this trading account is triple digit yearly return. Long Term Investing My long term funds are invested in the following way: About 80% are invested in index funds. The index investing strategy is based on Canadian Couch Potato principles, and is divided equally between Canadian, U.S. and international stocks and Canadian bonds.The Couch Potato strategy is a way of building a diversified, low cost and low-maintenance portfolio designed to deliver the returns of the overall stock and bond markets at minimal cost. While most investing strategies are based on picking individual stocks, making economic forecasts, and timing the markets, Couch Potato investors recognize most of these activities are counterproductive. They understand that investors give themselves a greater chance of success by simply accepting the returns of the broad stock and bond markets. To boost the returns and provide protection against market crashes, I implement variations of Steady Momentum and Anchor Trades strategies (put writing and hedging). In addition, I apply a very moderate leverage (around 120-130%) by selling ATM SPX options every month (Steady Momentum investing style), but also maintain a constant hedging by buying far OTM SPX puts, using up to 2% of the account. About 10% of the long term funds are invested in growth companies with strong fundamentals, using various options strategies. My target for the long term investing is 15-20% per year. Real Estate I was fortunate enough to purchase few rental units in good areas of Toronto and Ottawa before prices took off. All those units are cash flow positive and provide me with nice stream of income every month. I intend keeping those units for the long term and use them as part of my retirement income. Conclusion As Jesse mentioned: "Diversification is your best friend. There are many ways I diversify my portfolio including asset classes (stocks, bonds, cash, alternatives), geography (global stocks and bonds), and factors (market, term, size, value, momentum, trend, volatility) just to name a few." Diversifying my investments provides me with different sources of income and also reduces the volatility of my investments. As you can see, I'm putting my money where my mouth is and trading the same strategies we offer to our members.

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. Here it a screenshot from my broker's 2015 statement: Just to be clear, I have several accounts trading/investing different strategies, but this account is exclusive to trades that I share with my SteadyOptions and Steady Condors members. It uses a very conservative allocation of 5-7% for SteadyOptions trades and 15-20% allocation for Steady Condors trades, leaving around 30-50% of the account in cash on average. I followed the same allocation guidelines that I share with my members and started with account value consistent with what majority of our members allocate to our services. As you can see, the account return was 80.2% in 2015. You might have the following questions after seeing my performance: Q: Why are you revealing your personal performance? A: My goal is to show you that SteadyOptions performance is not a myth or hypothetical performance. By showing you my real numbers, I want you to see what is possible to earn by trading options if you have the patience, the discipline and the perseverance. I also want to silence the doubters who claim that I don't trade with real money. Q: Will I be able to replicate this performance if I subscribe to SteadyOptions and/or Steady Condors? A: That depends. If you just started trading options, then most probably the answer is NO. It will take time. I know this is not what people want to hear, but that's the truth. If you have some experience and spend the time to learn our strategies, then I see no reason why not. In fact, some of our members do better than our official performance. Q: Is 80% per year really that good? A: You might see sales pages showing you 200%+ returns on some cheap options they bought. But what they don’t tell you is that those trades happen once in a while and are not consistent. The real question is not how much you made on few isolated trades, but how much you made on the whole account. Performance Reporting: The Myths and The Reality shows a lot of examples of performance manipulation, so be careful. Q: How much risk did you take to achieve this performance? A: Trading is a risky business in general. However, we implement advanced techniques to reduce risk. For example, the Steady Condors trades are hedged and protected much more than "standard" Iron Condor trades. In SteadyOptions portfolio we balance the trades in terms of the Greeks to reduce risk. Position sizing also plays a big role. But those techniques can only reduce risk, not eliminate it. This is why I still don't recommend allocating more than 20-30% of your net worth to options trading, especially if you have big portfolios. Q: Can you achieve similar performance with $1,000,000 portfolio? A: NO. It is a well known fact that achieving very high performance numbers becomes more difficult as your account grows, for various reasons. One of the issues is liquidity, and this is why I don't recommend allocating more than $100,000 to SteadyOptions. Q: What is the impact of commissions on performance? A: As you can see, even with cheap broker, I still paid over $16k in commissions in 2015, which reduced the performance by ~20-25% per year. Commissions is the cost of doing business, but you should do whatever is possible to reduce them. Brokers and Commissions discussion can help you to pick the right broker. 2020 update: with availability of brokers like RobinHood, Tradier etc. the impact of commissions is much less than it used to be. Q: Why your performance page presents much higher returns for SteadyOptions service compared to your personal account performance? A: Few reasons: The performance on the performance page excludes commissions. My account traded mix of SteadyOptions and Steady Condors strategies and Steady Condors performance is lower. I kept relatively large portion of the account (around 30-50%) in cash most of the time. I might use slightly different allocation. I might execute some trades in my personal account that I don't share with the members, for various reasons (liquidity, higher risk etc.) Generally speaking, my personal account performance might be different from the official performance for the reasons outlined above. Q: Do you trade other strategies besides SteadyOptions and Steady Condors? A: This specific account is exclusive to SteadyOptions and Steady Condors strategies only. I have other accounts (retirement account, corporate account etc.) where I have longer term investments, including Anchor Trades strategy. I also have some Real Estate investments. Q: I would love to join, but I have a full time job and no time to dedicate to trading. Why don't you offer auto-trading? A: SEC considers newsletters that engage in auto-trading to be investment advisers, and I am not licensed to be an investment adviser. So most newsletters that engage in auto-trading are breaking the law and are exposed to lawsuits like this one. You can read more details here. Please let me know if you have any questions. I invite you to try our services and see how we can help you to become a better trader. I'm not going to promise you the Holy Grail. What I can promise you is that if you are willing to work hard and learn the craft, the sky is the limit. Watch the video: Start Your Free Trial *** Free trial is for new members only ***

Performance Dissected Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower. Commissions reduce the monthly returns by approximately 1-2% per month, depending on the broker and number of trades. As with every trading system which uses multi leg trades, commissions will have a significant impact on performance, so it is very important to use a cheap broker. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details. 2018 was a very different year from the previous years. Despite the increase in volatility, 77% of all SO trades were winners with an average gain of 7.07%. Our model portfolio produced 17.3% return in December 2018 while most major indexes were down double digits. We proved once again that our strategies can make money in any market, bull, bear or sideways. Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Straddles, Iron Condors, Calendar Spreads, Butterflies etc. We constantly adding new strategies to our arsenal, based on different market conditions. 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 specific strategies, reverse iron condors were our best performing strategy, producing 31.0% average return with 100% winning ratio. We started using the RIC and BWB strategies later in the year during times when VIX was high (20+). We will continue trading what works the best and adapt to the market conditions. What's New? We continue expanding the scope of our trades beyond the earnings trades, Iron Condors and calendars. We are now trading SPY, TLT, VIX, VXX, XLV and other ETFs to diversify the portfolio. When Implied Volatility spiked, we added RIC and BWB strategies to our arsenal. We will continue refining those strategies to get even better results. This gives members a lot of choice and flexibility. We launched a Creating Alpha service that trades exclusively VIX based products and TLT. It includes two separate model portfolios at very low introductory price. Our long time mentor @Yowster started contributing trades to our official model portfolio. This allowed us to expand the quantity and the quality of our trades, sometimes providing a slightly different angle and perspective. Our members now get official trades from two traders for the price of one! This means more selection and more diversity. We have implemented more improvements to the straddle strategy that reduces risk and enhances returns. As a result, the strategy produced highest average gain percentage and highest percentage of winning trades since inception. We started using the CMLviz Trade Machine to find and backtest some of our trades. This is an excellent tool that already produced few nice winners for us. What makes SO different? First, we use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. 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. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 704 Newsletters on Investimonials, a financial product review site. Read all our reviews here. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community. 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. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Steady Condors - Hedged monthly income trades managed by the Greeks. Creating Alpha - Volatility products like VXX and UVXY plus TLT portfolio. LC Diversified Portfolio - broadly diversified, absolute return, multi-strategy portfolio. We now offer a 4 products bundle (SteadyOptions, Steady Condors, Anchor Trades and Creative Alpha) for $745 per quarter or $2,495 per year. This represents up to 50% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. Subscribing to all 4 services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle. The LCD is our most diversified and scalable portfolio, I highly recommend that members check it out. It is offered as an added bonus of all subscription plans. We also offer Managed Accounts for Anchor Trades and LCD. Summary 2018 was another remarkable year. Our members enjoyed triple digit gains while US stocks posted its worst year in a decade. SteadyOptions is now 7 years old. We’ve come a long way since we started. We are featured on Top 100 Options Blogs by commodityhq, Top 10 Option Trading Blogs by Options trading IQ, Top 40 Options Trading Blogs, Top 15 Trading Forums and more. I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 110,000 posts in the last 7 years. Those facts show you the tremendous added value of our trading community. I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services. 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." If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee. Happy Trading from SO team!

It immediately became clear this could be used, not only for put selling testing, but to test Anchor over longer periods of time than previously done and try to find other areas to improve the strategy, which has been a core part of SteadyOptions for quite some time. After two weeks of testing, much of what Anchor has evolved to over the past few years was validated, but we also identified some areas for improvement that should increase performance of the strategy. In this article, and a future one next week, I will discuss the conclusions from our expanded optimization, back testing, and review. Later articles will dive into the implications for the leveraged versions of the Anchor Strategy, as well as the benefits of expanding Anchor by diversifying into IWM, QQQ, DIA, and potentially other indexes. I. Selling Calls for Credit Anyone who has been following Anchor recently knows we have been on a quest to find other ways to pay for the hedge. The biggest drag on the strategy is the hedge, and any way we can improve paying for the hedge cost helps. In this decade long bull market, paying for the hedge has been particularly problematic, more so in recent years. For the past few months, we’ve been structuring and testing a variety of call selling strategies in an effort to extract a few more basis points of performance out of Anchor. Initial paper trading had us optimistic, as well as the manual testing done over the previous nine months. Further, the CBOE maintains covered call indexes, which seemed to indicate that the strategy should work. We were optimistic enough to start tracking it on the forums in the leveraged anchor accounts. What a thorough back testing demonstrated was that selling naked calls on indexes, SPY in particular, is a losing strategy, or at best a breakeven one, since 2007. This is true over shorter periods of time as well, such as since 2012. If calls, three weeks and one standard deviation out are used, since 2012, the strategy would have lost a 1.6% per year. If data from 2007 is used, so as to capture 2008 and 2009, the strategy still would have lost 0.20% per year. Trying further out in time over periods such as 28 days, 45 days, or 60 days were all losers. What about putting in stop losses or profit targets – also all losers. In fact, only through extreme curve fitting, was I able to identify any possible profitable naked call selling strategy at all, and only if you use the data set from 2007 to the present – even then performance would only have gone to 0.55% per year. Then if you remove 2008 from the data set, results immediately went back to negative performance. Changing from an at the money position, to a 30 delta position did not help much either. Since 2007, selling a 30 delta one month call, would have netted you only 0.22% per year – essentially flat. Changing the delta to 10 or 60 did not help either. This result was initially puzzling, as the covered call index (BXM) is up over 50% over the last five years and 75% over the last ten – until those results are broken down. BXM is not naked call selling, it is covered call selling. Given over the last five years, the S&P 500 is up about 75%, which means call selling is responsible for 25%, or more, of BXM’s losses. If covered call selling was profitable, there would not be this drag. By eliminating the gains from the long stock positions, the returns go to negative – as indicated by our testing. The conclusion? Simple Anchor will not be selling calls as a way to gain additional income to help cover the cost of the hedge and such strategies will be removed from the leveraged versions of Anchor. II. 14 vs. 21 vs. 28 Days for the Short Puts A few years ago, we switched from selling puts either one or two weeks out to three weeks till expiration. Doing so gives the strategy more time to “be patient” in the event of small market moves down and not realize losses that did not have to be realized simply due to normal market fluctuations. When making the selection on how many days “was optimal” we used the past 18 months of actual Anchor data for back testing purposes. ORATS confirmed that over that 18 month period, 21 days was the optimal time to use. However, with more data at hand, we have been able to confirm that 28 days is a significantly better time period over history than a 21 day period. In testing, we used two data sets on SPY – from January 2012 to present and from January 2007 to present. January 2012 was picked because after that point, SPY weeklies were fully available. January 2007 was picked because that’s the furthest back in time the software’s data went. From January 2012 to the present, selling puts 21 days out, with a profit target of 30%, would have returned, on average, 8.87% per year with a Sharpe Ratio of 1.63. From 2007, a return of 5.32% was realized with a Sharpe Ratio of 0.42. Merely by increasing from 21 days to 28 days, those numbers increase to 11.08% and 2.14 for 2012 to the present and 8.52% and 0.93 for 2007 to the present. This is a massive increase. It was enough of an increase to make us question the results. If this was a more “optimum” period, as theorized, such results should hold across other, similar instruments. For both QQQ and IWM, the results held. 28 days achieved much better returns on a put selling period than 21. We also learned that rolling the short puts on a set day (Friday), anytime you can for a gain, is not close to an optimal roll period. Significant improvements can be gained by ensuring the profits are somewhere between 25%-35% prior to rolling. Interestingly, waiting till profits are in excess of 50% began to have a negative impact on results. (Profits are defined as a percentage of credit received. So if we receive $1.00 for selling a put, a thirty percent gain would occur when the price declined to $0.70) Anchor’s current put selling strategy has us making an adjustment each Friday. If there’s a gain in the position, we roll, and if not, we hold – simple rules. Unfortunately, by adhering to “simpler” rules in an effort to make the strategy easier to manage for everyone, we cost ourselves significant performance. If we rolled when a profit target was reached, regardless of day, as opposed to on a Friday at any profit point, we would have increased our returns to 11.08% and Sharpe Ratio to 2.14 from the 6.87% return and 0.7 Sharpe Ratio we have experienced since 2012 on put selling. Using the same put selling ratio we have, that means by doing Friday roles, instead of a profit target, we’ve cost ourselves between 1.5% to 2.0% per year in total performance. III. Cautionary Notes One thing to be careful with software such as ORATS is over mining and getting confused by the noise. For instance, why not pick 25% or 33% profit target instead of 30%? Once you get that granular, randomness becomes a factor. One year 25% might work significantly better and another 33% and yet another 30%. Given that there are only 12-24 trades per year, which profit target hit on that tight of a range is a bit of “luck.” For instance, if we sold a put for $1.80, a 25% profit would have the price dropping to $1.35 and at 33%, $1.21. Prices move that much intraday frequently, so trying to target the “exact” price to do everything is a fool’s errand. The inability and/or inaccuracy in trying to overly optimize is a concern in getting exact performance numbers. It is not a concern in identifying major trends. If profit targets between 1%-20% all underperform profit targets from 25%-35%, over multiple periods, clearly we should be using 25%-35%. Similarly if all results are worse over 50%, then 50% is too high. Using different instruments (IWN and QQQ) provided further verification for this process, providing a higher degree of confidence. There is also a concern that any back testing is simply “curve fitting,” and that is one hundred percent true. The data we have discussed is pulling out the optimal curve. Some of this can be combated by using different time periods (e.g. 2007 to present and 2012 to present, or even smaller periods). If the conclusions founds hold over various time periods and various instruments (QQQ and IWM), it is more likely than not that the results are not merely curve fit, but instead due to consistent trends. However, as we all know, previous results are no guarantee of future performance – they merely increase our chances. In verifying our hypothesis about 28 days and profit target rolling, we went even more granular, across SPY, QQQ, and IWM. To our relief, the results generally stood. 28 day periods are more optimal than 7, 14, 21, 35 or 45 over the vast majority of time periods. There are years “here and there” were 21 days were better and one year on IWM were 35 days was a better period. But even in those years, 28 days was the second best performing. Over any multiple year period (from 2007 to the present), our conclusions held. The same held true for profit margins. Maybe one year 20% was the best and another 45% the best, but in all multi-year periods we looked at, using a profit margin of “around” 30% was much better than a static day roll with no profit margin requirement. Because of this, starting this Friday, we will be modifying Anchor’s rolling rules. Moving forward, we will be rolling to 28 days out and rolling once profits have gotten above 30%. This means we may be rolling on days other than Friday moving forward if profit targets are obtained. We could even roll several days in a row in a bull market. If profit targets are not hit, we will continue to hold, as the strategy currently operates. Next week we’ll discuss other Anchor modifications we will be implementing to ideally further improve Anchor’s average performance.

When the loss has been reported, this is how it looked like: And then the fund suffered another, 54.6% fall to $1.94 a share on Feb. 6—a two-day total decline of 80%. “It may be the biggest two-day drop for a mutual fund ever,” says Gretchen Rupp, a Morningstar analyst who covers the fund. Like mountain climbing itself, the reality proved far scarier—especially for a fund with “preservation” in its name. “The fund sold naked put options on S&P 500 futures,” says Rupp. “It was leveraged and had above-average margin [borrowing] levels.” A put option is a contract that allows its buyer to sell a security at a specified price, the strike price. This allows the buyer to hedge a position or an entire portfolio; if the price of the security falls below a certain level, the option buyer will at least make money on the option. When an institution “writes” or sells a put option to a buyer, the seller is betting that the price will stay higher than the option price. When the seller doesn’t own the actual securities on which it is writing options, that is called “naked” option writing, and it amplifies downside risk. Standard & Poor’s 500 option prices are determined in part by market volatility; the more volatile the market, the more likely the option will hit its strike price and become profitable. LJM was betting that the market wouldn’t become too volatile—a strategy known as shorting volatility. “The VIX [volatility index] spike on Monday was the sharpest spike in history,” Rupp says. The VIX more than doubled from 17 to 37. So leveraging the fund’s bet against it proved disastrous. According to LJM’s prospectus, the fund’s investment objective is to seek “capital appreciation and capital preservation with low correlation to the broader U.S. equity market.” Nothing in that statement proved true on Feb. 5. “This fund should never have been marketed to fund shareholders as a tool for capital preservation,” Rupp says. As someone mentioned: "Short volatility strategies, selling options and collecting premium, have been critically described as picking up dimes in front of a steamroller," wrote Don Steinbrugge, the founder and CEO of Agecroft Partners, a hedge-fund consulting firm, in a blog post. "They generate very good risk adjusted returns until volatility spikes and then have the potential to lose most of their assets if not properly hedged." This is not accurate. Those strategies can produce very good returns if used properly. What most experts are missing is the simple fact that the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does. I did some simulations of how those strategies would perform on Feb.5 without leverage. Using different strikes and expirations, the fund would be down around 10-15%. Not pleasant, but survivable. I can’t even imagine how much leverage they used to be down 56% in a single day. LJM Preservation and Growth Fund was not the first to fall into the leverage trap. We all still remember the story of Karen Supertrader who suffered significant losses due to excessive leverage. I described what happened there in my articles Karen The Supertrader: Myth Or Reality? and Karen Supertrader: Too Good To Be True? Another famous case of excessive leverage was Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. But when we give our hard earned money to professionals to manage them, we expect better. LJM Partners had a solid long term reputation. Till Feb.05. As Warren Buffett said - "It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.” If you liked this article, visit our Options Trading Blog for more educational articles about options trading. Related articles Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? How To Blow Up Your Account James Cordier: Another Options Selling Fund Goes Bust

Performance Dissected Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower, depending on the broker and number of trades. Please read 2024 Year End Performance By Trade Type for full analysis of our 2024 performance. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. The 116% annual return was pretty typical, compared to our long term averages. We are very pleased with this return. We continue delivering the most consistent and stable performance 13 years in a row! It's nice to call a 116% return "typical". And the beauty of our trading philosophy is having different strategies in our model portfolio that compliment each other. As I mentioned in one of the discussion topics, our performance reporting is very conservative. We rarely have more than 5 trades open at the same time, but with 5 trades open, you are basically only 50% invested. If you made 10% on the invested capital, we would report as 5% return on the total account. No service is doing it, but this is the only correct way to do it. But it also means that members can invest more than 10% per trade on trades that are more conservative and more liquid. Also there are tons of unofficial trades that don't make it to the official portfolio due to their size.being too large for 10k portfolio. If we reported performance like most other services do (return on investment and not on the whole portfolio), our reported performance would be 300%+. More details: How We Calculate Returns? Thank you again to everyone for their support, and of course special thanks to our contributors @Yowster @krisbee @TrustyJules @cwelsh and @Romuald After 13 years in business, SteadyOptions maintains its position as the most stable and consistent options trading service, with 122.5% Compounded Annual Growth Rate. We proved again that we can make money in any market. As one of our members mentioned: "I would rate the 3% profit for March 2020 as even MORE successful than the 25% profits for Jan/Feb. If someone can make a profit in a month when there was total carnage in the markets, then that shows resilience and security in the trading strategies. It shows that even during a black swan event, the system works, and the account will not be blown." Our strategies SteadyOptions uses a mix of non-directional strategies: earnings plays, Long Straddle, Long Strangle, Calendar Spread, Bitterly, Iron Condor, etc. We constantly adding new strategies to our arsenal, based on different market conditions. 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. We aim for many singles instead of a 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. What makes SO different? We use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. Our performance is based on real fills. Each trade alert comes with a screenshot of our broker fills. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage. It is not a coincidence that SteadyOptions is ranked #1 out of 723 Newsletters on Investimonials, a financial product review site. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community. 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. Other services In addition to SteadyOptions, we offer the following services: Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Simple Spreads - simple spread strategies like diagonal spreads and vertical spreads. Steady Collars - our version of lower risk collar trades SteadyVIX - Volatility based trades. SteadyYields - Treasures trading We offer all services bundle at $3,100 per year. This represents up to 63% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. More bundles are available - click here for details. You can also get the yearly bundle with one month trial at $100. Subscribing to all services provides excellent diversification since those services have low correlation. We also offer Managed Accounts for Anchor Trades. Summary 2024 was another excellent year for our members. We are very pleased with our performance. SteadyOptions is now 11 years old. We’ve come a long way since we started. We are now recognized as: #1 Ranked Newsletter on Investimonials Top Rated Newsletter on Stockgumshoe Steady Options Review: In-Depth Analysis Top 10 Option Trading Blogs by Options Trading IQ Top 4 Options Newsletters by Benzinga Top 40 Options Trading Blogs by Feedspot Top 15 Trading Forums by Feedspot Top 20 Trading Forums by Robust Trader Top Twitter Accounts to Follow by Options Trading IQ I see the community as the best part of our service. We have the best and most engaged options trading community in the world. We now have over 10,000 registered members from over 50 counties. Our members posted over 190,000 posts in the last 13 years. Those facts show you the tremendous added value of our trading community. I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services. 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." If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee.

When you sell options, or option spreads, it's prudent not to wait for expiration. Let someone else have the last few nickels At some point, the remaining profit potential (and that's all it is: potential) is just too small for the risk involved One of my difficult experiences as a CBOE market maker was suffering through losses that were the result of not buying back my short option positions when they were available at a ‘teeny.’ A teeny is 1/16, or $6.25 per option. Options did not always trade in decimals (decimalization began in 2000 and was complete by 2001), and for many years traded in fractions, with 1/16 being the smallest fraction. It seems to be a true waste of money to pay $6.25 for an option that is ‘obviously’ worthless. And it is a lot of money. In fact, I used to joke about it on some Friday afternoons when I’d make a point of selling one option at 1/16, announcing that this was paying for my dinner tonight. *In the late 1970’s that price bought a decent dinner.] Today, I’m horrified that this was my standard operating procedure. When an option reached a ‘teeny’ it was hopelessly out of the money and it seemed so foolish to buy it back. I clearly remember making a bunch of money when Jan 1978 expiration passed. I was short options that expired worthless. In those days, our account balances (net liquidating value) did not reflect that the options were worthless until Wednesday morning. Today, efficiency and powerful computers make that data available Sunday, or barely one day after the options officially expire on Saturday morning. Thus, Wednesday after expiration was always a pleasant day. We may have earned the money earlier, but we did not have it to spend until the third business day following expiration. But I digress. In February, I recognized a powerful income source when I saw one and had an even larger expiration day, collecting those residual teenies. March was better yet. I decided I was being foolish and went for a larger payday in April. Alas, April 1978 was not a good time to be short call options. That was my first significant loss. Getting clobbered should have made it a simple no-brainer to cover those cheap options forever after. But life is not a fairy tale and it didn’t happen. I was caught again. More than once. Today, I no longer play that game. I’m a firm believer in making my profits and letting someone else have the last few nickels on any trade. Some people prefer to sell options and spreads that are very far out of the money. Yes, the premium collected is small, but those premium sellers believe the profit is guaranteed. It’s not. There’s always a chance of a major stock market event. Oct 1987 anyone? If you are a seller who collects a $0.25 premium, then I’m not suggesting that you pay $0.05 to close. I don’t know how to deal with positions that are sold for so little. I know when I sell call or puts spreads at prices near $1.50, I’m pleased to pay as much as 25 cents to get them back – depending on how much time remains. Today I’m always bidding something to bring those home. A waste of money? Yes it is. But not always. Every once in awhile those small buy-backs have saved me a bundle. This is a difficult lesson to learn. Especially from someone else’s experiences. I had risk managers, trading friends, and clearing house presidents tell me how foolish I was. But I knew better. I scoffed, to my everlasting regret. Today, risk management is at the center of my trading and education methods. Near the top of must-do strategies is the idea that there’s just too much risk involved to go after the last nickel or dime. I’m happy to allow someone else to earn that profit. I truly hope that you never suffer through the experience of having very low priced short positions explode in value. And when I say explode, I’m not thinking that the price may move from $0.05 to $1.00. I’m thinking of 10 x that number. This post was presented by Mark Wolfinger and is an extract from his book Lessons of a Lifetime. You can buy the book at Amazon. Mark has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Mark has published seven books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University. Added by @Kim Thank you Mark. Excellent example. If something thinks this is "theoretical", consider our JNJ hedged straddle from July 1, 2019: On July 11 we closed the short calls for 2 cents. On the morning of July 12 (expiration date of the short options), the stock was trading at $139, and we closed the short 137 puts at 3 cents: Some members questioned why we are closing puts that are $2 Out Of The Money and not letting them to expire. Couple hours later, they got the answer: news about criminal probe broke, and the stock nose-dived below $133. Those 137 puts that we closed earlier for 3 cents were suddenly worth around $5! After getting rid of the "hedge", we were able to close the 140 straddle for 73.6% gain. This is of course an extreme example, but you get the point. Trying to save the last few cents of the short options can backfire, big time. To many members, it was an eye opening experience.

Well, every trade should be put in context. Before evaluating a trade (or an options strategy), the following questions should be asked and answered: What is the holding period of the strategy? What is the maximum risk? What is the profit potential? What is the average return? What is the winning ratio? Why holding period is important? Well, making 5% in one week is not the same as making 5% in six months. In the first case we are talking about 250% annualized return. In the second case, 10%. See the difference. Maximum risk is important because it doesn't make sense to aim for 5% gain if your strategy can lose 50-100%. For example, when you are trading a directional strategy, and the stock gaps against you, the losses can be catastrophic. Since the risk is high, you should aim for higher return to compensate for the risk. However, if your maximum risk is limited, you can aim for lower return and still get excellent overall performance. Lets examine our pre-earnings straddles as an example. As a reminder, a long straddle option strategy is vega positive, gamma positive and theta negative trade. It works based on the premise that both call and put options have unlimited profit potential but limited loss. Straddles are a good strategy to pursue if you believe that a stock's price will move significantly, but unsure as to which direction. Another case is if you believe that Implied Volatility of the options will increase - for example, before a significant event like earnings. I explained the latter strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV 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. This is one of my favorite strategies that we use in our SteadyOptions model portfolio. This is how the P/L chart looks like: How We Trade Straddle Option Strategy provides a full explanation of the strategy. Lets take a look at 2022 statistics for this strategy: Number of trades: 148 Number of winners: 103 Number of losers: 40 Winning ratio: 72.5% Average return per trade: 4.9% Average return per winning trade: 8.7% Average return per losing trade: -10.2% Average holding period: 7.2 days Lets do a quick math. If you can do 10 trades per month, each trade producing 5% gain on average and 10% allocation per trade, your monthly return is 5% on the whole portfolio. That's 60% non compounded annual return, with minimal risk. To answer the original question: for a strategy that has 70%+ winning ratio and loses on average 10% on losing trades, with average holding period of one week, 5% is an EXCELLENT return. In fact, I would consider it as Close to the Holy Grail as You Can Get. Related Articles: How We Trade Straddle Option Strategy Buying Premium Prior to Earnings Can We Profit From Volatility Expansion into Earnings Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings

The options, by themselves, are not dangerous tools. I mention that because one of the long-lasting misconceptions about options is that they are dangerous to use. It is possible to use options to speculate (gamble), but options were created as hedging, or risk-reducing, investment tools. An alarming number of financial professionals, including stockbrokers, financial planners and journalists are in position to educate the public about the many advantages to be gained from adopting naked put writing (and other option strategies), but fail to do so. Many public investors never bother to make the effort to learn about options once they hear negative statements from professional advisors. Except for extremely bearish prognosticators, no one ever suggests that owning stock is anything but the most prudent of investment strategies. Yet, writing naked puts is a significantly more conservative strategy and definitely less risky than simply buying and owning stocks. As such it deserves to be considered as an attractive investment alternative by millions of investors. Who should consider writing naked (uncovered) puts? 1. Investors Who are bullish on the market Who are bullish on specific stocks Who want to buy a specific stock at a lower price Who adopt a buy and hold strategy Who want additional income from their holdings 2. Traders Who want a higher percentage of winning trades Willing to consider holding a position for a month or two Who want to begin a spread position with a bullish leg Strategy Objective Why would you want to write naked puts? What is there to be gained? Writing naked puts is a bullish strategy. When selling naked put options, you are attempting to achieve one of two investment goals Profit. You are bullish on the stock and expect the put option to lose value, and perhaps expire worthless as time passes. If the latter happens, the option premium (cash from selling the put option) becomes the profit. Buy stock at a discount. If the put option is in the money when expiration arrives, you will be assigned an exercise notice and be obligated to buy the stock you want to own at a discount to today’s price. This is an intelligent method for an investor to gradually add positions to a long-term portfolio. NOTE: When you are eventually assigned that exercise notice, the stock may be below your target purchase price. However, if you had entered an order to buy stock at that target price, you would be in worse shape than the put seller (who cushioned any loss by the amount of the premium). Another alternative is combining put selling with call selling, a strategy known as the Wheel strategy This post was presented by Mark Wolfinger and is an extract from his latest book Writing Naked Puts (The Best Option Strategies). You can buy the book at Amazon or sign up for our free trial and get it for free. Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

A popular option strategy is the short strangle, which consists of selling an out of the money put and call. My personal backtesting and real trading experience is that this strategy on equity market ETF's or cash settled indices can increase portfolio diversification and if overlaid on a portfolio of underlying assets like mutual funds or ETF's can also increase total returns. When you sell a strangle, you bring cash into your account. By doing so, you can "overlay" this trade on top of a portfolio consisting of ETF's or other investments without paying margin interest. Before we get too deep into the weeds, lets deal with the elephant in the room...you've heard strangles are risky. Is that true? The answer isn't that simple, as the trade isn't what measures risk, instead, it's the position size. Excessive leverage is risky, but strangles don't have to be traded this way. I'd encourage every option trader to not only consider the margin requirement of any particular option trade, but the notional risk. For example, think in terms of a 1 contract SPY strangle with SPY trading at $280 as theoretically being a $28,000 position (stock price X 100), similar to how buying 100 shares of SPY at $280 is a $28,000 position. When sized this way, a typical strangle will actual have less risk than the underlying asset. With this in mind, let's look at a rough example of how we could implement this idea in a $100,000 account. First, we'll look at the performance of a 50/50 stock/bond portfolio that is rebalanced monthly since 2000. This portfolio would have returned a little over 5% annually, with a standard deviation of 7.31%, producing a Sharpe Ratio of 0.54. Next, we'll add a 50% strangle allocation to this same portfolio. Yes, this equals 150%, which does make this concept only possible in a taxable margin account. The strangle allocation is based on our own backtesting platforms and proprietary rule sets and includes hypothetical trades on both SPY and IWM. A trader would sell 2 strangles on SPY in a $100,000 account to approximately replicate the concept. Blue: Stock/Bond Portfolio Red: Stock/Bond/Strangle Portfolio The 50/50/50 portfolio nearly doubles the annualized return to over 10%, and only with a modest increase in standard deviation to 8.37%. This increase in risk adjusted return substantially improves the portfolio Sharpe Ratio to 1.05. Even with a 50% increase in total portfolio allocation, the portfolio risk only slightly increases due to the low correlation of the strangle strategy to both stocks and bonds. This example is only meant to show the concept of an option overlay in action, and the potential benefits of doing so. Many other creative ideas could be implemented with other underlying assets and option strategies. My investment advisory firm, Lorintine Capital, currently implements these concepts in managed accounts as well as in one of our private funds, LC Diversified Fund. We are happy to have discussions with investors interested in a professionally managed solution, or ideas on how to implement this concept on their own. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse is managing the LC Diversified portfolio and forum, the LC Diversified Fund, as well as contributes to the Steady Condors newsletter.

So what do you do when your most successful strategies suddenly become much riskier? The answer: you are looking for new opportunities. Our long time contributor @Yowstercame with the following idea: For those of you not familiar with RIC (Reverse Iron Condor) - it is a limited risk, limited profit trading strategy that is designed to earn a profit when the underlying stock price makes a sharp move in either direction. The RIC Spread is where you buy an Iron Condor Spread from someone who is betting on the underlying stock staying stagnant. This is not a new strategy for us - we have traded it successfully back in 2012, but the current version is slightly different and more suited for the current environment. Our first RIC was opened on November 27, 2018: This is how P/L chart looked like: Fast forward to Dec.4 - NVDA moved to $170+, and the trade has been closed for 81.4% gain. It is worth to mention that such high gain is not typical for this strategy. Normally, we aim for 15-20% gains. But sometimes stocks gap in the right direction, and you can get much higher gains. As @Yowstermentioned in the strategy description on the forum: Reverse Iron Condor (RIC) trades can be used during periods of elevated market volatility to take advantage of stock price movement that is more common during these timeframes. A RIC trade is buying OTM put and call debit spreads. RICs are vega positive trades, meaning they are helped by rising IV and hurt by falling IV. However, the degree by which IV changes affect the RIC are much less compared to hedged/unhedged straddles – this is simply because they have equal number of long and short legs using the same expiration and the strikes are relatively close to one another. Therefore, using RICs instead of straddles during elevated market volatility has 2 main advantages: Better handle the scenario of IV significantly falling back down closer to normal levels – Straddle RV can decline 10% or more in one day that has the VIX drop significantly, and 30% or more during a multi-day significant VIX decline. It will take a lot of gamma gains due to stock price movement to overcome that drop, and if it’s a hedged straddle its more likely that short strangle losses will exceed long straddles gain when this happens. RICs can still get hurt by IV decline (especially if the stock price winds up being near the midpoint) but if you get some stock price movement away from the midpoint the RIC will be in better shape. Easier to make good gains despite IV decline – if the significant IV decline comes with a larger stock price move (fairly common when IV spikes downward) then the RIC can still have a very nice profit if the stock price movement takes the stock price near one of the wings. The biggest negative of RICs compared to hedged straddles is that you’ll need the stock price to move to make a profit. Hedged straddles can make gains due to short strangle credits when the stock price doesn’t move, and this is why hedged straddles are great trades to initiate during low volatility times because its less likely that any market wide volatility decline will significantly hurt the trade (and any IV rise will help it). Since starting trading RIC strategy in late November 2018, we closed 12 winners out of 12 trades: BABA +20.3% FB +20.0% GS +15.4% AXP +10.2% GS +5.7% GS +19.9% MSFT +19.7% FB +20.5% MSFT +15.9% GS +17.9% NVDA +38.4% NVDA +81.4% Of course, the strategy is not without risks - you need the stock to move in order to make a gain. However, in the current environment, if you select the stocks that have tendency to move, you improve the probabilities significantly. When the market conditions change, you need to be flexible and trade what is working. And this is exactly what we do at SteadyOptions. Related articles: Reverse Iron Condor Strategy Straddle, Strangle Or Reverse Iron Condor (RIC)? How We Trade Straddle Option Strategy

It’s a popular trade because it has a high win rate. And our lizard brains love consistency… But if you’re willing to go against your innate biological wiring it’s possible to make a good chunk of change by doing the opposite. At Macro Ops we like to identify opportunities to buy deep out-of-the-money (DOTM) options. As long as the winners earn multiples of the losers it’s possible to walk away with a profit — despite the low win-rate. To win as a buyer you must carefully select DOTM options that have the best chance of upsetting the implied distribution of the Black-Scholes pricing model. Black-Scholes for the most part works pretty well. But it has a flaw, the model assumes that momentum doesn’t exist. This assumption holds up just fine in the short-term. But it breaks down badly in the long-term. As market practitioners we know that momentum, of course, does exist. And we know also that momentum becomes even more pronounced the longer the time-frame. So there’s a profitable trading opportunity if we buy DOTM options with many days left to expiry and allow the underlying enough time to drift pass the strike price. Jim Leitner — one of the most successful global macro traders of all time picked up on this long ago. He talks about the mispricing of long-dated options in his 2006 interview with Steven Drobny (emphasis mine). Longer-dated options are priced expensively versus future daily volatility, but cheaply versus the drift in the future spot price. We need to make a distinction between volatility and the future drift of the currency. Since the option’s seller (the investment bank) hedges its position daily, it makes money selling options. Since some buyers do not delta hedge but instead allow the spot to drift away from the strike, they make money on the underlying trend move in the currency. So both the seller of the option and the buyer make money. The profit for the seller comes from extracting the risk premia in the daily volatility, and for the buyer it comes from the fact that currency markets tend to exhibit trending behavior. If the option maturity is long enough, trend can take us far enough away from the strike that it’s okay to overpay. Although his specific observation has to do with the forex markets. The same logic can be carried over to the equity markets — where our DOTM (deep out of the money) strategy focuses. Hot stocks have a tendency to drift (ie, trend) for long periods. They don’t follow a random walk as the Black-Scholes model assumes. Knowing this, our go-to DOTM option strategy is to buy low delta calls 4-12 months out in time on high momentum stocks. A momentum stock can cause DOTM calls to appreciate as much as 64x of the original price…Here’s an example of that from one of our stock picks from the summer of 2017. In August of 2017 we became interested in Interactive Brokers for fundamental and technical reasons. At the time IBKR traded for $40.54. The December DOTM call options struck at $47 were trading for just $0.20. By December 15th, IBKR was trading for $60.40. A 49% gain in a few months. But take a look at the price of the 47 DOTM calls. Those were trading for $13.00 That’s a 6400% return in a few months. A $1,000 position in this DOTM option would have turned into $65,000 in just four months.... The Black-Scholes model massively mispriced these calls. A return of that magnitude should rarely occur. But we see it happen again and again in the long-dated DOTM calls of high momentum stocks. Here’s another more recent example from DOTM calls in Twitter. Twitter started to run out of its base at the beginning of 2018. By summer stockholders had been rewarded with a nice 77% gain. But check out the June DOTM calls on January 12th, the day of the breakout in Twitter. These 37 calls were trading for $0.50. By summer those same calls were trading for $8.80! That’s an incredible 1600% return. A $1,000 position in this option turned into $16,600 in only 5-months. Since Taleb’s Black Swan was first published just months before the GFC, traders have been mindlessly buying put options in the hopes that another “left tail” event is around the corner. But it’s been the wrong strategy. Since 2008 all of the outlier returns have actually occurred in the right tail. Here is yet another example of an extreme right tail return out of NFLX in the DOTM calls. NFLX had DOTM call options trading on July 7th 2017 for $0.93. At expiry on June 15th 2018, these DOTM calls were trading for $141.00…See ‘em on the option chain below. That’s about a 15,000% return. 10 contracts would of cost $930 and in one year’s time they could have been sold for $141,000... DOTM calls on momentum stocks are producing once-in-a-decade returns every year. Returns of this magnitude shouldn’t happen this frequently. But they do because the Black-Scholes model isn’t equipped to properly value DOTM call options on high momentum names. The key to executing this strategy successfully relies on finding strong, high-momentum stocks that can trend well past the strike prices of the DTOM calls. If you buy DOTM calls on the wrong underlying, like an equity index or a commodity, you’ll just rack up losses and the winners won’t be big enough to make up for it. This strategy only wins because of the magnitude of the winning trades. It’s all about realizing that right tail return and ringing the register on a 50 bagger. Focusing only on individual stocks with the following characteristics has helped us identify the best candidates for DOTM call buying. 1) The stock must have positive momentum Stocks that have been performing well in the recent past have the highest probability of continuing perform well into the future. You can run a momentum screen and find what stocks have the best 6-month and 12-month returns. Focus on those. What’s even better is if the stock is also in a sector that has been outperforming the broad market. So narrow the scan down to the strongest stocks in the strongest sectors. Finally, if you look at the chart and see a clear break higher from a congestion zone, that’s an added bonus. Breakouts from consolidations act as technical catalysts that propel a stock higher and none of the trend is yet priced into the options. 2) The company must have exciting fundamentals It’s not enough to simply scan for positive price momentum. The fundamentals should support higher prices as well. From a fundamental perspective we like to see growth potential that can exceed the market’s current expectations. The sweet trends of the FAANG stocks occurred because market participants vastly underestimated their growth potential. Usually, these high momentum stocks will have strong rates of revenue and free cash flow growth. If you see negative numbers for either of these skip the stock and go onto the next one. Finally, a strong fundamental catalyst that the market is fixated on helps to keep the hype train moving and the trend rocketing higher. Something like a large earnings beat or a new product launch is always good. 3) Attractive options After finding a quality momentum candidate we do a quick check on the listed options.Two things matter here, the implied volatility and the liquidity. Implied volatility isn’t hugely important for this strategy, our focus is betting on direction. But it’s still worth paying attention to. High implied volatility makes it tougher for the stock to exceed the strike price of the DOTM call option. In the graph below, notice how the red line (high IV) is higher than the blue line (low IV). If the IV gets too high, the cone widens so much that even a strong trend in the underlying stock can’t breach the strike price of our DOTM calls. We’ve found the sweet spot for IV is anything lower than 40%. Below 40% keeps the option strike close enough to the stock so that it has a realistic chance of outperforming the implied move of the Black-Scholes model. After IV we check liquidity conditions. The stock has to have tradable options both far out in time and far away from the strike price. The call options need at least 100 days of expiry let in them and a delta of 15 or less. You can see in the example below that IBKR is trading for $64.46. The options of interest are the ones with a strike price far away from $64.46. The red rectangle shows DOTM calls struck at $85 and $90. Also notice that these DOTM calls are much cheaper than the ones closer to the current stock price. The 90 call in this example trades for $.80. The 65 call trades for $5.60 — 7 times more expensive. DOTM calls have more positive asymmetry versus the ones that are closer to the money. Finally, if the bid ask spread looks reasonable then we’ll pull the trigger on the DOTM call. From there it’s all about letting Mr. Market do it’s work. In our experience, when it comes to managing a DOTM trade, less is more. We like to run our DOTM calls to expiry without management and just accept whatever the market chooses to give us. Most of the time that’s a goose egg — remember, this is a very low win rate strategy. But, every once in awhile we’ll get a 50-bagger that pays for all of our losses and much much more. There you have it! That’s the DOTM call strategy in a nutshell. This is one of many strategies that we implement in the Macro Ops Portfolio. If you would like even more information on our DOTM call strategy you can learn more by downloading this free DOTM guide by clicking here. Tyler Kling is the co-founder of Macro Ops, a trading community focused on the art of global macro. He is a former trade desk manager at a $100+ million family office where he oversaw multiple traders and created quantitative trading strategies for options and futures. Tyler also worked as a consultant to the family's in-house fund of funds in the areas of portfolio manager evaluation and capital allocation. He holds a Certificate In Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

This can be seen in historical market data, and from an efficient markets point of view, should be expected to persist in the future as a rational risk premium for the transfer of risk from a willing buyer to a willing seller. Stop and think with me for a moment about the concept of passive vs. active. I believe it's wise to only invest in strategies ("factors") with an underlying expected return, before any active management is applied. In other words, the market naturally makes you money over time without any requirement of an investment manager's "skill" to be able to select securities and/or time entries and exits. This is important because academic research has documented manager skill in decades of historical mutual fund performance to exist less than would even be randomly expected (especially after fees and taxes). As an example of a passively managed VRP strategy, the CBOE has been publishing their S&P 500 Put write index for years, with historical data going back to 1986. Since then, a passive strategy of selling fully cash secured one-month at the money (ATM) S&P 500 puts, with collateral assumed to be held in a money market account holding US Treasury bills, would have produced returns similar to the S&P 500 index itself. Due to the nature of ATM puts, risk (measured as volatility and drawdown) was less than the underlying index, resulting in about a 30% increase in Sharpe Ratio. Put selling is robust across markets as well, as can also been seen in CBOE's historical data for PUTR, where the same methodology is applied to the Russell 2000 index. With liquid option markets on ETF's like EFA and EEM, a globally diversified equity put write strategy could be constructed with attractive characteristics vs. a traditional mutual fund or ETF that only holds the underlying equities. (Readers can backtest these ideas for free for an entire week with a free trial of the highly recommended ORATS Wheel) Last month, AQR published an excellent paper, Understanding the Volatility Risk Premium. The paper's executive summary is presented below: The authors also present an interesting case study of how investor behavior tends to create significant demand for and value placed on insurance like investments, such as buying puts to hedge a position or portfolio. These preferences and behavioral biases cause an overestimation of downside risk, documented by a Yale University survey conducted where both retail and institutional investors were asked to estimate the probability of a "catastrophic stock market crash" within the next six months. Since 1989, with few exceptions, a majority of both groups consistently believe that there is a greater than 10% chance of such, yet in reality the historical likelihood of such an event has been approximately 1%. This overestimation of crash risk may be part of the explanation of the persistent VRP seen in option and volatility futures pricing where option and volatility futures buyers are willing to pay, and sellers require receipt, of a large premium to transfer risk from one party to another. On the opposite end of the option spectrum is call options, where the VRP has also been documented to exist (and can be seen in CBOE's BXMD index in the chart above), although for slightly different reasons. Call options can be thought of as lottery tickets, where a buyer spends a small amount of money to have the potential for a large payoff if the underlying asset moves much farther and faster to the upside than the market expected. This preference for positive skew results in a call option VRP that can also be captured by option sellers in a variety of different ways, including covered calls and short strangles where short puts and calls are combined into one (usually) delta neutral position. I'll finish with the conclusion from AQR's paper, but before I do, a word of caution. The reason you often hear "options are risky" is because people often are under-educated about the inherent leverage built into options. Remember, one contract is the equivalent of 100 shares of the underlying. Don't rely on your broker's margin requirement as any indication of how many contracts you should sell any more than you'd rely on a sports car's ability to drive 180 MPH as any indication of how fast you should drive. In our firm, we believe that any skill that may persist in financial markets is in having a deep understanding of portfolio construction, and then the discipline to have a long term mindset when most others don't. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse oversees the LC Diversified forum and contributes to the Steady Condors newsletter.

After all, option positions are usually held until something happens. For example, the stock moves or time passes, or volatility changes etc. Any decision to exit (or hold or adjust) the position should be based on the current risk of the position. In other words: If you want to own the position as it is, then own it. If risk is too large, or profit potential is too small, or it you are not comfortable with the current trade, then do something: adjust, reduce size, or exit. If that play locks in a loss, so be it. That is not of primary importance. Any position that you hold must have the potential to earn enough cash to justify the risk associated with holding. Estimating the probability of success is one factor to consider when making the hold/fold decision. As long as risk is not too high – and that's most of the time – traders who sell time premium (trading iron condors for example) collect their profits as time passes. To be a profitable trader, you take your profits as they come, accept losses when that's the best decision, but don't concentrate on those factors. Instead, the key, and the most important item on which to focus is risk. That's the risk management skill that prevents large losses. That in turn translates into exiting risky positions, regardless of whether they are profitable or currently under water. Being willing to do whatever is necessary to get out of dangerous positions is the winner's mindset. Those who do not agree argue that failing to pay attention to whether a position is profitable before exiting gives the trader little chance for success. The thought is : If you don't trade for profits, how can you ever know when to exit a position? Here is a note from Christopher who takes the other side of my argument: *** Mark, The theory that profit and loss doesn't matter naturally assumes that you have a "perfect" assessment of the odds of a given trading position. In an imaginary world, whereby "current risk" can be measured to perfection, prior gains and losses never matter because we can always mathematically control our risk of ruin. In the real world nobody can perfectly gauge "current risk" and hence ignoring prior gains and losses can lead to ruin. Stop losses should be employed when we have reason to believe that our measure of "current risk" is in error. If you disagree, look up "Long Term Capital Management" for further evidence. Christopher Cole from Artemis Capital *** Hello Christopher, In discussing what role current profitability should play in deciding when to exit a trade, I was offering my opinion on how traders should manage position risk. The idea is that the inexperienced trader would benefit by following this advice because it overcomes a common blind spot. I was also hoping that the experienced trader may discover something he/she had previously overlooked. My point is simply this: Do you want to own any given position, right now, at its current price and under current market conditions? Nothing else matters. If you have no desire to own it, I strongly recommend closing. If that results in a loss, then that's the way it has to be. That's far better than continuing to hold a risky trade – planning to exit as soon as the trade turns profitable. I noticed a very timely blog from Felix Salmon regarding the US Government's decision to sell some of its shares of General Motors at the IPO price: "The next big tranche of bailout repayment funds, of course, is going to arrive tomorrow, with the upsized GM IPO. The size of the stake that Treasury’s selling has been growing impressively, and at this point it looks as though taxpayers are going to end up owning just 33% of GM, down from 61% right now. The more shares that the government sells in the low $30s, of course, the harder it’s going to be for Treasury to realize an average price of $44 per share for its stake by the time its last share of stock has been sold. That’s the point at which the government breaks even on the deal. But I’m glad that Treasury isn’t letting such considerations stop it—holding on to stock just because it’s trading below some arbitrary 0% return figure is simply speculating in the stock market, and it’s not Treasury’s job to be a stock-market speculator." You don't have to agree, but this discussion is hardly comparable to LCTM. I'm not talking about adding to the trade in gigantic size. They were absolutely certain that they were correct in their assessment. They grew the position size. They refused to believe that what they were seeing was real. And they had no real conception of risk because their risk-evaluation model was flawed. In their (brilliant) minds, they ignored one very basic principle for traders: "Markets can remain irrational longer than you can remain solvent." [John Maynard Keynes] Every trade eventually requires a hold/exit decision. When using options, an additional choice becomes available: hold through expiration. I don't believe it's a good idea to hold a loser, just because it is a loser. There's a time to own a position (potential reward justifies the risk) and there is a time to get out (risk too high when considering potential gain). I am certain that you recognize that not every trade can be a winner. Thus, holding losers with the hope of making every trade profitable is not viable. First, it will never happen. Second, traders would hold any poor (risky) position simply because he/she refuses to take a loss. I believe that a good trade decision does not have to take into consideration whether the current trade is showing a profit or loss. I'm not saying that you must ignore that factor (I ignore it), but it should not be the primary factor in your exit decision. Nor does the decision have to depend on an accurate assessment of future prospects. However, current risk is easy to measure when a trader adopts limited risk and limited reward strategies. I always know the best and worst possible scenarios and trade to avoid the worst case. To me, decisions cannot get any easier than that. How else can a trader manage risk? I either want this position in my portfolio or I don't. I may be unable to make a perfect assessment of the probability of winning, but I know how much can be won and lost. Why hold a trade when you have a negative opinion of future prospects? Just so you don't have to lock in a loss? That makes no sense to me. Here's an example of my bottom line: You can exit a specific trade by paying $100. How can it matter whether you sold this position and collected $200 (and would have a profit) or $50 (and would have a loss)? Do you want to own it or not. The price is $100 right now. Nothing else matters.. Christopher, I believe this is a matter of perspective. And apparently we have different perspectives. There's nothing wrong with that. Thanks for writing. Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

It is not. (Well, it is rarely a problem). In fact, almost 99% of the time, early assignment is a better outcome. Below will set forth two common assignment examples, work through the potential outcomes, and demonstrate why assignment is typically a better outcome than having just held the position. For Steady Option’s Anchor members, there is a persistent risk of being assigned a long stock position on the income producing portion of the strategy (the short SPY puts). This only happens in sharp market declines or very close to rolling of the position, but it can happen. Assignment risks increases the closer the position gets to a delta of 1. Most recently, this happened the week of May 13, 2019.For purposes of this example, we’ll use the actual SPY positions and walk through what did occur and could have occurred in other possible market situation. In early May, the strategy sold four contracts of the May 20, 293 put for $3.11. The market started to drop. On May 19, 2019, the options were early exercised when SPY hit 285. The value of the contract when assigned was $8.11. All of a sudden, most accounts had 400 shares of SPY and were down $117,200 (4 contracts x 100 x $293). Most accounts don’t have cash in them to cover the position and may have received a Reg-T notice (a Reg-T notice is a form of a margin call by your broker). What is a trader to do? Well first, the next trading day, simply close the position. Sell the stock, and the margin call should be covered. If it’s not, you can always sell other holdings to cover it. The way the Anchor Strategy is structured, it is virtually impossible not to have available cash or stock to cover in this situation. After closing the assigned position, is the trader worse or better off than if the position had been held? In all market conditions (up, down, flat), the trader is either in the same position as not having been assigned or better off. Note: This assumption ignores transaction costs. Some accounts have assignment fees, different commissions for buying and selling stocks and options and other various fees. These fees could make a difference on the analysis, depending on a trader’s individual account. Since such fees vary widely, the below discussion ignores all fees. The Market stays flat, SPY stays right at 285 In this case, the trader sells the assigned shares back at $285, facing a loss of $8.00/share. ($293 - $285)[1]. In other words, the trader has lost $1,956 ($8 stock loss less $3.11 received for selling the original position). This seems like a poor outcome. [1] For purposes of this article, I am going to ignore the fact that the position was hedged and look at it just from the assignment point of view. However, this is better than if the trader had just closed the short put at $8.11 at the market open. In that case, the trader would have lost $2,000. (($8.11 - $3.11) x 4 x 100). By being early assigned, the trader saved $0.11/share. This is what actually happened in actual trading the week of May 13. The Market moves up the next morning What would have happened though if the market had gone up? Let’s say to SPY $288. In this case, instead of selling the stock back at $285, you would sell it back at $288. That is a loss of $5 per share ($293 - $288) for a total loss of $756 on the trade ($5 - $3.11). Once again, the trader is better off. Delta of the short put is not one, rather it had a dynamic average of .95. This means the value of the put would have declined not to $5.11 (the previous price of $8.11 - $5.11), but, by $2.85 to $5.26. Closing that option position would result in a loss of $860 on the trade ($5.26-$3.11). The Market goes down The scariest situation for a trader is waking up the next morning and the market has declined. Instead of SPY $285, the market might have continued to go down to SPY $282 (or worse). In this case, the trader sells the stock for $282, resulting in a loss of $11 per share for a total loss on the trade of $3,156 ($11-$3.11). Yet again, the trader is better off. With the market going down from $285 to $282, the dynamic delta average is .98 and time value has dropped a bit, and the short put is now worth $11.03. Closing this put for a loss of $11.03 results in a total loss on the trade of $3,168. Even if the market had plunged down to SPY 100, the two positions would have been equivalent – meaning that the loss by being assigned equals the loss of having been in the short put. In other words, in every market situation, the trader is either better off or exactly the same when assigned the position rather than having simply held the short put. The closer delta is to 1, the more likely you are to be assigned, but even in that situation, you would be no worse off between assignment and holding. But if that’s true for puts, is it also true for calls? Let’s take a common example. You sell 5 contracts of the $100 call on Stock ABC that is currently trading at $99 for $2.00. You are now short the $100 call. You receive $1,000. It expires in 3 weeks. Two weeks from now the stock is trading at $99.80 with earnings coming up tomorrow, and the option is trading at $1.00.You have $1,000 in cash and -$500 in call value. Someone exercises the option. The next morning your account looks like: Short 500 shares ABC at a value of $49,900 Long $51,000 cash ($50,000 for sale of stock at $100/share plus $1,000 from the sale) Are you in trouble? Did you lose money? Once again no, you’re not. Let’s look at what happens in each situation at market open: The Market stays flat at $99.80 In this situation, you buy back the 500 shares of Stock ABC for $49,900. You keep the $51,000 and did not have to buy back the call. So you’re up $1,1000. If you had not closed the position out, not been assigned, and the market stayed flat, the price of the option may have declined to around $0.50. Clearly, you are better off because of the assignment – by over $800. The Market goes down (any amount) Earnings come out and the price drops to $90 (or any value below $100). In this situation, you buy back the 500 shares for $45,000. You keep the $51,000 and did not have to buy back the call. So you’re up $6,000. If you had not closed the position out, not been assigned, and the market went down, the price of the option may have declined to $0.01. Again, you are better off because of the assignment – by almost $6,000. The Market goes up by less than $2 (to under $102) Earnings come out, and the price increases to $102 (or anything between the last close and $102). You buy back the shares for $51,000. This nets out the cash you already had and did not have to buy back the calls. In this situation you break even. If you had not closed the position out, not been assigned, and the market went up, the price of the option contract would have increased to at least $2.00. In this case, you are in the same boat because of the assignment. Closing the short contract at $2.00 would cost you $1,000, which nets to $0.00 with the $1,000 you received from the sale. The Market goes up by more than $2 (e.g. $110) Earnings come out, and the price increases to $110. In this situation you must buy the shares back for $55,000. Offsetting with the cash already received, you have lost $4,000. If you had not closed the position out, not been assigned, and the market went up a significant amount, the option price would have increased to at least $10. Closing this short contract out will cost $5,000. You are again better off because of the assignment. In other words, in every situation you are in an equal or better situation because of an assignment. This is because options have time value – which an early assignment forfeits to the option contract holder. Even if the option contract had no time value left in it, the worst situation is still break even. The only real risk to assignment is failing to quickly move and adjust the position (eliminate the oversized short position), your account goes into a Reg-T call, and your broker starts closing positions in a non-efficient manner.There are brokers who also require margin calls to be covered by cash deposits, instead of adjusting positions. (Very few). If that’s the case, you may get a demand for cash (and switch brokers). As long as you stay on top of your positions and address any assignments, there is no reason to fear early assignment since in all situations you will be either equal or better off on early assignments. This is why I am almost always surprised by early assignments. The only time early assignment really ever makes sense is on surprise dividend announcements that weren’t originally calculated into the option prices – and even then, as the price of the option likely moved before the assignment occurred, there may be no impact. What any option investor should always keep in mind is what to do if they get assigned early, what that will look like, and what trades will need to be entered the next business day. Being prepared prevents fear and mistakes – particularly when there is no need for that fear in the first place. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Strategy and Lorintine CapitalBlog. Related articles Can Options Assignment Cause Margin Call? Assignment Risks To Avoid The Right To Exercise An Option? Options Expiration: 6 Things To Know Early Exercise: Call Options Expiration Surprises To Avoid Assignment And Exercise: The Mental Block Should You Close Short Options On Expiration Friday?

What I began to realize over the years was that the risk I was taking with iron condors was excessive, so the thought of selling a “naked” strangle was unimaginable. This risk was due to ridiculously large position size, or leverage, and over time I began to understand this reality better. An iron condor is simply a short strangle with long options that are further out of the money than the short options. Some traders refer to the long options as “wings”. Because an iron condor creates a maximum potential loss equivalent to the width of the spread, traders make the mistake of often trading their account up to or near the maximum number of contracts that would wipe out most of their account if that max loss occurred, which during periods of low market volatility may be as minor as a 10-15% drop in the market.The average intra-year drawdown for the S&P 500 has been about 14% since 1980, so this is something that occurs almost every year. This is of course why you hear so many stories of retail traders and credit spread/iron condor newsletters blowing up. As is almost always the case, the risk isn’t really the strategy…but instead the position size of the strategy! There’s no strategy so good that enough leverage can’t make it a blow up waiting to happen. Due to the nature of out of the money option selling, the negatively skewed return stream can take a while to materialize when there are long periods of relatively calm market conditions. Today, I think of a strangle as a cash secured put along with an out of the money short call. Thinking about the trade this way transforms a short strangle from seemingly risky into a rather conservative trade, due to the position sizing rule. For example, with SPX currently trading at about $3,000, a strangle would be sized at about 1 contract per $300,000. Compare this to selling 10-point wide put and call credit spreads to create an iron condor, and many newsletters might suggest that you sell something like 275 contracts per $300,000 of capital! Think about that for a moment…technically the iron condor has “defined risk” of $275,000 (ignoring the credit received), while the strangle has “undefined” risk because the short call is naked and prices can theoretically rise forever. Yet the risk is immensely different for the two trades due to the number of contracts involved. The strangle has a positive expected return and will very likely survive and succeed over the long-term due to the well documented Volatility Risk Premium (VRP), while the iron condor will cause an eventual blowup. When someone says they prefer iron condors over strangles because the risk is “defined” with an iron condor, they probably haven’t spent a lot of time thinking about position sizing. This should be the biggest lesson from this article…risk is defined by your position size to a much greater degree than it is by the strategy. Yet it’s a topic that is not well understood or appreciated by most traders. I think about an iron condor similar to how I’d think about owning 100 shares of a stock and then buying a protective put. A strangle is like owning just those 100 shares, while an iron condor is like owning those 100 shares along with an out of the money protective put. That put will reduce your downside during extreme selloffs that are greater than the market already baked into prices, but at a substantial cost over the long run (again, due to the VRP). To illustrate this, I backtested SPY strangles and iron condors using the ORATS wheel. Selling 30 delta strangles on SPY since 2007 has produced an average annual return of 5.34% (volatility of 8.36%, Sharpe Ratio 0.64), while a 30 delta iron condor with wings set at 20 delta returned only 0.15% (volatility of 3.08%, Sharpe Ratio of 0.05). I ran the test a few times just to make sure I was getting consistent results. The additional transaction costs and performance drag of the long options is so significant that almost the entire return generated from the short options disappears. Another comparison is Iron Condor Vs. Iron Butterfly Conclusion On your journey as an options trader you’ll hear a lot of conventional wisdom repeated over and over that simply isn’t true or provides incomplete information. One of those myths is how selling strangles is risky and instead a trader should sell an iron condor. This statement tells us nothing about position sizing. If you read this article and are still resisting the information I’m sharing, ask yourself this question: Is the reason you still want to use an iron condor over a strangle due to how you might look at the expected return of the strangle as I’ve laid it out and feel a little underwhelmed? Perhaps this article is also what you need to hear instead of what you want to hear, because I know I was in that camp at one time. You might consider that the 5% return of the SPY strangle since 2007 is similar to the long-term global equity risk premium, which serves as the benchmark for virtually everything since so few investments have been proven to be able to reliably exceed it over the long term.Until someone shows you an independently audited decade plus long track record of a fund or newsletter selling iron condors with the “X% per month” average returns that are often fantasized about and marketed to new traders, use the position sizing algorithm presented in this article instead as your baseline. Think in terms of notional risk instead of margin requirements, and you’ll substantially reduce the risk of an unrecoverable negative surprise on your trading journey. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios. Related articles Selling Naked Strangles: The Math Selling Short Strangles And Straddles - Does It Work? Selling Options Premium: Myths Vs. Reality Karen The Supertrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? How Victor Niederhoffer Blew Up - Twice The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust Trading An Iron Condor: The Basics The Hidden Dangers Of Iron Condors

For example, Bernie Madoff was able to run the largest Ponzi Scheme for decades by intimately understanding human psychology. Criminals like Madoff are often highly intelligent people who know how to prey on human emotion. He knew that if he told people they were making extraordinary returns they’d get suspicious and he might get exposed for the fraud that it was. So he instead played on the emotions of investors, many of whom were savvy enough that they should have known better, by telling customers they were making above average returns without the commensurately higher risk. During the 2008 Financial Crisis, investors were so panicked that they were selling investments of all kinds, causing Bernie’s house of cards to finally collapse. So how can we use history as a guide? We first should consider the words of Spanish philosopher George Santayana – “Those who cannot remember the past are condemned to repeat it.” A basic tenant of investing is that the path to higher returns is found through taking higher risks. Anomalies that suggest higher returns without a commensurate increase in risk should be approached with a high degree of caution and skepticism. It’s also important to note that academic theory and evidence tells us that not all risks come with higher expected returns…such as selecting individual stocks. We should only take compensated risks in the form of diversified portfolios and avoid taking uncompensated risks like holding individual securities. Below are several widely known risk factors that leading academic researchers have identified to lead to commensurately higher returns: Diversified bond portfolios have higher expected returns than riskless Treasury Bills. Diversified total stock market portfolios (Market Beta) have higher expected returns than bond portfolios. Stock portfolios with increased weightings toward smaller (Size) and lower priced(Value) companies have higher expected returns than market portfolios. With this information in mind, investors can construct well diversified portfolios based on their own unique ability (time horizon), willingness (risk tolerance), and need (required return to reach goals) to take risk. But the nature of risk and return is that expected returns do not always result in realized returns. If the relationships described above always played out as expected, there would be no risk. So back to the concept of history as a guide, we can look back to see how often these relationships between risk and return did not work out. The above chart is from Larry Swedroe’s excellent article, “Value Premium RIP? Don’t You Believe It”. The chart tells us how frequently each source of expected return was not realized over 1/3/5/10 and 15 year rolling periods since 1927. For example, the US stock market underperformed riskless Treasury Bills over 30% of 1 year, 19% of 3 year, 16% of 5 year, 7% of 10 year, and 0% of 15-year periods since 1927. Investors simply aware of this data would be much better equipped to make sensible investment decisions as well as understanding proper expectations. If you had capital you could invest for 1 year, you likely wouldn’t take risk if you knew there was a 30% chance of failure. Additionally, the magnitude of failure over one year can be quite great, with the stock market not only underperforming risk-free treasury bills but also producing losses (occasionally large ones). Now contrast this with the 15-year timeframe where there has never been a period of underperformance, making the thought of holding riskless treasury bills for this long (or longer) seem equally as irrational as holding stocks for only one year. Forewarned is forearmed. As it relates to the actual equity portfolio, many investors are surprised by the historical evidence that increasing exposure to small and value stocks has outperformed a market portfolio about as often as a market portfolio outperforms treasury bills. My firm recommends the use of Dimensional Funds for the implementation of this research, and since 1970 the globally diversified and small value tilted Dimensional Equity Balanced Strategy has outperformed a market like S&P 500 portfolio in 80% of 10-year periods by an average of more than 3% per year. Note this also would have occurred with comparable risk due to the benefits of diversification. Conclusion It’s very easy and human to overcomplicate things, including investment decisions. The knowledge and historical perspective of a great financial advisor with a focus on the best interests of the client can lead to better investment experiences and greater peace of mind. A focus on the things that we can control, such as allocating capital according to time horizon, diversification, fees and expenses, taxes, and rebalancing are all ways we can stack the odds in our favor. Understanding the historical probabilities can also lead to greater patience to endure the difficult times when the known risksof investing actually show up. Enjoy the ride! Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

This is important not only if you hold equity positions (for covered call writing, for example). Option premium is richer for some underlyings than for others, for a good reason. Higher premium points to higher volatility. In other words, higher risk. No matter what forms of option strategies you employ, picking the underlying is always a reflection of your risk profile. If you are like many options traders and you rarely if ever consider the stock and the company, you could be exposing yourself to higher risks than you intend. The fundamental test Risk is not limited to option moneyness or implied volatility. It is not limited to historical volatility of the underlying either. These are all technical tests. Of equal importance are fundamental tests. Options traders often are obsessed with risk, but they might not even consider the origins of risk, the company and its fundamentals. Fundamental volatility is worth checking and comparing. If a company experiences rising revenue every year and consistent net returns, this is a reliable trend and volatility is low on the fundamental side. If a company sees erratic changes each year, from high net return to a net loss, and from rising revenues to falling revenues, that is a signal of higher risk. Even though this seems far removed from option valuation, it affects the entire options market directly. Five key tests of the fundamentals should be performed over a 10-year period, using the CFRA reports provided by most large brokerages. These define fundamental volatility and translate to how much risk you face in trading options: Dividend yield and history. What is the dividend yield and how has the trend evolved? Many exceptional companies pay 3.5% to 5.0% dividend and see equally strong priced growth over time. Select high-dividend stocks for improved reliability in price. A second test is the number of years the dividend has been increased. Many companies have increased dividend per share and dividend yield every year for 10 years or more. These so-called “dividend achievers” tend to perform over time far above market averages. Dividends matter to options traders, especially those using strategies like covered calls for which equity positions are held. Dividends often represent a substantial portion of overall return from trading, and should not be overlooked in favor of other tests such as high option premium. P/E ratio range per year. The current P/E ratio is meaningless by itself, because it reflects the current value and not the typical value. Because P/E compares a technical factor (price) to a fundamental factor (earnings per share), the timing is always off. Price is the price today, but earnings are reported quarterly and may be out of date at the moment. For this reason, the best way to check P/E is the annual high and low levels over 10 years. Look for companies with low volatility in P/E. The moderate range between a high of 25 and a low of 10 indicates that the pricing of stock is reasonable. Revenue growth. A well-managed company should see higher revenue year after year. This is difficult to accomplish over a 10-year period, so some flexibility is necessary. The cyclical nature of many sectors makes it practical to look at overall growth and not to demand that every year’s revenue should rise. Earnings growth and net return. There are two key earnings test. First, look for the dollar amount of earnings to increase each year. Second (and more important), check net return. This is the dollar amount of earnings divided by revenues. Expect to see a consistent net return over many years. A growing net return is not realistic; but the combination of higher dollars of net and consistent net return define good management. A company whose revenues are rising but whose net return is falling, is not being well managed. Debt to total capitalization ratio. This might be the most important of all fundamental tests. Total capitalization consists of long-term debt plus net equity. The ratio tracks the debt portion. If this is rising year after year, it is a red flag, indicating poor cash management and trouble in the future. As a company relies more on debt to fund dividends and future growth, less future profits will be available. Most cash management testing relies on the simple current ratio (comparing current assets to current liabilities). This is an inadequate test than can be easily manipulated by planning the timing to pay liabilities. It hap[pens too often that a company declares higher dividends and pays for those dividends by accumulating ever higher long-term debt. Look for companies with steady or declining debt ratios and avoid those with ever higher debt year after year. The testing of fundamentals as a first step in picking stocks for options trading is the only way to ensure that an options program is a sound match for the trader’s risk profile. Too often, options traders express disdain for the fundamentals, thinking of them as outdated and of no use in setting up an effective trading program. Those same traders often are perplexed when trading profits fail to materialize. By controlling the fundamental risks (volatility) by the companies selected for options trading, the historical volatility of stock and implied volatility of options will be a good match for your risk profile. If you prefer high-risk in speculative issues, pick fundamentally volatile stocks; but if you seek consistency and moderate stock and option volatility, look for the same characteristics in the fundamentals of the companies you pick for options trading. Ultimately, a successful options program cannot be random or based on picking high-risk strategies on highly volatile underlyings. The relationship between the fundamental side and the technical (stock prices) determines the risk level in the options traded. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

As always, note these are my opinions only, I am not able to predict the future, and you should form your own opinions before making any investment decisions. If anyone has any questions, I welcome your posts, emails, and even calls. Market Thoughts To me, there is only one investment rule currently in play -- do not bet against the Federal Reserve. Whether you want to call it a Bernanke put or the Yellen floor, the markets are being controlled by the Fed right now. In the last eighteen months, I personally have had this made very clear to me. While of course fundamentals of a business still matter, market trends as a whole are governed by the Fed and will continue to until the Fed stops. Interest rates, bond markets, gold prices, oil prices – are all tied to current Fed policy. In a way that is unfortunate, as it makes it impossible for efficient markets. However, it certainly is a great wave to be on while it lasts. So just how long is it going to last? Well according to Yellen, at least for a few more months (and thus the most recent run up in the market this week). Until the Fed starts hinting at taking their foot off the gas pedal, I do not think we’ll see a major market draw down. Now Fed policy cannot guarantee that markets will keep going up at a rate of twenty percent per year, but it should provide a floor and prevent a major sharp drawdown. But does the Fed keep its current policies in place through Summer 2014? Your guess is as good as mine. Not knowing when the rug is going to be yanked out from investors should keep everyone on their toes. If you’re not in a place to make significant adjustments once governmental policy changes, you certainly need to have some sort of protections in place – whether it is stops, puts, or owning inverse positions (such as a long/short fund). This past summer gave us a hint of how fast prices can move when the Fed even hints at changing prices. Bond prices cratered, very quickly, just on the hint of changing rates. Once it becomes official policy to increase rates and slow down bond purchases, it very well could be too late to save your bond portfolio. (Of course this also depends on what your bond portfolio is and the purpose of it – if you own physical bonds for yield and not growth, you likely will not be affected near to the extent as the individual who owns three major bond funds.) I realize that a prediction that (i) the market will stay somewhere between up and flat and (ii) until the Fed moves then bad things may happen is not much of a prediction and may seem obvious. However, that is the problem with large governmental intervention – it interferes with normal market movements and patterns. Because of this, I structure my personal investments always with one eye toward fast changes and try to invest as much as I can in actual non-correlated assets. If your investment adviser has you in a small-cap fund, a mid-cap fund, a large-cap fund, a foreign investment fund, a commodity fund, a bond fund, and a high dividend fund such as a REIT or pipeline, and tells you that you’re adequately diversified find a new investment adviser. In a market crash, ALL of those asset classes will get hammered. Sure, on a week to week basis in a bull market you are diversified and relatively protected against company and sector risk. But you are horribly exposed to market risk, and the vast majorities of investment advisers either simply do not understand this or believe that “that’s just the way things are.” However no investor should accept that answer. Yes, all of those investments have a place in a portfolio, but that should not be the end of the investment discussion. Rather the next questions have to be “how to I protect those investments,” as well as “if these investments do not perform, how do I get income/growth.” It is entirely possible to have it all in a well-designed portfolio. Anchor Strategy Update There is an entire thread, open to all members, where I provide a full review, analysis, and critique of the Anchor Strategy as a whole and as it applies to Steady Option's members, If you have questions on the strategies performance, please direct them there. In a short synopsis though, the strategy is performing as expected. It's not under performing and it's not over performing. As for new developments, we are in the process of developing a "leveraged" Anchor strategy. With interest rates (particularly the margin interest rates available through Interactive Brokers) where they currently are, the potential for massive returns appear to exist. Note that this strategy is in its initial testing phases. It has been back tested and is currently being paper traded. I try not to recommend, or put my own money at risk, until I have (i) back tested the strategy, (ii) paper traded it for close to a year, (iii) submitted it for a full Monte Carlo simulation, and (iv) traded it live with few funds committed. In the present case, I will have to avoid step (iv), as the strategy requires portfolio margin. I want to introduce the strategy here (as well as in the Anchor Trade forums) for members to comment on. The basic premise behind the Anchor Strategy, for those that don't know, is to fully hedge a "normal" stock/ETF portfolio, that is highly correlated to the S&P 500 through the purchase of LEAP puts. In essence, an investor is buying insurance in the form of puts that if the market goes down then the investor’s portfolio would not. However, such "insurance" typically cost (depending on volatility) anywhere from 7%-15% of entire portfolio. This is simply too expensive. If the markets average a 7% return over a decade, you'd only break even on such a strategy. If the markets average a 5% return over a decade, the investor would be down well over 20% while anyone just holding the SPY ETF would be up well over 60% (compounding). That's simply not acceptable -- so a way to "pay" for the hedge has to be found. The Anchor Strategy does this by purchasing "extra" LEAP puts and then selling short against them weekly. A full discussion of how this works is available in the Anchor forums. As noted the goal of the Anchor strategy is to not lose money, while not sacrificing too much upside in bull markets. However, investors are always on the quest for outsized returns. The question this is if this can be accomplished with the Anchor Strategy. It appears as if in the current interest rate environments it can. Again note, this is not a fully developed strategy, and I would not advise anyone to utilize it or trade it right now without further work and a very in depth understanding of the risks of trading options on highly leveraged portfolio margin. Here's the basic premise: Interactive brokers, on portfolio margin accounts, currently charges 1.09% margin interest; A weighted combination of the SDY, RSP, and VIG etfs (which HIGHLY correlate to the S&P 500), pays a dividend of 1.79%; On portfolio margin, these ETFs can be traded at ratios of 10:1 or 15:1; Going on "full" margin (a 10:1 or 15:1) is too risky, as it leaves no "wiggle room," so let's target a use a 6:1 ratio; Assume an account of $1m, with which we buy $6m of ETFs (using $5m in margin); We then apply the Anchor Strategy to the entire $6m we just bought. To hedge at current levels and costs would cost about $750,000.00 (so now at 5.75:1); Then just use the Anchor strategy week to week to "pay" for the full hedge; Margin interest on the year is 1.09%, on $5,750,000 that's $62,675.00 (that's not entirely accurate as it will be less than that as the year goes on as the hedge will be "paid for," so the number will be dynamic, but let's keep the calculations simple for now); Dividend payouts on the $6m will be $107,400 -- or at least $44,725 more than margin interest. What then are the possible outcomes, assuming the Anchor Strategy works as designed as a hedging vehicle? In a flat market (S&P 500 return of 0%, but dividends of 1.89%), the leveraged strategy would return more than 4.47% -- so it would out perform the S&P 500; In a slightly up market (5% or so), the S&P 500 would return 5.89% (inclusive of dividends) and the leveraged strategy would return 34% (inclusive of dividends); In major up markets (S&P 500 up 20%), the S&P would return 21,89% (inclusive of dividends) and the leveraged strategy would return 94% (this assumes a "lag" of about 5% due to the lag in the Anchor Strategy, so each $1m would only be up 15%); In slightly down markets (-5% or so), the S&P 500 would be down 3.11% and the leveraged Anchor Strategy would be up 4.47%; In large bear markets (-20%), the S&P 500 will be down at least 20% (who knows what dividends will be slashed), and the Anchor Strategy will be up 20% or more (due to increased value in the long puts because of volatility). Back testing validates the strategy. Paper trading started in July 1. Over that time the S&P 500 is up 10.01% and the leveraged strategy is up 13.5% (only one quarter of dividend payments). This includes "rolling" the hedge from 166 to 176 a week or so ago. In other words, in the absolute worst market for the strategy (S&P up over 10% in the immediate months after starting), the strategy is out performing the S&P 500 and working exactly as designed. The biggest risks I see to this is (i) interest risks, if interest rates go above 3.5%-4% I'm not sure it still makes sense as flat markets could really hurt, (ii) margin calls -- in wild markets, option pricing on bid/ask spreads sometimes gets out of proportion, and margin calls are based on the side of the bid/ask you don't want to be on. Once the strategy is fully tested I will update more, but I wanted to introduce it to members for thoughts, questions, and comments. Professional Update/Lorintine Capital As many of you know I have an investment advisory firm, Lorintine Capital. For quite some time the primary focus of the Firm was to serve as a manager to a few hedge funds. However, due to numerous client requests, this year the Firm elected to become a “traditional” investment advisory firm offering a full range of services. Lorintine Capital is now also provides traditional investment management services to its clients, including providing investment advice, portfolio management services, retirement account services, and generally serving as financial advisers. personally am adverse to long term buy and hold, “riding” the market waves, and cannot stand advisers who just stick investors in their firm’s “plan” and take their 1.5%-2% in fees per year for basically doing what Morgan Stanley (Dain Rauchser, Edward Jones, Merrill Lynch – take your pick) publishes. This is not a good value for the client-investor. Too many investors are unprepared for market crashes, miss out on potential income, and have investment advisers who are reactionary instead of proactive. Lorintine Capital tries to avoid that, while at the same time actually educating investors about their options and assisting them in meeting their long term goals. In furtherance of this change, the Firm recently added a new investment adviser, Jesse Blom, who runs the Firm’s South Dakota office while I still run the Dallas, Texas office. We are currently in negotiations to bring another advisor on board in January, will have a new website by the end of the year, and are actively adding clients of all kinds. initial feedback to this change has been overwhelmingly positive. Given the Firm’s advisers’ backgrounds and the fact that it is a completely independent Firm, we have the capability of bringing hedge fund models, conservative strategies, and any products to the table that fit our clients’ needs. We now operate managed accounts specifically garnered toward the strategies discussed through Steady Option (Anchor and Steady Condors), retirement accounts, and typical investment portfolios. If you would like to discuss any of the products or services Lorintine Capital provides, contact me or Jesse at your convenience.

Lets take a closer look at position sizing and why it is critical for your financial health. How much should one allocate to any given trade? The 2% – 6% rules have been introduced in Dr. Alexander Elder's book "Come Into My Trading Room". The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts. Besides a disastrous loss, a series of losses can also damage traders' account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month. These 2 rules are designed to protect traders from the two types of losses. For those who are able to accept the higher risk, they might adjust the 2% – 6% rules to 5% – 10%, where the 5% is used to protect the account from any single disastrous loss while the 10% rules is used to protect traders from any series of losses in each month. With our earnings straddles, if you limit your holding period to 3-6 days and don't hold through earnings, it is very unlikely to lose more than 20% in a single trade. In fact, most of our losers are in the 5-7% range. If you adapt the 2%-6% rule, then you can allocate 10% per trade, knowing that you don't risk more than 2% of your account. You can adjust it after each trade, monthly, quarterly, etc. It depends on your risk tolerance. Adjusting monthly seems like a good compromise. Of course theoretically, any options trade can lose 100%, but for some strategies, it is very unlikely. You should usually account for a "reasonable" scenario when considering your position sizing. The general idea is knowing in advance how much you risk on any given trade and allocate the capital accordingly. If it is absolutely critical for you not to lose more than 2% per trade, you can set a stop loss of 20% per trade. I personally don't do it for two reasons. First, many times you have couple of days of theta with flat IV and then IV jumps, reversing the loss. Second, with spreads, your fills are going to be terrible if you place stop loss order, much worse than you could get with limit orders. And third, like I mentioned, the loss is very unlikely to be more than 20% anyway. How many contracts should you trade? Position Sizing - The Most Important Trading Rule article has a good explanation of the concept. I’m not sure about you. But I’m tempted to borrow as much money as I can from my family, extended family, friends, friends of friends, and my banker. Not to mention selling off my retirement portfolio and using the highest leverage my broker offers. I’m tempted to enter the market with as many contracts as I can. Yet, this is a temptation that I MUST resist. This is because there is a 1% chance of losing everything. If this loss occurs, it is one that I can never recover from. Not only will my broker and banker be after me, I will find creditors instead of friends. It is a catastrophic loss. Here is another way to look at it. Lets say you have a trade which you keep through earnings and require the stock to move about 5% to realize the maximum profit. If it happened, you would realize a 40-45% gain, depending on your entry price. The trade would be profitable 8 out of 10 last cycles. However, when the stock moves less than expected and doesn't reach the long strike, the trade is a 100% loser. In comparison, you can have trades which are sold before earnings, producing an average gain of 8-12%, with very limited risk. It is very rare for those trades to lose more than 7-10%. What is better – to make 8 times 40% and to lose 2 times 100% or to make 10 times 10%? In the first case, your accumulative return is 120% (12% per trade). In the second case, it is “only” 100% (assuming 10% per trade). But here is the catch: those returns don’t account for position sizing. Let’s assume you want to risk 2% of your portfolio per trade. In the first case, you know that you will win most of the time, but when you lose, you can lose 100%. So you can allocate maximum of 2% of your account per trade, which gives you a total portfolio return of 24%. In the second trade, you can rarely lose more than 7-10%. The maximum loss I had with those trades was around 20%. So you can easily allocate 10% per trade, which gives you a total portfolio return of 100%. Now you see the difference? With the second trade, I can have much smaller average returns, but with proper allocation, I’m still way ahead. Despite all your efforts, you will eventually have a streak of 4-6 losers. Those who tell you they haven't, are either lying or haven't been in the game long enough. Always ask yourself: How will your account look after 5 straight losers? As a general guideline, I always recommend starting small. Allocate maybe 5-7% per trade and then increase it gradually. Always keep some cash reserve (I recommend at least 20-30%). As for total account size - do it gradually as well. Prove yourself that you can make money with 10k. Do it for 2-3 months. Then increase to 20k. Don't increase from 10k to 100k. The markets will be there long time after all of us are gone. Dr. Van Tharp has some very good articles about position sizing. I would highly recommend his books to learn more on the subject. How we use position sizing in our model portfolio In our model portfolio, we allocate 10% per trade. Since most of our trades risk around 25-30% (there are some exceptions), we basically risk up to 3% of our portfolio in each trade. In some strategies (like trades that we hold through earnings) we allocate half position, or 5% of the portfolio per trade. Those are higher risk trades that can potentially lose 50-80%. "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between." - Michael Covel Recommended reading: Van Tharp’s Definitive Guide To Position Sizing Money Management Strategies for Futures Traders A Trader’s Money Management System: How to Ensure Profit and Avoid the Risk of Ruin Want to learn how to trade options in a less risky way? Start Your Free Trial

They Are Properly Capitalized – A very common mistake for beginner traders is not being properly capitalized. Beginners see the power of leverage option trading offers and think they can turn $2,000 into $20,000 in a matter of weeks. Before they know it, a couple of losing trades have completely wiped out their capital. I must admit I was also guilty of this. I was living in Grand Cayman and had just started options trading. I think in my first 6 months I broke just about every trading rule possible. I had a couple of small positions in the Australian stock market, one a utilities company and the other a REIT (real estate investment trust). Both of these positions had a low beta, meaning that the stocks did not move as much as the general market. So, through lack of knowledge and understanding I thought I would sell some call options on the main ASX index to hedge and protect my long positions. I obviously didn’t understand my net exposure was now hugely short as the short calls easily outweighed my stock holdings. Sure enough the market rallied, I refused to admit my mistake and take my losses and hoped and prayed that the position would come back my way. Next thing you know my capital has been completely wiped out and I had to send money via Western Union and have my brother deposit the money in my account the next day. Not a great experience for me, but one that I certainly learnt from! They Have A Low Tolerance For Risk – Another important aspect of successful options trading is having a low tolerance for risk. The best options traders will only trade when there is a low risk high reward scenario. They want to have the odds skewed in their favor as far as possible. The best option traders will not try to hit home runs with every trade.o the Stock Repair Strategy They Trade Only When The Market Provides An Opportunity – One quality all great traders have is patience. Successful investors will only enter into trades when the odds are stacked in their favor. They would much rather be the house rather than the average guy on the street trying to win big. They are focused on the bigger picture and are willing to wait and have the patience to only trade when the right opportunity presents itself. Some of the best traders often talk about sitting idle and just watching the markets, waiting for the perfect time to make a trade. Amateur investors find it very hard to not trade and are captivated by all the red and green numbers on their screen and feel like they are missing out on the action. Can you think of times in your trading when you have experienced this? Are you able to sit on the sidelines and just watch the market without jumping in? Knowing what cycle the market is in, is key to knowing when to trade and which trades to make. The best resource if have found for knowing what cycle the market is in is Investor’s Business Daily. Each day they publish a Big Picture article which states whether the market is in a confirmed uptrend, the uptrend is under pressure or if he market is in correction. I have found them to be incredibly insightful and you would do well to follow their advice. Their advice is to only buy strong stocks when the market is in a confirmed uptrend and this has been a time tested method for market outperformance. While it’s still possible to make money on the long side while the market is in correction, the odds are stacked against you and you would only want to be buying leading stocks such as those in the IBD 100. They Have A Trading Plan – Before opening an account, everyone should have a trading plan. This shouldn’t just be something in your head either, you need to write it down! By writing it down, it is clearly defined and you can refer back to it at any time. It will also be more real if you write it down and you’ll be much more likely to stick to it. Like anything in life, in order to be successful you need to have a plan and think things through rather than just flying by the seat of your pants. When I first started trading I would just place random trades based on how I was feeling at the time. I’d put on a bull call spread, then I’d try shorting stocks I thought were over valued and then I’d be making volatility trades. Needless to say I was not very successful during this time. While some of my trades were winners it was like I was taking 1 step forward and 2 steps back. All the great traders have a clearly defined trading plan. This is crucial to your success as a beginner options trader. They Have A Risk Management Plan – Only trade what you can afford, don’t risk money you can’t afford to lose. Trade defensively, rather than think of what you can make, every time you make a trade you should be thinking about the worst case scenario. What could you lose and how you are going to handle the position if things go badly? Beginner traders have trouble getting a handle on how much to risk on each trade. When starting out you do not want to have 90% of your capital tied up in one trade. One thing for beginner traders to consider is to split your trading capital in half, place half in an interest bearing account and use the rest to trade. This way, no matter what happens, you will never lose all of your capital. Another good risk management rule is to set a fixed percentage of you capital as your risk per trade. A common method would be to set 5% as the maximum capital to risk per trade, but for beginners you could even make that lower. Once a trade is placed you need to continue to monitor risk levels, you can’t just have a set and forget policy, you have to stay on top of your positions and your total portfolio risk. Having a risk management plan is crucial to success as a trader and something that should be done before you start trading. Everyone wants to make a great trade and make lots of money, but you should never take risk management too lightly. What risk management rules fo you have in your trading plan? They Can Control Emotions – Options trading is an incredibly emotional journey and one that you cannot fully appreciate until you have your own hard earned money on the line. The best traders are able to control their emotions not just when times are bad, but probably even more importantly when times are good. In my experience, and I’m sure this is the same for most traders starting out, some of my biggest losses have come when my confidence has been high. The best traders can keep their ego out of the equation and are able to stay grounded even in the midst of tremendous winning streaks. Also, when one of their trades turns out to be a loser, they are able to admit they were wrong and close out the trade. Great traders never get attached to a trade or a particular stock. A bad trade could turn out to be ok, but sticking to your pre-defined trading rules is crucial. You can be 100% right on a particular trade, but you also need to have the right timing. If your timing is off and your trade breaks your stop-loss you should always stick to your trading rules and keep your emotions out of it.Get Your Free Covered Call Calculator They Are Incredibly Disciplined – Successful option trading takes a great deal of discipline. Beginner option traders may find it incredibly difficult to just sit and wait for a good opportunity to trade. Waiting for the right opportunities may mean you don’t trade for a while, but trading out of boredom or excitement is one of the worst things you can do. Having a money management and a risk management plan is one thing, but in order to be a successful trader, you need to have the discipline to stick to it. You also need discipline to stick to the types of trades you are successful with and not start trading strategies that you are not an expert in. They Are Focused – For beginner options traders it is very easy to get carried away and get excited by all the green P&L numbers on their account statement. Keeping a level head is essential. Staying focused can also be hard when there is so much news on the markets and so many experts, each with a different opinion. The most important thing is to stay focused on your goals, your trading strategy and your rules. Don’t try to copy someone else’s trades or go against your trading rules just because of something Jim Cramer said. Get to know yourself as a trader as well, I have had a few periods when I wasn’t focused and that led to some big losses. I now can recognize those periods and I know those are the times when I really need to refocus my energies and review my trading plan. If you find yourself losing focus, or getting too distracted and stressed with everything going on, it can be a wise move to close out all of your positions and take break for a while. Sometimes that is the best medicine and will allow you to come back with a clear head, more relaxed and more focused. They Are Committed – Options trading takes a great deal of commitment. Any time you have your hard earned money at risk, you should be trying to get the most out of your investment strategies and controlling your risk. You need to be on top of your game all the time. Any time you stop paying attention to the market, you will get burned. Not only do you need to keep an eye on your trading performance, you need to be staying abreast of the current news, market cycles and investment outlook. Some of the great resources I use, that allow me to keep up to date on the markets and take up the least amount of my time include: Alpha Trends – Brain Shannon from Alphatrends.net is a market guru and author of one of the top 10 trading books ever written – “Technical Analysis using Multiple Timeframes”. Brian does a free video analysis of the markets a couple of times a week. In the first 5-10 minutes he goes through the current state of the general stock market and the various market indices. Watching this video only takes a few minutes each week, but you will receive expert analysis on the market from a trader with 17 years experience. Later in the video Brian goes through examples of specific stocks of interest which can be a great source of trading ideas. IBD – Investor’s Business Daily is the news service the market pros use. It only takes a minute each day to read their Big Picture article to see what cycle the market is in as well as how the some of the market leading stocks have been performing lately. IBD is listed as the 4th most visited site by Charles Kirk of The Kirk Report. If you’re a beginner options trader and find you’re struggling with the commitment required to keep up to date with the market, or find you are suffering from information overload, try these 3 sites out. You will be able to get opinions from multiple experts and it will take you less than 10 minutes a day! They Have Back Tested Their Strategy – Backtesting is a key part of developing your trading plan. This involves evaluating your trading strategy against the historical performance of the market to check the past performance. Of course past performance does not guarantee future performance, but it will at least give you an idea of how your strategy has performed in different time periods and market conditions. The average investor may not have the capabilities to run these calculations on their own but there are a number of software providers out there that will be able to perform backtesting. In addition, most brokers such as TD Ameritrade have backtesting software that is free to account holders. Backtesting allows you to evaluate the pros and cons of your strategy and also provides scope for improvement or tweaking of the strategy. However, a few things to consider are: Make sure you are using an appropriate time period – If you are testing a long only strategy between 1995 and 2000, you are likely to get some very favorable results. The same strategy may not have performed so well between 2007 and 2009. It’s a good idea to test a strategy over a long time period. Take into account sectors – If your trading strategy is solely focused on a particular sector, your backtest sample should be taken from that sector. However, in all other cases it is best to use a large sample size from all sectors. Take into account commissions – commissions can seriously erode your returns, so you need to adjust for this expense, especially if your strategy involves frequent trading. Past performance may not be a good guide to the future – While your chosen strategy may have worked in the past, there is no guarantee it will work in the future. A good idea is to paper trade for a month or two, just to make sure your strategy still works in the current environment. Some great resources for backtesting can be found at http://www.tradecision.com and http://www.amibroker.com. While I have not used these resources personally, they come highly recommended from other industry professionals. So, those are my Top 10 Traits For Successful Options Trading, what do you think? Can you think of any other important traits required for successful investing? Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter.

Unfortunately, when it comes to options, all too many traders are led astray on the role probabilities play in option trading and end up limiting their chances of success. This article has two objectives: Discuss Probabilities and Option Trading Offer suggestions on making winning option trades Probabilities and Outcomes Most people believe that when placing a bet with multiple choices it is wisest to take the one with the highest probability. We see this frequently when option traders espouse selling Deep-Out-of-The-Money (DOTM) calls or puts and other strategies as “High-Probability” trades. This is facilitated as most every Broker-Dealer includes “probability” as part of their option trading platforms. One requires no special math skills to determine which of many options trades offer the highest probability. Option probabilities can be just a mouse-click away. But the real question is “Does knowing the option probability help us?” Expected Return When placing bets, or investing, it is NOT the probability of outcome that dictates choice … it is the probability of outcome weighed against the “pay-off” that matters. One cannot make a successful and informed choice until one is given the “pay-off”. It is NOT probability that matters ... it is EXPECTED RETURN that matters. If you take nothing else from this article, take this… When placing a bet, one does not choose the most “probable” outcome; one must choose the most “favorable” outcome. Let’s look at the simple coin toss to better understand this. We all know that a fair coin toss has a 50% probability of landing either heads or tails. But what if the odds for winning bets on heads were one-for-one (1:1) while the odds for winning bets on tails was only 0.75:1? Though the probability remains the same, the expected return does not. One can expect to break even betting on heads and lose money betting on tails. One must not just look at the probability of “winning” but compare it to the reward to determine if it is favorable. So, what do coin tosses have to do with option trading? Very simple … option pricing is 100% about probabilities. The real difference between options and a coin toss is that expected return is not as easy to calculate. There are numerous possible results. For instance selling a DOTM Call has a fixed return on the profit side, but many possible results on the loss side…including (theoretically) unlimited loss. In order to calculate the expected return one cannot just multiply the probability by the premium credit. One must also calculate the expected loss return for each strike interval that ends up in-the-money (ITM). It means taking every possible strike for the underlying, calculating the probability associated with that strike, multiplying each strike by its probability, adding them all together and subtracting them from the probability of gain. This is an arduous task (fortunately made easier through calculus). The Greeks Consider that the Market makers determine the pricing using very sophisticated statistics and “Greeks”. Most traders are aware of some of the first order Greeks such as Delta, Theta and Gamma … but there are second and third order Greeks most traders never heard of… such as “Charm” and “Speed”. So don’t fool yourself, without advanced training in math, statistics, probabilities and the proper algorithm you cannot properly assess all the factors taken into account in the pricing. I’ll save everyone a great deal of effort in making these complex calculations and simply state that every option is probabilistically equivalent. Over time, one has NO better probability of a GROSS profit on a DOTM option than a DITM option. This may take a little explaining. Surely, a call that is written 2% DOTM has a much better chance of not being over-run than a call 1% OTM. However, it also has a much lower premium credit. Over time, the extra “over-run” risk of the 1% OTM is compensated for by the extra premium credit gained when it is not over-run. They are probabilistically equivalent. If I may “hammer this home” by using a Roulette wheel as an example. Bettors can make the equivalent of a DOTM bet by betting on odd, even, red or black. Or they could make the equivalent of an ATM bet by betting on a single number, such as 28. Over time the monetary results will be the same. They will “hit” more often on the red/black/odd/even but will win less when they do. I won’t go into it here, but the “house edge” is the same 5.26% on every bet one can make (actually, there is one bet that increases the “house edge” to 8%, but few make that bet). Let me also clear up a common misconception about probability and the Roulette wheel. Probability theory DOES NOT predict that everyone will be a loser if they play often enough. Quite the opposite. Even in a game that is purely chance and requires no skill, there will be lifetime winners and lifetime losers. It’s only when these two sets of betters are aggregated will we see the expected result. Probability theory only predicts that, over time, the winners and losers will even out and winners will win 5.26% less than “fair” and losers will lose 5.26% more than “fair”. If you are not a member yet, you can join our forum discussions for answers to all your options questions. The House Edge With this basic understanding of options probability and expected return, let’s look to see if the “high-probability” option trade is, in fact, the “most favorable” trade. To make this analysis we must add in the costs of the trade. We need to move out of theory and into reality … a reality where the Market Maker insists on a “house edge”. Before I get started, let me say that there are, on occasion, mispriced options. If there is a mispricing it can be exploited. However, this is very rare and most traders aren’t equipped to notice it. So let’s leave that on the shelf and move forward. Let me use options on SPDR S&P500 ETF (SPY) as my example. I choose this underlying as they are widely traded, liquid and have a very low bid-ask spread. Let’s look at selling a call option. We can compare an At-The-Money (ATM) trade with a DOTM trade. We must remember that the pay-offs are adjusted according to their probability. From a risk/reward perspective on a GROSS return they are equivalent. Let’s look at the bid/ask of the ATM and the OTM option. Though the bid/ask will vary dependent upon duration (weekly, monthly, etc.) …. for these purposes let’s look a month ahead. Most typically, the option will be priced as follows: Strike Bid Ask Spread “House Edge” 214 (ATM) 4.04 4.05 .01 .25% 218 (2%OTM) 1.78 1.79 .01 .56% 222 (4%DOTM) .46 .47 .01 2.12% What we discover is that the bid-ask spread (the “house edge”) when represented as a percent of the premium, actually increases the further OTM one goes. Though the options probability/payoff is theoretically identical, the “house edge” is not. So, the further OTM one goes, the less “favorable” the option becomes. If one added the fixed trading costs … which vary by broker ($6.95,$7.95,$8.95, etc.) … it would further compound the disadvantage of OTM options. As a function of the “house edge” increasing the further OTM one goes, a nearly “fair” ATM option becomes an unfavorable DOTM option. The results can be even more dramatic with many other underlying stocks that don’t have as low a bid-ask spread as SPY. For instance, many stocks have a bid-ask spread of 5cents or 10cents (sometimes even more). That means the “house edge” can be from 6% to 15%. That’s a pretty steep hurdle to jump for profitable trading. Option Spreads Often traders will enter spreads as opposed to singular trades. The theory is to limit downside by reducing costs or exposure. One must consider that every option incurs its own “house edge”. So the more legs one enters, the less likely they will have a favorable outcome. This is a hard concept for option traders to get their hands around. So let me go back to the “probability laboratory” … the Roulette wheel. Each bet theoretically loses 5.26%. So, if one bets on, say, two numbers instead of one number, they increase their chances of a “hit” but they decrease their overall chances of winning money. Inasmuch as option pricing is neutral (except for the “house edge”) over time, one gains nothing by engaging in multiple legged option strategies. Winning Option Strategies Now, let me be perfectly clear. I’m not suggesting that one cannot make profitable option trades. Nor am I suggesting that limiting costs or risk through spreads and other actions is wrong. What I’m saying is that trying to make profit by looking at option trades that are, high probability is not a winning strategy. It is not “probability” that is important it is “expected return” that is important. What we’ve discussed so far is that option trades are “odds against”. That is, they may be high or low probability but the only favorable trade lies with the market maker. Does that mean I can’t win trading options? Of course not … many people do very well and since you’re on this site, you’re probably one of them. The one thing that separates option trading from the roulette wheel is that the Roulette wheel is a game of CHANCE and option trading can be a game of SKILL. But let me be as clear as I can. The skill is NOT evidenced in “fancy-dancy” option strategies. The skill is evidenced in correctly predicting the movement of the underlying security. This bears repeating ... so here goes …. The skill is NOT evidenced in “fancy-dancy” option strategies. The skill is evidenced in correctly predicting the movement of the underlying security. Successful option traders are successful because they spend most of their time understanding the stock or the market. Let me give an example: If I said that that SPY would end up at $218 on December 31st and asked for an option strategy to match that result … option traders could easily maximize a variety of strategies. Instead, if I said that SPY would end up between $200 and $218, completely different strategies would unfold. If SPY actually landed at $218, none of these would show the gains of the first hypothesis. In contrast, if SPY ended at $200 they would all show better results than the first hypothesis. Therefore, the viability of any strategy is dependent upon its relevance to the underlying. If one gets the underlying right, they will prosper. If they don’t, they won’t. Summary Successful long term option trading starts with an understanding that there is no such thing as a free lunch. Option trades involve counter-parties and there are winners and losers on every trade. That is, except for the Market Makers taking their “house edge”. It is important to understand that options are not some sort of Magic Elixir. They are not a substitute for stock market research. What they can provide is a very calculated methodology to exploit stock market movement. It doesn’t really matter if a stock is up, down or flat … there’s an option play to exploit every possible scenario. When option traders focus more on the characteristics of the underlying and less on the characteristics of a particular option strategy, they will find it much easier to pick the winning option strategy. Related articles: Is Your Risk Worth The Reward? 10 Options Trading Myths Debunked Can you double your account every six months? Debunking Options Guru Advice Why Winning Ratio Means Nothing Do 80% Of Options Expire Worthless? Want to see how we handle risk? Start your free trial

I came across an excellent article by Colibri Trader. Here are some gems from the article. The question of what it takes to become a master in any field (sport or business) has been in the epicentre of research for many years. It has occupied psychologists and philosophers alike for decades. Is it the innate talent what matters or a skill can be mastered with practice. What does it take for professional athletes to become first among others with inborn talents… Almost fifty years ago Herbert Simon and William Chase summed up a groundbreaking conclusion that is still echoing with importance: After Simon and Chase there have been numerous psychologists and authors testing this hypothesis and proving and disproving the rule of “The 10, 000 Hours“. For example, John Hayes researched the works of over 70 of the most famous classical composers and found that almost none of them did create a masterpiece before they have been composing for a minimum of 10, 000 hours. There were just a few exceptions and they were Shostakovich and Paganini, who took them only 9, 000 hours. In trading, it seems to be the same or at least really similar. I don’t know a lot of other traders, whom after an honest conversation have not shared with me that have spent years of losing money consistently before becoming profitable. In my trading career I remember just one trader who told me that was successful straight from the very beginning. He was sharing with me that it only took him 3 months on a simulator and with the help of his trading mentor, he became successful. He is an exception because in his case- he managed to save a lot of costly mistakes by following his mentor’s trading approach. But most traders are doing it alone and that is why it takes them such a long time. Trading, as any other highly competitive sport discipline, takes a lot of hours in front of the screens and practice. In a book that I recently read (Focus: The Hidden Driver of Excellence), Daniel Goleman reveals the complex truth behind the popular 10,000 rule: The words of Ericsson cannot be more true regarding the trading field. Professional traders know that going out of the comfort zone is what makes a difference in the long-run. Imagine you are doing the same trading mistake over and over again. The only way to get rid of your bad habits is to get out of your “comfort zone” and do something differently. Even if you are not sure where your mistake is, you should put all of your efforts into trying to find it. Only then and after long hours of practice, you would be able to become profitable. What matters in this case is not only the time invested in trading, but the quality of the time. It appears that even if you stay 20,000 hours in front of your screens, it won’t make a difference if you are doing the same mistakes repeatedly. It seems obvious and simple, but modern education is build on the premise of sheer time investment. That is why it is important to emphasize on the fact that success is “deliberate practice”, concentrated training with the sole aim of personal improvement, many times accompanied or guided by a professional and skilled coach or mentor.That is how I became successful myself- I have been mentored by one of the biggest and most successful traders in London. Before I had the chance to meet this important person to me, I was making too many mistakes- 80% of which I was not even aware of! That is such a striking number when I look back at it now. According to Goleman, what I have found also applies to other disciplines: That is completely in-line with trading field. You need an objective feedback from somebody, who can monitor your performance. Human beings tend to be subjective when it comes to measuring their own performance. That is why, it is crucial that you have a profitable trader helping you along the 10, 000-hours of trading journey. It is imperative that you are coached by a real professional or at least somebody with years of trading behind his back. No wonder that every world-class sports champion has a coach. If you keep on trading without a feedback from a proven profitable trader, you won’t be able to get to the very top. In the end, it seems that the trading strategy that you are using is not the most important element of becoming a master trader. It is the feedback that you receive from really experienced traders and the quality of the time invested in improving you own mistakes. Now stop thinking how good you are- start seeing how you can improve through concentrated trading effort. Some quick tips and facts My good friend Kirk Du Plessis from OptionAlpha lists few 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 applies not only to new traders. Even if you have some experience with options, it always takes some time to get used to new strategies. 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 4-5 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? I aim for many singles instead of few home runs. Those are all great quotes. I suggest remembering them when you get frustrated and overwhelmed by the amount of information and learning curve required to become a successful trader. Related Articles: Why Retail Investors Lose Money In The Stock Market Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality Are You EMOTIONALLY Ready To Lose?

In this article, I would like to show how the gamma of the trade is impacted by the time to expiration. For those of you less familiar with the Options Greeks: The option's gamma is a measure of the rate of change of its delta. 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. This might sound complicated, but in simple terms, the gamma is the option's sensitivity to changes in the underlying price. In other words, the higher the gamma, the more sensitive the options price is to the changes in the underlying price. When you buy options, the trade has a positive gamma - the gamma is your friend. When you sell options, the trade has a negative gamma - the gamma is your enemy. Since Iron Condor is an options selling strategy, the trade has a negative gamma. The closer we are to expiration, the higher is the gamma. Lets demonstrate how big move in the underlying price can impact the trade, using two RUT trades opened on Friday March 21, 2014. RUT was trading at 1205. The first trade was opened using weekly options expiring the next week: Sell March 28 1230 call Buy March 28 1240 call Sell March 28 1160 put Buy March 28 1150 put This is the risk profile of the trade: As we can see, the profit potential of the trade is 14%. Not bad for one week of holding. The second trade was opened using the monthly options expiring in May: Sell May 16 1290 call Buy May 16 1300 call Sell May 16 1080 put Buy May 16 1070 put This is the risk profile of the trade: The profit potential of that trade is 23% in 56 days. And now let me ask you a question: What is better: 14% in 7 days or 23% in 56 days? The answer is pretty obvious, isn't it? If you make 14% in 7 days and can repeat it week after week, you will make much more than 23% in 56 days, right? Well, the big question is: CAN you repeat it week after week? Lets see how those two trades performed few days later. This is the risk profile of the first trade on Wednesday next week: RUT moved 50 points and our weekly trade is down 45%. Ouch.. The second trade performed much better: It is actually down only 1%. The lesson from those two trades: Going with close expiration will give you larger theta per day. But there is a catch. Less time to expiration equals larger negative gamma. That means that a sharp move of the underlying will cause much larger loss. So if the underlying doesn't move, then theta will kick off and you will just earn money with every passing day. But if it does move, the loss will become very large very quickly. Another disadvantage of close expiration is that in order to get decent credit, you will have to choose strikes much closer to the underlying. As we know, there are no free lunches in the stock market. Everything comes with a price. When the markets don't move, trading close expiration might seem like a genius move. The markets will look like an ATM machine for few weeks or even months. But when a big move comes, it will wipe out months of gains. If the markets gap, there is nothing you can do to prevent a large loss. Does it mean you should not trade weekly options? Not at all. They can still bring nice gains and diversification to your options portfolio. But you should treat them as speculative trades, and allocate the funds accordingly. Many options "gurus" describe those weekly trades as "conservative" strategy. Nothing can be further from the truth. Related articles Options Greeks: Theta, Gamma, Delta, Vega And Rho Options Vega Explained: Price Sensitivity To Volatility Options Theta Explained: Price Sensitivity To Time Options Delta Explained: Sensitivity To Price Options Gamma Explained: Delta Sensitivity To Price The Use And The Abuse Of The Weekly Options The Risks Of Weekly Credit Spreads Should You Trade Weekly Options? Make 10% Per Week With Weeklys? Would you like to learn in real time how to identify those opportunities and trade them? Click the button below to get started! Join SteadyOptions Now!

Don't you find it amazing? The guy admits he is new to options, but wants to double the account "at least yearly". Do you have realistic expectations? My reply was: "There is a lot of hype surrounding options trading. Some "gurus" out there will make you to believe that doubling your account every 6-12 months is an easy task. If it was, we all would be millionaires by now. My advice to you: if you just start options trading, preserving your capital during your first year of trading would be a great achievement" I didn't hear from him since then. He probably went to one of those charlatans who promise to double your account in one month and charge you few thousand dollars for a week of “one on one consulting”. Many people will tell you what you want to hear to get your hard earned money. Here is another email from one of our members: "I'm new to options trading. I'm retired and am hoping to make $1.25 million per year by trading" This member cancelled after just 2 weeks. Why I'm not surprised? And honestly, I would be very interested to know the psychology behind people thinking they can have no experience with something, probably not even know how to place an order, and start making money with options right away. A 7 figure income in this case. But maybe it's the same psychology that makes people to believe that they can lose 50 pounds in 2 months without any effort.. Making money with options is easy? Here is the problem: Making money with options is easy. Doing it consistently is much more difficult. People see all the hype and think it is an easy task. To become an engineer you have to study 4 years, and probably another 4 years (at least) to become a good one. Why people expect it to be different in trading? I see sales pages all the time that show you 200%+ returns on some cheap options they bought. But what they don’t tell you is that those trades happen once in a while and are not consistent. Maybe they did make 200%+ on a trade, but that doesn’t happen all the time and to set your expectations that high would be very ignorant. One website "challenges" you to turn 3k into 100k in four months (that's 3,233% in four months), charging $600/month in the process. They claim to do it successfully 2 times out of 11 challenges, but since the website is live less than a year, only one challenge was traded live. Incidentally, the live challenge has actually lost 99%. I just got an email from someone saying "Give Me 9 Minutes a Week and I Guarantee You $67,548 a Year. $185 Per Day, Every Day… Forever". Seriously? Is it even legal to make any guarantees in the stock market, not to mention the ethical aspect? There are many options sites that advertise "10%/month" or "5%/week" with no real effort. They might succeed doing that for a limited period of time, but it's only matter of time till they blow up their accounts. What they also "forget" to tell you that they present their returns as ROI (Return On Investment), not return on their whole account. You can read explanation about the difference here. In real life, 10% ROI would usually translate to 7-8% return on the whole account, before commissions. I can assume that those guys are much richer than me. But to me, my integrity is more important than money. Honesty is not a good business and has cost me a lot of potential members, but I will not sell my beliefs and will not mislead people just to get them to sign up. Someone smarter than me said: Here is the inconvenient truth about successful trading: It’s work. 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. Are you a quitter? Unfortunately, I see many members who sign up for a SteadyOptions with unrealistic expectations. Here is how it usually works with those members. Statistically, SteadyOptions have about 2-4 really good months every year when we make 20-25%. Those members see those gains and join the service, only to see the next couple months going back to the "boring" 3-4% per month (or even suffering some small losses). They quit, just in time to miss the next hot streak. Believe it or not, but I had few members quitting and re-joining 4-5 times, repeating the same pattern over and over again, always missing the most profitable months. Many of them cancel after just few weeks or 3-4 bad trades. One of my members told me after cancelling that he doesn't need me because he made 100%+ in 2013 trading mostly long calls. Well, 2013 was the best year for the S&P 500 since 1998, so making 100% with highly leveraged long strategies was not that difficult. I doubt this strategy would work well in 2008 or 2000. The key to successful trading is using strategies that work well in any market and have minimal drawdowns. Making 100% per year consistently and over time is an extremely difficult task. If you can do that, you would most definitely be among the top 0.1% traders in the world. In fact, most fund managers would dream to make half of that. Van Tharp says successful trading/investing is 60% psychology...only 60%? Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change. Some quick tips and facts My good friend Kirk Du Plessis from OptionAlpha lists few 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 applies not only to new traders. Even if you have some experience with options, it always takes some time to get used to new strategies. 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 4-5 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? I aim for many singles instead of few home runs. If you are ready to start your journey AND make a long term commitment to be a student of the markets: Join SteadyOptions! Related Articles: Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality Are You EMOTIONALLY Ready To Lose? Can You Really Turn $12,415 Into $4M?

How long straddles make or lose money A long straddle option strategy is vega positive, gamma positive and theta negative trade. It works based on the premise that both call and put options have unlimited profit potential but limited loss. If nothing changes and the stock is stable, the straddle option will lose money every day due to the time decay, and the loss will accelerate as we get closer to expiration. For the straddle option strategy to make money, one of the two things (or both) has to happen: 1. The stock has to move (no matter which direction). 2. The IV (Implied Volatility) has to increase. While one leg of the straddle losses up to its limit, the other leg continues to gain as long as the underlying stock rises, resulting in an overall profit. When the stock moves, one of the options will gain value faster than the other option will lose, so the overall trade will make money. If this happens, the trade can be close before expiration for a profit. In many cases IV increase can also produce nice gains since both options will increase in value as a result from increased IV. This is how the P/L chart looks like for the straddle option strategy: When to use a long straddle option strategy Straddle option is a good strategy if you believe that a stock's price will move significantly, but don't want to bet on direction. Another case is if you believe that IV of the options will increase - for example, before a significant event like earnings. I explained the latter strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV 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. This is one of my favorite strategies that we use in our SteadyOptions model portfolio. Many traders like to buy straddles before earnings and hold them through earnings hoping for a big move. While it can work sometimes, personally I Dislike Holding Straddles Through Earnings. The reason is that over time the options tend to overprice the potential move. Those options experience huge IV Crush the day after the earnings are announced. In most cases, this drop erases most of the gains, even if the stock had a substantial move. Selection of strikes and expiration I would like to start the trade as delta neutral as possible. That usually happens when the stock trades close to the strike. If the stock starts to move from the strike, I will usually roll the trade to stay delta neutral. Rolling simply helps us to stay delta neutral. In case you did not roll and the stock continues moving in the same direction, you can actually have higher gains. But if the stock reverses, you will be in better position if you rolled. I usually select expiration at least two weeks from the earnings, to reduce the negative theta. The further the expiration, the more conservative the trade is. Going with closer expiration increases both the risk (negative theta) and the reward (positive gamma). If you expect the stock to move, going with closer expiration might be a better trade. Higher positive gamma means higher gains if the stock moves. But if it doesn't, you will need bigger IV spike to offset the negative theta. In a low IV environment, further expiration tends to produce better results. Straddles can be a cheap black swan insurance We like to trade pre-earnings straddles/strangles in our SteadyOptions portfolio for several reasons. First, the risk/reward is very appealing. There are three possible scenarios: Scenario 1: 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. Scenario 2: 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. Scenario 3: The IV goes up followed by the stock movement. This is where the strategy really shines. It could bring few very significant winners. For example, when Google moved 7% in the first few day of July 2011, a strangle produced a 178% gain. In the same cycle, Apple's 3% move was enough to produce a 102% gain. In August 2011 when VIX jumped from 20 to 45 in a few days, I had the DIS strangle and few other trades doubled in a matter of two days. The main risk to this strategy is earnings pre-announcements. They can cause volatility crash and significant losses. To demonstrate the third scenario, take a look on SO trades in August 2011: To be clear, those returns can probably happen once in a few years when the markets really crash. But if you happen to hold few straddles or strangles during those periods, you will be very happy you did. Overall this strategy produces over 75% winning ratio with very low risk. It is very rare to lose more than 10-15% using pre earnings straddle strategy. Summary A long straddle option can be a good strategy under certain circumstances. However, be aware that if nothing happens in term of stock movement or IV change, the straddle will bleed money as you approach expiration. It should be used carefully, but when used correctly, it can be very profitable, without guessing the direction. If you want to learn more about the straddle option strategy and other options strategies that we implement for our SteadyOptions portfolio, sign up for our free trial. The following Webinar discusses different aspects of trading straddles. Related Articles: Buying Premium Prior to Earnings Can We Profit From Volatility Expansion into Earnings Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings Is 5% A Good Return For Options Trades? Want to learn more? We discuss all our trades on our forum. Join Us

Those who purchased the straddle a day before earnings more than tripled their money. However, for each buyer there is a seller. Those who sold those options (thinking that they are overpriced) got absolutely killed. They have lost almost $9,000 per contract. Well, of course not all of them - some of them sold those options as part of a hedge or maybe more complex trade, but you get the point. So what are the lessons here? First, NEVER ever sell naked options. Especially not before earnings. Especially not on stocks like GOOG, NFLX etc. that have a history of big moves. If you insist to sell premium, hedge yourself with further OTM options (creating an Iron Condor). Those who did it with Google, still lost 100% of the margin, but at least they knew their maximum risk in advance. Second, be aware that earnings are absolutely unpredictable. If you decide to play earnings, do it only with a small portion of your capital and pre-defined risk. Overall, options tend to be overpriced before earnings, and selling them with defined risk should produce good results over time - but you should always limit your loss and position sizing knowing that from time to time, there will be surprises. However, not all options are overpriced. There are some exceptions, and Google is one of them. Statistically, as I showed in my article, buying Google straddle a day before earnings would produce pretty good results. Options trading can be very lucrative, but you should always remember about the risks. And if you are playing earnings, the only risk management tool you have is position sizing. By the way, Google was not the only stock this week when the options market was terribly wrong about the potential move. Chipotle Mexican Grill (CMG) straddle was pricing a $28 move - in reality, the stock moved $70. Sandisk (SNDK) also moved almost double than the implied move. If you still believe that the markets are efficient, you live in a fantasy land.

The Index and the Index-based ETF The starting place is understanding the differences between an Index and an Index-based ETF. Indices are numerical calculations and have no physical existence (sort of like digital currency). On the other hand, one can replicate an index by buying the components that make up the Index. That's what Index-based ETFs such as SPY do. The ETF buys the underlying stocks in the proportions necessary to mimic the associated index. One can buy or sell an ETF. One cannot buy or sell an Index. So, let's look at the major indices (most popular) and the ETFs that replicate them. Other Indices and ETFs exist, but they are more thinly traded and present some nuance beyond the scope of this article. One way to indirectly invest in an index is to invest in an ETF that corresponds to the index. However, though one can't directly invest in an Index, they can trade options on it. Settlement SPY, DIA, QQQ and IWM are ETFs and their options are American style. Both the last trading day and expiration day for these options are the same: the third Friday of the month just like options on individual stocks. SPX, DJX, NDX, and RUT are indexes and their options are Index Options. They are European Style options, which means that their monthly “last trading day” is different than those of ETFs. Index options expire on the third Friday of the month, so their last trading day is the third Thursday of the month. If you are not familiar with the important differences between these option styles, check out this post. I recommend NEVER holding RUT options into settlement Friday to avoid settlement risk. Assignment Risk Some investors use call or put spreads in IRAs. Some use bull spreads and some bear spreads. Whether they are calls or puts, bull or bear, one leg is always "short" and susceptible to assignment. This possibility is magnified around the ex-dividend date. The short call assignment: If the investor used a call spread and the short leg is assigned ... well, "Houston We Have a Problem". IRAs do not permit the short sale of stock, and if a short call is assigned one must immediately cover the short. Well one can't cover a short unless one has cash available to execute a closing buy of the short. If ready cash isn't sufficient it will necessitate selling other holdings. If there isn't sufficient cash under any circumstance they jeopardize the tax deferral of the entire IRA. If you've ever encountered this, you know what a mess it is. ETF options run that risk, index options do not. BIG difference. If one is using call spreads in an IRA it practically mandates using SPX, not SPY. The short put assignment: Unlike naked shorts, naked puts are permitted in IRAs provided there is sufficient cash on hand to cover an assignment (cash secured puts). So that problem is self-remedied. However, if one is using put spreads and not cash secured puts, they run the risk of being assigned without sufficient cash to cover the assignment. So, cash-secured-puts can use SPY options, while put spreads should consider SPX. Covered calls: There's the counterpart to "assignment" ... getting "called away". In this situation, one owns SPY and sells a covered call. Well, if the call goes ITM, one risks it being exercised and SPY is automatically liquidated. This isn't the technical problem resultant from spreads, but it can be an inconvenience. Additionally, one would incur cost to reinstitute the position. They might even have to reinstitute at a higher price. SPX options would just make the cash adjustment. What most investors don't know is that the CBOE allows one to pair Index options with its corresponding ETF. So one isn't restricted to pairing SPY options with SPY, but can sell covered calls using SPX. Some broker-dealers may not permit this, so check with your broker. Just because the CBOE allows it, doesn't mean the BD has the capability of allowing it. Liquidity SPY has very "tight" bid/ask spreads. This helps planning because one has a pretty could idea of the execution price. It also enables the use of market orders which are easier and can execute much quicker than limit orders. When using market orders, many brokers (I know Fidelity does) offer price improvements that can result in favorable execution prices. SPX, on the other hand, has a relatively wide bid/ask spread when compared to SPY. This means that limit orders are a must. That means some "bargaining" with the price and much slower execution. It is more time intensive, less precise and one never really knows if they received the best price. Some traders prefer ETFs like SPY or IWM due to better liquidity. What they often forget is the fact that Index options are 10 times bigger product, so 20 cents spread on RUT is equivalent to 2 cents spread on IWM. For example, spread of 10.00/10.50 on RUT would be equivalent to 1.00/1.05 on IWM. The slippage on RUT is usually no more than 10-15 cents which is 1-1.5 cents on IWM. Position size There are differences in size of the contracts. For example, the SPY is 1/10 the size of the SPX and the IWM is 1/10 the size of the RUT. To build the same dollar amount position, you will need to buy 10 times more contracts on IWM than on RUT. That means you will need 10 contracts of IWM for every one RUT option to have the same profit potential. But small traders may not want to trade as much as a one-lot in RUT, and can invest smaller sums by trading a few contracts of IWM. Commissions Buying less contracts means a significant difference in commissions. For example: if you buy one lot of 10 strike RUT Iron Condor, you will trade 8 round trip contracts. At $1/contract, that's $8 or 0.8% of the $1,000 margin. Buy 10 lots of 1 strike IWM Iron Condor - and the commissions jump to $80 or 8% of the $1,000 margin. Tax Treatment Differences Here there is a substantial plus to Index options. The IRS treats these indexes differently from stocks (or ETFs). The Index options get special Section 1256 treatment which enables the investor to have 60% of a gain as long term (at a 15% tax rate), and the other 40% treated as short term (at the regular 35% short term capital gains rate) even if the position is held for less than a year. By contrast, the ETFs are treated as ordinary stocks, and thus if held less than a year, all gains are taxed at the less favorable 35% short-term capital gains rate. Thus the Index options can be better from a tax standpoint. You should of course consult with your tax advisor to see how these tax implications may or may not be significant in your situation. Verdict: SPX tax treatment is significantly better than SPY. SPY has an advantage in LEAPS, but from a practical point of view, it can't even come close to the advantages offered SPX. Remember, it's not what you make it's what you keep that matters. Summary There are many factors to consider in choosing SPY options versus SPX options. Each has their advantages and shortcomings. SPX clearly wins the "assignment risk" war, the "trading costs" war and the "taxable account" war. It loses on flexibility and convenience. For those that trade options in IRAs and ROTHs, SPX should be very seriously considered. Sometimes it's better to pay a little and NOT be sitting on a time-bomb. For those with taxable accounts the tax advantages afforded SPX dwarfs any increase in costs. In the end it comes down to one's willingness to spend extra time and effort to achieve tax savings.. For me, the choice is clear: I prefer RUT over IWM and SPX over SPY. But it might be different for you, as you might have a different commissions structure, different tax treatment, prefer smaller size trades etc.

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 options. 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.

A lot of option trading websites promise you to make 10% per month with Iron Condors. Is this true? Well, it is actually not that hard to make 10% per month with iron condors. The problem is, in order to make 10% on your entire account, you would need to place ALL capital into Iron Condors. If you do that, it's only matter of time till your account is toast. So yes, if it's too good to be true, it usually is. Many of them actually recommend placing 70-80% of your account into those trades (and keep the rest in cash). They claim that since they have 3-4 trades (usually on the broad market indexes like RUT, SPX or NDX), it provides them the necessary diversification. What they fail to mention is the fact that those indexes are 90% correlated and tend to move in tandem. To me, this is not diversification. To add insult on injury, many of them recommend placing 80% of your account into weekly trades. To me, this is a financial suicide. I love Iron Condors! I love Iron Condors and I trade them regularly when the conditions are right. In the long run, those trades can produce a steady 8-10% gain per month. Depending on the deltas of the sold options, they usually have pretty high winning ratio. You can expect to win in 8-9 months per year. The trick is not to lose much in the losing months. Of course this is easier said than done. With proper risk management, most of the time this goal is achievable. However, once in a while, despite all the good efforts, the Iron Condor trade can lose 40-50% and there is nothing you can do about it. To reduce the possibility of a big loss, I have few strict rules for Iron Condors: Open the trade 6-8 weeks before expiration. To reduce the gamma risk, never hold till expiration week. Close about 2-3 weeks before expiration or when sufficient profit has been achieved. Never let the average loss to be much higher than the average gain. For example, if your average winner is around 15%, don't allow the average loser to be more than 25-30%. Iron condors are a short Vega trade. So it makes sense to trade them when volatility is high and expected to go down. I would not trade them (or at least significantly reduce the allocation) when VIX is around 12-15. So what is the problem? As long as you follow those rules and don't allocate big portions of your account to those trades, you should be able to survive few occasional losses. Here are some mistakes that people do when trading Iron Condors and/or credit spreads: Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation. Holding the trade till expiration. The gamma risk is just too high. Allocating too much capital to Iron Condors. Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss. Trading every single month, regardless of the market conditions. To me, it doesn't make sense to place an Iron Condor trade when VIX is at 12. You are not getting enough credit for the risk and you have to choose the strikes too close to the underlying. Unfortunately, some options "gurus" make those mistakes on a consistent basis. What can go wrong - a case study To demonstrate what could go wrong with this approach, let's go back few weeks, to Friday April 12. RUT has been on a steady climb, and you decide to place a bull credit spread using weekly options expiring the next Friday. With RUT at $943, you decide to sell the 920/910 put spread for $0.67. If RUT stays above 920 by next Friday, that's a potential 7.1% gain in one week. Not bad. If you can do it week after week, you are going to be very rich. Fast forward to Monday April 15. RUT is down to $906 and your spread is worth $7.00. That's 68% loss. Ouch. But wait - maybe we can give it few days to recover? Fast forward to Thursday April 18. RUT is at $901 and the spread is worth $9.40, a 93% loss. The big loss was caused by 2 factors. The first one of course is a sharp and quick move. The second one is a sharp increase in the IV (Implied Volatility) of the options due to the sharp move. Iron Condor is a vega negative trade, and any spike in IV has a negative impact on the trade, multiplying the loss. The easy excuse - blame the market Market conditions play a big role in the success of this strategy. The recent market strength has been tough for credit spread traders. Implied Volatility has been on a steady decline, and options premiums simply do not justify the risk. In order to get a decent credit, you had to go closer and closer to the current price every cycle. And when IV spikes, the trade can be a big loser. Many options newsletters that trade exclusively credit spreads have experienced heavy losses. Some of the subscribers have reported losing as much as 80% of their accounts. By the way, if you are not a subscriber, you probably not going to see those losses in the track records. Many newsletters use a trick called "rolling" that allows them to hide the loss almost as long as they wish. In some cases, after heavy losses they simply "reset" the old portfolio and start a new one from scratch. It is very easy to blame the market, Mr. Bernanke, the irrationality of other investors etc. The simple truth is that allocating 80% of the account to credit spreads and presenting it as "safe and conservative strategy" is very misleading. Credit spreads can be very brutal and should be treated with respect. Conclusion At SteadyOptions, we trade credit spreads too. But they are always part of a well diversified options portfolio and never exceed 20% of the account. We also hedge them with gamma and vega positive trades to reduce the risk. This is why we are doing so well and have never experienced a major drawdown. If you are still not a member, we invite you to take the SteadyOptions free trial and see by yourself. Please refer to Frequently Asked Questions for more details. Related articles: Why You Should Not Ignore Negative Gamma Options Trading Greeks: Gamma For Speed Why Iron Condors Are NOT An ATM Machine

Was it the right conclusion? Is any losing trade necessarily a bad trade? The answer is no. No matter how well he executed his trade, there will be losing trades because we are playing a probability game. Trading is a business based on probability. And probability means that sometimes we get what we want, sometimes we don't. And that's the nature of the this business. The sooner we emotionally prepare ourselves for a stock market loss, the better we can operate it as business. "There's a difference between knowing the path... and walking the path." - Morpheus How you react to your losses? Most people know there will be losers. But to paraphrase Morpheus sentence, "there's a difference between knowing that there will be losers... and actually experiencing them". In a probability game, it is guaranteed that we will eventually experience a string of losses. This can be in the form of losing days and at times, losing months! But even knowing that losses are part of the game, most traders still react the wrong way when those losses actually happen. How you react to your losses is what separates good traders from bad. It gets tough when we experience extended periods of losses or poor performances and that's where most traders quit because in the first place they never accepted emotionally that they are playing a probability game. As soon as a few losing trades and/or a drawdown of any kind occurs they hit the eject button and continue in their search for the Holy Grail strategy that always wins. Jumping from one trading system to another will only lead to more frustration. Only when you will accept emotionally that you are playing a probability game, you will be able to take your trading to the next level. Few members asked me today "What went wrong with the YUM trade?" The answer is: nothing went wrong. This was the sixth time we played this name before earnings. The previous five trades produced +18%, +11%, +17%, -4% and 12%. As you can see, this was a high probability trade, it just did not produce the desired result this cycle. But the loss was only 5%, and some members actually managed to squeeze a small gain. At SteadyOptions, we are trading probabilities. This is why our winning ratio is well over 60%. Combined with the fact that our average winner is higher than our average loser, it gives us a positive long term expectancy. In Q1 2014, we produced a 69.2% ROI and continue to significantly outperform the markets. It doesn't mean we won't have losers. But as long as we execute our strategy, we will continue to deliver outstanding results. Finally, I would like to quote Peter Brandt for whom I have a great respect: "Too many traders have an obsession with Winning Trades. I hate to be the bearer of bad news to some of you, but taking losses is the primary job description of a market speculator. If Losing Trades offend you or upset your emotional chemistry, if you consider “being wrong” to be a character fault or a “problem” with your trading approach, if you even think that the marketplace cares what you think or what you do, then market speculation is probably not for you. I have known many extremely profitable career traders over the years and very few of them have a win rate in excess of 50%. Almost to a person, these traders view taking losses (many losses) as the process of finding winners. To be a successful profit taker, a trader must first become good at taking losses. Sorry – both profits and losses are part of trading. If Losing Trades and being wrong bothers you then trading is not for you. If you become obsessed with Winning Trades and making money back in the same stock in which you lost capital, then you need to seriously examine if you should be involved in market speculation." If you want to learn how to treat options trading as a business and put probabilities in your favor, I invite you to join us. Start Your Free Trial Related Articles: Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality

Lets examine those statements and see how you should put them in context and consider other parameters as well. We will use vertical spread strategy as an example. Lets take a look at the following trade: Sell to open RUT August 1175 call Buy to open RUT August 1185 call This is the risk profile of the trade: As we can see, we are risking $822 to make $177. This is pretty bad risk reward. However, the picture looks a lot better when we look at the probability of success: it is 78%. We need the underlying to stay below 1175 by August expiration, and there is 78% chance that it will happen. In this trade, bad risk/reward = high probability of success. Lets take a look at another trade: Sell to open RUT August 1100 call Buy to open RUT August 1110 call This is the risk profile of the trade: As we can see, we are risking only $185 to make $815. That's terrific risk/reward (more than 1:4). The only problem is that RUT will have to go below 1110, and there is only 20.7% probability that this will happen. (In fact, to realize the full profit, RUT has to go below 1100 and stay there by expiration). In this trade, excellent risk/reward = low probability of success. The following table illustrates the relation between probability of success and risk-reward: Of course, this is not an exact science, but it helps us to see the approximate relation and trade-off between the risk-reward and the probability of success. So next time someone will ask you: "Would you risk $9 to make $1?" - consider the context. Yes, it is a terrible risk/reward, but considering high probability of success, this is not such a bad trade. It will likely be a winner most of the time - the big question is what you do in those cases it goes against you? At the same time, the answer to the question "Would you risk $1 to make $9?" is also not so obvious. It is an excellent risk/reward, but the probability to actually realize this reward is very low. In trading, there is always a trade-off. You will have to choose between a good risk-reward and a high probability of success. You cannot have both. Watch the video: If you want to learn more about options strategies: Start Your Free Trial

What are Weekly Options? For those less familiar with options, they expire on the third Friday of every month. Weekly options, first introduced by CBOE in October 2005, are one-week options as opposed to traditional options that have a life of months or years before expiration. New series for Weekly options are listed each Thursday and expire the following Friday. Not every stock or index has weekly options. For those that do, it basically means that every Friday is an expiration Friday. That opens tremendous new opportunities but also introduces new risks which can be much higher than "traditional" monthly options. Let's see for example how you could trade Apple (AAPL) using weekly or monthly options. Are they cheap? Lets buy them. Apple took a hit after their recent rare earnings miss. Many people think that the selloff is overdone. They want to use the recent pullback as a buying opportunity. The stock closed at $585.16 on Friday, July 27, 2012. Looking at ATM (At The Money) options, we can see that August 18 (monthly) calls can be purchased at $10.10. That would require the stock to close above $595 by August 18 just to break even. However, the weekly options (expiring on August 3, 2012) can be purchased at $6.15. This is 40% cheaper and requires much smaller move. However, there is a catch. First, you give yourself much less time for your thesis to work out. Second and more importantly, the weekly options are much more exposed to the time decay (the negative theta). The 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 draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. For the monthly 585 calls, the negative theta is -$0.22. That means that the calls will lose ~2.2% of their value every day all other factors equal. For the weekly calls, the negative theta is a whopping -$0.43 or 7% per day. And that number will accelerate as we get closer to the expiration day. You better be right, and you better be right quickly. Buying is too risky? Maybe selling is better? If this is the case you might say - why not to take the other side of the trade? Why not to use the accelerating theta and sell those options? Or maybe be less risky and sell a credit spread? A credit spread is when you sell an option and buy another option which is further from the underlying price to hedge the risk. Many options "gurus" ride the wave of the weekly options and describe selling of weekly options as a cash machine. They say that "It brings money into my clients account weekly. Every Sunday my clients access their accounts and see + + +.” They advise selling weekly credit spreads and present it as a "a safe option strategy because we’re combining an option purchase with an option sale resulting with a credit into your account". This strategy can work very well.. until it doesn't. Imagine for example someone selling a 133/134 SPY credit spread on Thursday with SPY below $132. That seems like a pretty safe trade, isn't it? After all, we have just one day, what could possibly go wrong? The options will probably expire worthless and the clients will see more cash in their account by Sunday. Well, after the market close, good news from the EU summit took traders by surprise. The next day SPY opened above $135 and the credit spread has lost 100%. So much for the "safe strategy". By the way, this was a real trade recommendation from one of the options "gurus". He is charging $2,500 for his advice. So what is the biggest problem with selling the weekly options? The answer is the negative gamma. The gamma is a measure of the rate of change of its delta. 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. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. When you are short weekly options (or any options which expire in a short period of time), you have a large negative gamma. Any sharp move in the underlying will cause significant losses, and there is nothing you can do about it. The Bottom Line So is the conclusion that you should not trade the weekly options? Not necessarily. They can be a good addition to a diversified options portfolio - as long as you are aware of the risks and allocate only small portion of the account to those trades. Link to the original article Related articles: The Options Greeks: Is It Greek To You? The Risks Of Weekly Credit Spreads Options Trading Greeks: Gamma For Speed Options Trading Greeks: Theta For Time Decay Why You Should Not Ignore Negative Gamma Make 10% Per Week With Weeklys? Want to learn how to reduce risk and put probabilities in your favor? Start Your Free Trial

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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. This article presented by Marcus Holland, the editor of FinancialTrading.com – a new but fast growing education resource on all aspects of financial trading

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This infographic has been designed to make it easier for you to understand option trading.